The economic environment’s abrupt departure from zero-interest rates in the past year might mean that a collapse in the risk-filled banking sector was always likely, but almost nobody was expecting this, not even the regulators. Since the famously terrifying bank runs that ushered in the Great Depression of the 1930s, the Federal Deposit Insurance Corporation has guaranteed deposits up to a certain threshold, but that got thrown out the window Sunday night when the Federal Reserve, Treasury, and FDIC jointly announced a “systemic risk exception” that they also insisted wasn’t a bailout. Now all the depositors on Silicon Valley Bank’s roughly $220 billion balance sheet will be made whole, even though around 95% of them weren’t insured by the FDIC on Friday. Clearly something has to change, and Jason Furman, the Harvard economist who once advised President Barack Obama, has a three-point plan. Still, he insists “no one should feel good about what happened here.”
SVB became the second-largest bank failure in U.S. history after the largest-ever bank run, and while it insisted it was solvent right up to the very end, it just wasn’t prepared for the surge in withdrawals. The bank had reinvested many of its assets into risky long-term bonds that lost value as the Fed hiked interest rates, meaning that as the tech sector freaked out about the solvency of its favorite bank, it didn’t have the cash on hand to pay them.
