The financial sector was rolled last week by the second- and third-largest bank failures in U.S. history.
On Friday, Silicon Valley Bank, unable to sustain a run by depositors, failed and came under control of the Federal Deposit Insurance Corp.
The bank, flush with deposits from the COVID-19 pandemic, had invested much of the cash in longterm, safe, low-paying Treasury securities. When the Federal Reserve raised interest rates, these bonds lost value and the bank had to sell them at a loss. depositors lost confidence and wanted their money. SVP couldn't cover the demands.
Then on Sunday it happened again, with federal regulators taking charge of New York's Signature Bank. Signature was one of the few banks that catered to cryptocurrency users and turbulence in that market contributed to its demise.
Needless to say this had a lot of folks worried about what would come next.
President Joe Biden took to the airwaves Monday to assure depositors that they were fully covered. Although the FDIC only insures accounts up to $250,000, the president said that agency and the Federal reserve would make sure depositors got all their money.
Taxpayers won't be footing the bill, we are assured. The money will come from fees paid by member banks.
And that has smany wondering why big depositors are being covered. After all, they knew the deposit insurance limits. Some have even taken to calling this a bailout.
But there are good reasons for the move.
One is that deposit insurance limits haven't really kept up with the demands of even small- to medium-size businesses. Many businesses have to keep cash on hand in excess of federal deposit insurance limits to cover payroll and expenses. losing their operating reserves would be a terrible blow that would impact jobs and average Americans.
Another good reason is to head off ripples in the larger economy. Restoring confidence in the banking system to keep other banks from suffering runs by worried depositors and calming an uneasy stock market.
And, unlike the financial crisis of 2008, there will be consequences for what happened. The president said management at the banks will be fired, rather than keeping their jobs and even receiving big bonuses as happened in the Wall Street bailout of 2008. And the banks' owners won't be compensated. They will lose their investments.
There are promises as well of Congress taking action to strengthen bank oversight -- the stricter rules put in place after 2008 were loosened in 2018 -- to help make sure this doesn't happen again.
In our view it's a positive, measured response to what could have been a much bigger issue.