The U.S. government swooped in on Sunday to save the tech industry from a problem of its own making, announcing that it would ensure all depositors in Silicon Valley Bank had full access to their money by Monday.
In an extraordinary move, U.S. regulators classified Silicon Valley Bank—which claims it serves nearly half of all venture capital-backed startups in the country—as a systemic risk to the financial system, a designation that allows it to guarantee all deposits and not just the standard $250,000. The government’s actions also cover New York’s Signature Bank, one of the main banks used by cryptocurrency companies, which was shut down by regulators on Sunday. All depositors will be made whole, officials said.
In a joint statement, Treasury Secretary Janet Yellen, Federal Reserve Chairman Jerome Powell, and FDIC Chairman Martin Gruenberg stressed that that taxpayers would not foot the bill for shoring up the banks and added that this wouldn’t save everyone.
“Shareholders and certain unsecured debtholders will not be protected. Senior management has also been removed,” regulators said in their joint statement. “Any losses to the Deposit Insurance Fund to support uninsured depositors will be recovered by a special assessment on banks, as required by law.
A Treasury official told the Wall Street Journal that the government’s actions didn’t constitute a bailout because they wouldn’t protect stock and bondholders in both banks.
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Silicon Valley Bank burst into flames within days last week. On Wednesday, it revealed it had sold its assets at steep losses ($1.8 billion) because it didn’t have enough cash and announced it needed to raise more than $2 billion. The situation only got worse when the bank tried to calm customers down. Silicon Valley Bank’s CEO, Greg Becker, reportedly held a call with customers and told them, “the last thing we need you to do is panic,” according to TechCrunch. It had the opposite effect.
“It’s like the end of ‘Animal House,’” an unnamed customer who had been on the call with Becker told the outlet. “Don’t panic? Now, I am panicking, watching your broadcast.”
The panic quickly spread to venture capital firms, which urged their startups to get their money out of the bank while they could, and quickly turned into an old-fashioned bank run. On Friday, Silicon Valley Bank was shut down by regulators.
Officials spent the weekend trying to find a solution that would ensure the survival of the bank’s clients, many of whom are startups. Various startups told media outlets that they wouldn’t be able to pay their employees or keep their doors open without their money.
Silicon Valley Bank is the second-largest bank to fail in U.S. history.