The word that financial regulators fear most is: a bank run.
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This happened last week. In just one day, depositors withdrew $42 billion from California-based Silicon Valley Bank (SVB), leaving the bank's cash balance short by $1 billion.
"This is the first Twitter-driven bank run," said Representative Patrick McHenry, a Republican who chairs the House Banking Committee, describing the tsunami of withdrawals.
Silicon Valley Bank CEO Greg Becker disclosed in a March 8 letter to shareholders that the bank lost $1.8 billion on sales of U.S. Treasury bills and mortgage-backed securities. Becker asked to find $2 billion in new capital to stabilize the bank. Depositors and others then took to social media to speculate on the bank's health.
The letter was the catalyst for the Silicon Valley bank's collapse. It was the second-largest financial institution failure in U.S. history and the first such event since the U.S. recession 15 years ago.
With the collapse of Silicon Valley Bank, the state of New York abruptly shut down Signature Bank, a bank known for its close ties to the shaky cryptocurrency industry. Deposits were withdrawn in a panic, totaling $10 billion, before closing the bank, pushing the bank to the brink of bankruptcy.
Some of Signature Bank's largest clients are top cryptocurrency exchanges, each with hundreds of millions of dollars in deposits.
Bank runs risk spreading. Individuals across the United States typically have thousands or tens of thousands of dollars in deposits, not millions, and they can't help but worry about the safety of their money. Regional banks are more vulnerable as stock prices fall.
Senate Majority Leader Chuck Schumer said Tuesday on the Senate floor that small businesses and households could be at risk from the financial crisis. The Federal Deposit Insurance Corporation (FDIC) acted, going beyond its authority.
Most bank customers have seen the word FDIC, which appears on the top of the bank depository logo, and has this guarantee: "Each depositor is insured for at least $250,000." This amount may cover most individual depositors in the United States. Potential losses, but Silicon Valley Bank's wealthy clients are high-tech start-ups and entrepreneurs, and their deposits are much larger.
The FDIC has decided that all deposits of Silicon Valley Bank and Signature Bank customers will be insured, regardless of how much money they have with the two banks. This restored consumer confidence and there were no more runs on US banks. But some feel the decision is to save the rich.
"Taxpayers are not going to lose," President Joe Biden said Monday.
That's technically true because the FDIC is giving savers cash from a pool of funds that are All insured banks must inject capital into it. "But Thomas Hoenig, a senior distinguished fellow at George Mason University's Mo caster Center and a former FDIC vice chairman, said: "This is probably the rescue." "This is where market constraints break down,
the FDIC touts its track record: "Not a single depositor has lost a penny of insured deposits since the FDIC was founded in 1933." The FDIC was established as an independent OnePlus agency during the Great Depression. "Before that, there was a wave of bank runs in the United States in the early 1930s, which caused the collapse of thousands of financial institutions and wiped out the savings of many Americans in a period of high unemployment. "The FDIC was seen as quite aggressive," Honig told VOA, noting that even President Franklin D. Roosevelt was initially opposed to creating a deposit insurance fund. Feeling uneasy because he worries about "the moral hazard problem, which is making people not care what the banks are doing."
There is also a sister agency called the Federal Savings and Loan Insurance Corporation (FSLIC), which was created to protect depositors at noncommercial banks. The Federal Savings and Loan Insurance Corporation (FSLIC) and the Federal Home Loan Bank Board (FHMB) went bankrupt and stopped working in 1989. "The FDIC can insure those smaller savings institutions today, while the government-backed National Credit Union Administration (NCUA), established in 1970 to protect depositors at credit unions, was formerly known as the Bureau of Federal Credit Unions".
According to Hogney, there was "always the possibility" that the FDIC would go bankrupt. "However, the FDIC actually had a line of credit from the U.S. Treasury Department, which it could turn to if a large number of banks failed and the FDIC ran out of funds".
Currently, the FDIC has $100 billion in funds, Honig noted. However, it insures about $20 trillion in deposits. "You really don't want everyone saving every time, or you might as well turn these institutions into utilities," Honig cautioned.