Is the banking system in peril?

The federal government is scrambling to restore confidence in the financial system following the collapse of Silicon Valley Bank, the second biggest failure of a federally insured bank in U.S. history. The lender, which had $209 billion in assets at the end of December, went under after news of its money troubles sparked a run on deposits last week. A second institution, Signature Bank of New York, which had significant cryptocurrency deposits, failed on Sunday, spreading anxiety about the health of the financial system.

The Treasury Department and the Federal Deposit Insurance Corporation stepped in, taking control of both banks and promising that the government would backstop depositors, ensuring that they'd be able to get their money — not just the $250,000 insured under federal law. Many tech startups deposited investments from venture capital firms at SVB, and the Biden administration said its extraordinary actions were intended not to protect bank shareholders, but to make sure tech employees would get paid and head off a wider "systemic" meltdown.

To shore up confidence in banks and prevent a broader financial crisis, regulators said SVB customers would have access to their accounts on Monday. They also established a system giving banks access to emergency funds, and the Federal Reserve made it easier for financial institutions to get emergency loans. The Biden administration also said a bigger bank would likely step in to buy SVB, providing long-term security for its customers. President Biden said taxpayers wouldn't shoulder any costs, and sought to reassure Americans, saying: "The banking system is safe."

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What are the commentators saying?

SVB wasn't brought down by "lending to risky start-ups, or gambling on sketchy crypto coins, or some other ill-considered tech scheme," said Kevin Roose in The New York Times. "It was an old-fashioned bank run, set off back in 2021 by a series of old-fashioned bad decisions." A bunch of tech startups "parked" their cash in SVB, and the bank put a lot of the money into bonds. "Those investments looked relatively safe at the time but became riskier last year as interest rates rose and the bonds lost some of their value."

The crisis started when SVB announced last week it would lose $2 billion on the investments. "That's a lot for you or me or the state government, but just a small fraction" of SVB's deposits, said Joseph N. DiStefano in The Philadelphia Inquirer. The bank said it was prepared to "sell the bonds at a loss and replace the losses, as healthy companies do, by selling more shares, anticipating good times and high profits will return." But that wasn't enough to stem the panic. About $165 billion in Silicon Valley deposits weren't insured — mostly because it was in accounts holding millions more than the FDIC's $250,000 limit — and depositors rushed to withdraw what they could.

Taking government help is a bitter pill for an institution and industry "fond of railing against government intervention and lobbying against stricter regulatory oversight," said John Thornhill in the Financial Times, but this "pragmatic move" was necessary to protect thousands of "blameless" SVB customers, "many of whom would have seen their businesses go bust without a financial backstop." "The alternative was to risk the stability of the deposit system and inflict huge damage on the technology sector," said Chris Hughes in Bloomberg. Some critics are "lecturing" regulators about moral hazard, arguing that by saving the day the government is signaling banks can take risks without suffering the consequences. But the U.S. is only making customers whole. "There's no bailout for shareholders or bondholders — so those who consciously put capital at risk have paid the price" as the company's stock cratered.

What's next?

Congress and regulators will face pressure to intensify oversight of mid-sized lenders. The theory that banks with less than $250 billion of assets can't pose a threat to the financial system "has just been subjected to a real-life stress test and failed," said Aaron Back in The Wall Street Journal. "These lenders' case for a lighter regulatory touch is now dead, politically and substantively." It could take years for Congress to pass the kinds of "new laws that often follow bank crises." In the meantime, "regulators have many discretionary tools they can use to intensify oversight of midsize lenders."