Update on Bank Failures

Last week's collapse of Silicon Valley Bank was a byproduct of the Federal Reserve's hiking of interest rates by 1,700% in less than a year. Once risk-free Treasurys started generating more attractive returns (5%) than what SVB was offering, people started withdrawing their money, and the bank needed a quick way to pay them.  

Is this the beginning of a long-anticipated recession?  

14th district Congressman Jeff Jackson sent the following email to constituents Monday morning (March 13th).  In the wake of two bank failures over the last few days, it provides some clarity and reassurance that we wanted to share with Lincoln Herald readers.

Last night there was an emergency Zoom call with several hundred members of Congress.

It was convened by the Treasury Department. We were given 15 minutes notice.

It was literally on regular Zoom. I was emailed a link. I clicked it and suddenly I was in a very normal-looking Zoom room, only this one had most of Congress in there. 

(It wasn’t even presentation mode - just a wide-open Zoom room where people had to be reminded to mute themselves when they weren’t speaking. It was wild.)

The purpose was to announce the extraordinary steps that will now be taken to secure our financial system.

Here’s what’s happening:

As most of you know, three days ago, we had the second-largest bank failure in American history.

It happened because Silicon Valley Bank in California lost a lot of money, its depositors got scared, and there was a run on the bank.

So the federal government, through the FDIC, stepped in and closed the bank.

Here’s the problem:

The federal government only insures your deposits up to $250,000 - but the vast majority of customers at this bank had deposits more than that because this bank specialized in small businesses and start-ups.

And this problem, as it turns out, was scary enough to produce contagion. The uncertainty about what was going to happen to customers with more than $250,000 spread to other regional banks.

A New York bank failed last night - and several others started flashing red.

Basically, people with money at smaller banks were getting scared and transferring their money to bigger banks. By late Sunday evening, we were in the early stages of a domino effect.

Which brings us back to the emergency Zoom call.

After recapping the situation, the Treasury Department informed us that all the depositors at the Silicon Valley Bank will be made whole. Same with the bank in New York.

We were told that we’re going to pay for that with a fund that banks already pay into - not taxpayer money.

We were also told that only the depositors were being made whole - shareholders and bondholders in the two failed banks will be “wiped out.” 

It was repeatedly emphasized that the purpose (and legal basis) of this decision was to limit contagion - not a particular concern for the customers of either failed bank, even though the result could have been thousands of failed small businesses. There were many, many references to the importance of preventing additional runs on smaller banks.

Silicon Valley Bank has been put up for sale but, as of the time of our Zoom call, did not have a buyer. Treasury expressed some hope that the emergency steps it was taking would help to entice a buyer.

As it was explained to us, every step being taken has one purpose: to make sure this domino effect ends now - while it’s still relatively inexpensive to halt.

The reaction of the members of Congress on the Zoom call was interesting in two ways.

First, no one expressed any disagreement with the fundamental decision by the Treasury Department to make the depositors whole. 

In fact, the majority of the questions were members seeking reassurance that the steps the Treasury was announcing would be sufficient to stop the contagion. Questions alternated between Republicans and Democrats and most of us asked some version of the same question: Will this be enough?

Second, with one exception, everyone treated the situation with the seriousness it deserves. Grandstanding and bickering were present, but basically minimal.

There’s going to be a huge political debate now about the regulation of regional banks. 

That’s good. If you have to change the rules after-the-fact, they probably should have been different beforehand.

But we’d all rather have a political debate than a financial crisis, so in the meantime, you need to know that your deposits at your bank are safe because the full weight of the federal government has decided that they will be.

I’ll keep you posted.

Rep. Jeff Jackson