The crisis of confidence in banks caused by Silicon Valley Bank's collapse shows no signs of abating.
That crisis is reflected in the market pressure on regional banks' shares, which have lost billions of dollars of value since March 10. That's when SVB collapsed, becoming the second-largest failure of a bank in U.S. history after the failure of Washington Mutual in 2008.
Emergency interventions by regulators have so far failed to restore calm.
The Federal Deposit Insurance Corp. guaranteed all of SVB's deposits, even those above $250,000, removing the regulatory limit.
The Fed also created a new loan facility, called the Bank Term Funding Program, designed to safeguard institutions affected by the collapse of SVB.
A Bank Bailout Is Off the Table
The facility provides loans of up to one year in length to banks, savings associations, credit unions, and other eligible depository institutions that pledge U.S. Treasury securities, agency debt, mortgage-backed securities and other qualifying assets as collateral.
These assets will be accepted as collateral at par value, which means at their original value, regardless of the rise in interest rates in recent months. Those higher rates have reduced the value of long-term bonds that were purchased when rates were low. The Fed wants to avoid institutions being forced to sell their bonds for big losses.
But this is still not enough. Investors continue to fear contagion, wondering whether the regional banks have more unpleasant surprises in store for them. Some of these banks also hold bonds that they acquired when interest rates were low. (The value of bonds moves inversely to the direction of interest rates.)
In acquiring the bonds, the banks took no credit risk because the prospect that the borrowers -- the U.S. government and municipalities -- would default was minimal. But some of the banks, including SVB, did not properly manage market risk: They held on to the bonds even as interest rates were rising and caused the value of the bonds to slump.
For many experts, the regulators must do something and quickly. The question is which measure would be appropriate since the federal government has already ruled out any idea of a politically sensitive bailout, like the one in 2008.
That 2008 bank bailout solved the subprime-mortgage crisis, which was caused by major banking-industry mistakes and nearly brought down the global financial system. It was and is very politically unpopular and regulators don't want to repeat that effort.
It is in this context that a Twitter user posted a message showing the importance of regional banks in the U.S. commercial and industrial lending and in residential real estate financing. The user concluded that if nothing is done, the economy could plunge into a depression.
Fed Must 'Contain Regional Bank Collapse': Tweet
"If the Fed does not contain the regional bank collapse, there will be another great depression," the user said. "Small/medium banks account for 50% of US commercial and industrial lending, 60% of residential real estate lending, 80% of commercial real estate lending, and 45% of consumer lending."
The user supports the point with Goldman Sachs analyst graphs based on FDIC data.
Musk found this alarming enough to highlight it by commenting on this data.
"This is a serious risk," the billionaire warned.
The billionaire's fear, which is shared by other influential figures and economists, is that regional banks will be reluctant to grant loans. If consumers and businesses find it difficult to access to credit, the economy could be sharply slowed.
To avoid such a situation, the discussion is currently focused on raising the limit at which deposits are guaranteed. Some ask that the FDIC guarantee all deposits regardless of amount. Others say the $250,000 limit is too low and that it could be raised to $1 million or even $2 million.
"FDIC needs to change to unlimited coverage to stop bank runs and Treasury needs to stop issuing ridiculously high yield bills, such that it makes no sense to have money in a low interest rate bank 'savings' account," the billionaire suggested on March 18. "Right now."
