Silicon Valley Bank

How should the federal government respond to the collapse of the Silicon Valley Bank (SVB), the 16th largest bank in the United States?

SVB collapsed on Friday, March 10, 2023, after an unprecedented run on deposit during which customers requested $42 billion of withdrawals in a single day. The value of SVB’s securities portfolio had declined severely. The bank had bet on long-term government securities, and when the Fed raised interest rates, the mark-to-market value of this asset had dropped precipitously. Ninety-Four percent of the bank’s deposits were uninsured, so customers reacted quickly when rumors spread that the bank might be insolvent.

The Federal Deposit Insurance Corporation (FDIC) had taken the unusual action of closing the bank on a Friday morning. Now, the Biden administration, the Federal Reserve and the FDIC had the weekend to decide what to do and coordinate a response. SVB’s collapse had sent shock waves through the banking sector. A few other banks with a large percentage of uninsured deposits and exposure to the hike in interest rates were rumored to be in trouble. Financial pundits were raising the question of whether this might lead to a financial crisis as occurred  after the failure of Lehman Brothers in 2008. There were also the SVB depositors who had not been able to get their money out of the bank in time – many of them tech start-ups that were a major driver of the economy.

Senior policymakers at the Treasury, the Fed, and the FDIC faced decisions that were politically fraught. Obviously, a recession would be politically unpopular. But the decision in 2008 to provide subsidies to banks had also proved contentious. Both the left and right had decried what they perceived to be “bank bailouts.”

Policymakers knew they had to react quickly. Before them, they had a number of options that could limit the fallout from SVB’s collapse. They also had to devise a communications strategy that calmed the markets and the public. Finally, they had to start the long process of examining what went wrong at SVB in order to ensure that it did not happen again.