The Biden administration's guiding principle in protecting depositors after the failures of Silicon Valley Bank and Signature Bank came down to this, Axios has learned: Prevent bank runs beyond the initial crisis.
Why it matters: The administration's move to shield the banks' depositors — and let banks with profiles similar to SVB and Signature get pummeled by the stock market — carried significant risks.
- Monday’s stock market reaction was the first test of the government’s decision to declare a “systemic risk exception” for the two failed banks, a move that allowed unlimited backing to depositors — beyond the typical $250,000 insurance the FDIC typically provides.
- The stock prices of other mid-sized regional bank dropped sharply, including a brutal 62% decline in the shares of First Republic.
- But by the market's close on Monday the trouble appeared to be limited to stock prices, and largely affecting medium-sized regional banks, rather than a systemic run on the U.S. banking system. In investor parlance, the damage was idiosyncratic, limited to a specific asset class.
What they are saying: “We took sweeping action, powerful action, trying to prevent possible future bank runs,” a Treasury official told Axios.
- “We took multiple, overlapping options,” the official said.
Driving the news: The government's move began to unfold Thursday, amid questions about SVB’s ability to survive until the weekend. The FDIC and the Fed decided to move the bank into receivership before its branches opened at 9 a.m. Pacific time on Friday, according to a source familiar with the matter.
- Starting Friday, and then over the weekend, President Biden was briefed regularly by Chief of Staff Jeff Zients and National Economic Council Director Lael Brainard, according to a White House official.
- Over the weekend, officials from Treasury, the Fed and the FDIC aligned around three options:
1. Try to find buyers for the banks.
2. Invoke the "systemic risk exception" for SVB and Signature account holders.
3. Open a new Fed lending facility to help banks that needed help meeting withdrawals.
On Saturday, Treasury Secretary Janet Yellen, Fed Chair Jerome Powell, Fed Vice Chair Michael Barr and FDIC Chair Martin Gruenberg decided to move forward with that three-step plan. They agreed on the need to:
- Make sure that SVB and Signature account holders — which includes companies like Roku, a streaming platform, DocuSign, a cloud software vendor, and other technology companies — would not suffer adverse financial consequences (In a blog post, DocuSign stated the amount at stake was "immaterial" given their various banking relationships).
- Move quickly to get ahead of Asian markets that were opening on Sunday.
- Ensure that taxpayer dollars wouldn’t be used — only money from the FDIC's Deposit Insurance Fund, which relies on fees assessed on banks.
- Protect depositors and replace the failed banks' management. The banks' investors would be left on their own.
Sunday afternoon, Yellen, Zients and Brainard briefed the president before the Fed, Treasury and FDIC made their joint announcement about the government's move.
Monday morning, President Biden seemed almost gleeful when he enumerated the consequences for the executives — and investors — of the failed banks.
- “The management of these banks will be fired,” he said.
- “Investors in the banks will not be protected," he said. "They knowingly took a risk and when the risk didn’t pay off, investors lose their money. That’s how capitalism works.”
- But also he went out of his way to assure depositors that their money was safe — just as he tried to assure the rest of America that the banking system was sound.
Editor's note: This story has been corrected to reflect that not all SVB and Signature account holders had payrolls that were jeopardized.
