After Silicon Valley Bank (SVB) and Signature Bank failed, the US government quickly fixed the banking system on Sunday.
The government said that starting on Monday, people and businesses who had money in SVB would be able to get it all.
After pressure grew, the government also shut down the New York-based Signature Bank.
Later on Monday, President Joe Biden will talk about the crazy weekend in the financial world.
In a statement, he said, “Those who got us into this mess will have to take full responsibility.”
SVB was a bank whose main business was giving loans to tech companies. The government closed it down and took everything it had on Friday. It was the biggest US bank failure since the 2008 financial crisis.
The Federal Deposit Insurance Corporation (FDIC), US Treasury and the Federal Reserve all said that depositors would be safe. It also said that the taxpayer would not have to pay anything for the move.
SVB worked hard to get the money it needed to make up for a loss it made when it sold assets whose value fell because interest rates went up.
“The US banking system is still strong and stable,” the government said in a joint statement. “This is mostly because reforms made after the financial crisis made the banking industry safer.”
“These changes, along with what we’re doing today, show that we’re willing to do whatever it takes to keep depositors’ money safe.”
These steps also apply to Signature Bank of New York, which is the next most vulnerable bank after SVB because it just got regulated on Sunday.
As part of what they are doing to rebuild trust, regulators have shown banks a new way to get access to emergency funds.
The Federal Reserve said it would help with its new Bank Term Funding Program, making it easier for banks to borrow money from it when they are in trouble.
When tech companies were starting, SVB was seen as an important lender. For example, its banking partners were almost half of the venture-backed US technology and healthcare companies that went public last year.
What went wrong at SVB?
SVB specialized in giving loans to new businesses, and last year it worked with almost half of the US venture-backed technology and healthcare companies that went public.
Higher interest rates made it difficult for its customers to raise funds through private fundraising or selling shares. This put pressure on the company. More clients pulled out their deposits in a trend that grew last week.
Friday, the bank failed in the US because it couldn’t get enough money to cover losses from the sale of assets, mostly US government bonds, that were hurt by higher interest rates.
One founder said he kept refreshing his online banking page repeatedly in the hopes that it would work.
Another person said he was sure the government would help, but he also said he might have lost about 40% of the company’s cash overnight.
So, people with money in the bank were happy about this statement. But some people will look silly if they do this.
Most of the time, SVB worked with elite tech start-ups and venture capitalists in Silicon Valley. And these Silicon Valley elites tend to be more than a little bit libertarian: the standard view is that the government is too slow and too big.
Some people think it’s funny that the government has stepped in to save the day. Some people will wonder if influential tech bros are getting special treatment: capitalism when things go well and socialism when things go wrong.
The statement is worded carefully because taxpayers won’t pay for this. Now, Mr. Biden will have to defend the decision and reassure people in his party that guaranteeing depositors was the only way.
In another case, Canadian authorities took control of SVB’s assets in that country for a short time. But the top bank regulator said that they would try to get control for good.
SVB started as a bank in California in 1983. In the last ten years, it has grown quickly.
But it was put under pressure when higher interest rates made it harder for new businesses to raise money through private fundraising or selling shares.
In Silicon Valley, people are still feeling the effects of the collapse as businesses try to figure out how it will affect their finances.
Paul Ashworth, the chief North American economist at Capital Economics, said the US government had “acted aggressively” to stop a disease from spreading.
“Rationally, this should be enough to forestall any contagion from spreading and bringing down more banks, which can happen in the twinkle of an eye in the digital age,” he said. “But contagion has always been linked to irrational fear, so we want to stress that there is no guarantee this will work.”
Between then and now, HSBC has bought the UK branch of SVB.
The Treasury said that no taxpayer money was used in the deal, which was worked out with HSBC through the night so that it could be done before trading started on Monday.
Customers and businesses that could only get their money after can now do so as usual.