A Bank Collapsed. Next: Moves to Avoid a 'Contagion'

Media outlets detail Biden administration's frenzied weekend to try to keep banking crisis at bay
By Jenn Gidman,  Newser Staff
Posted Mar 15, 2023 8:29 AM CDT
A Bank Collapsed. Next: Moves to Avoid a 'Contagion'
People walk past a Silicon Valley Bank sign at the company's headquarters in Santa Clara, California, on Friday.   (AP Photo/Jeff Chiu)

The collapse on Friday of Silicon Valley Bank, which was bookended by the shuttering of two other financial institutions, led to wider fears among Biden administration officials: the possibility of a "contagion" that could lead to a domino effect of failure among America's banks, as one White House official put it. What followed was a "72-hour scramble" to prevent that type of crisis from taking place, with the Biden administration undertaking "a major intervention with extraordinary speed," per the Washington Post. Especially worrisome to regulatory aides who were keeping an eye on the situation after Silicon Valley Bank demise: an increase in cash withdrawal requests at banks that didn't seem to be linked to SVB's troubles.

This meant that, in addition to helping out SVB customers who needed access to their funds, government officials also had to figure out a way to keep Americans from making a run on banks overall. What President Biden himself wanted to avoid: any moves that could be perceived as a taxpayer-funded bailout, which caused major outcry during the 2008 financial crisis, and which some worried would give other banks the green light to engage in future risky behavior, sources tell Politico. Amid Biden's reservations, however, his economic team started feeling the pressure from banking execs who saw spooked customers, Silicon Valley bigwigs, and lawmakers from California, where Silicon Valley Bank was based. It eventually became evident that a big move had to be made.

By Sunday, after what the New York Times calls "intense deliberations across the government," a plan was cobbled into place, just ahead of the Asian markets starting a new week. Per the terms of the deal, depositors would be made whole via the non-taxpayer-funded FDIC Deposit Insurance Fund, bolstered by fees from FDIC-insured institutions, as well as interest on money invested in government bonds, per CNBC. The plan that "almost didn't happen" didn't completely shelter other regional banks, per Politico: First Republic, for instance, saw its stocks sink 62% on Monday. But by Tuesday, "the storm appeared to have calmed, and stock prices in the banking sector had stabilized," per the Post. "And yet other risks may lie just around the corner." Read much more here, here, and here on the behind-the-scenes of what Politico deems a "historic rescue of a distressed industry." (More financial crisis stories.)

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