US President Joe Biden said in a speech at the White House that the “banking system is safe”, thanks to the extraordinary interventions that the government and financial authorities took over the weekend following the failure of Silicon Valley Bank, the largest in the US since 2008. Biden spoke in response to strong concerns from markets that the bank’s failure (followed by the US government’s decision to close another particularly at risk) could cause that which is defined as a contagion extended to other parts of the banking system, an eventuality which however is for now very remote.
Precisely for these fears, the European stock exchanges opened very badly on Monday and all fell heavily. When the US markets opened, the stocks of some regional banks (i.e. medium-sized but very important for the territory in which they are located) fell quite seriously: the most serious falls for now are those of First Republic Bank and by Western Alliance, whose stocks lost more than 60 percent, followed by PacWest Bancorp, which lost 35 percent.
The fears were mainly related to the fact that the checking accounts at the Silicon Valley Bank, which managed those of many of the country’s leading technology companies and many start-ups, would remain blocked for a long time. In the United States it is established that customer bank deposits are guaranteed by law only within 250 thousand dollars and that above that amount, in the event of a bank failure, they are to be considered lost.
In this case, however, an exception was made and the US government allowed the “insurance fund” that manages these things to fully reimburse all amounts in bank current accounts. If this had not been the case, the customers, which are mainly companies with accounts well in excess of 250 thousand dollars, would no longer have been able to pay the salaries of the employees or the invoices of their suppliers, causing a significant chain financial crisis. “All customers of these banks can rest assured: they will be protected and will have access to their current accounts starting today,” Biden said.
The total repayment of current accounts is a remarkable fact and over the weekend the Biden administration was strongly criticized by the Republican opposition, who accused it of wanting to make up for the mismanagement of the bank managers with public money. Biden then said: «the losses will not be borne by the taxpayers, and this is important. Let me repeat, there will be no losses for the taxpayers.’
There will therefore be no public bailout and “the funds will be guaranteed by the fees and commissions that the banks pay to the Deposit Insurance Fund”, a fund with private resources managed by the Federal Deposit Insurance Corporation (FDIG) precisely to protect the current accounts of the banks that fail (the US correspondent of the Italian interbank fund which has guaranteed the current accounts of failed banks in recent years).
Biden then said that “American citizens must rest assured that the sums in their checking accounts are available for when they need them”. The point is important because it serves to reassure all citizens, who in these contexts of financial uncertainty are driven by panic to withdraw large sums from their accounts, thus generating a so-called “bank run” which then spreads to the entire financial system , sending him into crisis.
– Read also: How bank runs work, told with the Nobel prize winner Ben Bernanke
Unlike account holders, the bank’s investors, i.e. those who held Silicon Valley Bank securities, “will not be protected” – said Biden – “because by investing in securities they have consciously taken a risk, and when the risk does not pay off, investors lose their their money. That’s how capitalism works.”
Biden also said he will propose making financial and banking security rules stricter than they are now. And precisely because the FDIG has taken over the management of Silicon Valley Bank’s current accounts, he said that all the bank’s management will be fired.
Meanwhile, this is also being discussed in the European Union, where the financial markets are significantly affected by the news, mindful of the financial “contagion” which in 2008 led to a very serious economic crisis. On Monday and Tuesday, the finance ministers of the countries adopting the euro will meet in Brussels to talk – among other things – also about the risk that European banks run after the failure of Silicon Valley Bank. At the moment the possibility of a contagion still seems rather remote, as mentioned also by the Commissioner for Economic Affairs Paolo Gentiloni.