The US and UK governments spent the weekend scrambling to prevent Friday’s dramatic collapse of Silicon Valley Bank – the second biggest in US history – from setting off a new banking crisis.
In an extraordinary action to restore confidence in the banking system, the Biden administration said Sunday all deposits at SVB would be guaranteed. The government also shut down Signature Bank and said its depositors would be protected by a similar deal.
By guaranteeing deposits, the US government is trying to avoid two potentially risky scenarios, both of which could have dire consequences: Other banks with similar profiles to SVB and Signature could be next to fail if customers lose faith that they will have ample cash to fund their deposits. And the tech companies that kept their cash with SVB could collapse if they were unable to make payroll or fund their operations.
In the United Kingdom, similarly feverish efforts over the weekend paid off when banking giant HSBC stepped in just before markets opened Monday to buy SVB UK, protecting the deposits for thousands of British startups.
US futures and global markets got an immediate lift from news of the move to protect SVB’s depositors, but that relief rally is fading early Monday on concerns that other banks that may need to shore up their finances. Banking stocks in Asia and Europe are under pressure Monday.
Some background: SVB ran into trouble when it sold US Treasury bonds at a loss to raise cash to cover deposit withdrawals. Like many banks, it bought bonds in recent years when interest rates were very low. Now that interest rates have shot up, those bonds are worth less. According to the Federal Deposit Insurance Corporation, such unrealized losses total $620 billion at American banks.