The Federal Deposit Insurance Corp. (FDIC) and Federal Reserve are discussing creating a fund to backstop deposits if more banks fail following the collapse of Silicon Valley Bank.
Silicon Valley Bank was shut down by regulators on Friday in the biggest bank failure since the 2008 liquidity crisis.
Silicon Valley Bank reportedly held $173 billion in deposits.
The Fed interest rate is at 4.57% and $117 billion of Silicon Valley Bank securities are yielding only 1.56-1.66% – this is causing a run on the bank.
By Friday Silicon Valley Bank was in FDIC receivership.
The Federal Reserve caused the run on the bank by raising interest rates seven times in 2022.
2022’s rate hikes totaling 450 basis points is causing problems for bankers because investors want to move their money into higher-yield bonds.
After creating the problem in the first place, the Federal Reserve is now discussing a new vehicle that would allow regulators to backstop deposits if more banks were to collapse.
Bloomberg News reported:
The Federal Deposit Insurance Corp. and the Federal Reserve are weighing creating a fund that would allow the regulators to backstop more deposits at banks that run into trouble following Silicon Valley Bank’s collapse.
Regulators discussed the new special vehicle in conversations with banking executives, according to people familiar with the matter. The hope is that setting up such a vehicle would reassure depositors and help contain any panic, said the people. They asked not to be identified because the talks weren’t public.
The vehicle is part of the agency’s contingency planning as panic spreads about the health of banks focused on the venture capital and startup communities.
The Silicon Valley Bank failure may not be the only bank to fail.
First Republic’s stock on Friday tumbled 50% after Silicon Valley Bank’s failure.
People lined up at the First Republic branch in Brentwood to withdraw their money on Saturday.
I’ve never seen a bank run in Brentwood Los Angeles in over 40 years — this is at first republic bank branch. People standing in rain pic.twitter.com/k31PqqpyO3
— pjb.eth (@Dr_PhillipB) March 11, 2023