(LibertySons.org) – Silicon Valley Bank (SVB) closed its doors for the last time on Friday, March 10, when the California Department of Financial Protection and Innovation took control of the institution’s remaining assets and placed them in the hands of the Federal Deposit Insurance Corporation (FDIC). Numerous investors stood to lose fortunes due to FDIC caps, according to a press release from the federal agency, so it used the funds in an emergency move to create a safety net for Silicon Valley Bridge Bank (SVB). Now, lawmakers like Rep. Blaine Luetkemeyer (R-MO) are calling for Biden to temporarily offer the same guarantee to every other bank in the nation.
The Fall of SVB
SVB’s collapse marks the second-highest failure of a financial institution in the United States, according to USA Today, which explains that the bank’s demise began with short-sighted investments. It had apparently counted on a payoff from long-term bonds, which the institution had purchased when interest rates were still extremely low. The interest spikes that occurred starting in 2022, a response to skyrocketing inflation, led to SVB’s downfall by toppling the value of those bonds, leading to a loss of $1.8 billion.
A snowball effect ensued. Once Wall Street got wind of the damages, SVB suffered an additional $160 billion crash in the stock market within 24 hours. Then, fearful of losing everything, investors began pulling their funds en masse. Because banks only carry on hand a portion, or ”fractional reserve,” of their total wealth — in this case, money that was tied up in long-term bonds, which had crumbled in value — the bank didn’t have enough liquid assets to accommodate the high volume of withdrawals. The result was a total collapse of the institution.
Emergency Move
The FDIC stepped in due to the potential impacts the losses could have had on an already fragile economy. In normal circumstances, the agency would only cover $250,000 per account, a drop in the bucket for a good portion of SVB’s investors. Because these companies had so much to lose, the FDIC instead used those funds to create a “bridge bank,” which will cover every dollar of every investment SBV lost.
Call to Protect Investors Nationwide
The move seems far from fair, especially given the fact that corporate superpowers like Goldman Sachs will now be able to recover their losses in the hundreds of millions. And the fallout in other areas could be catastrophic. Rep. Luetkemeyer, who has years of professional experience in the banking industry, recently stated that unless President Biden offers the same guarantees to all banks across the board, smaller institutions will suffer. The representative said such a move would “give the system confidence,” according to POLITICO, which would reduce the threat of investors panic-withdrawing their funds elsewhere.
Luetkemeyer believes that the investment guarantee should remain in place until interest rates have fully stabilized — or, at the very least, a minimum of “30 to 60 days.”
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