Good morning. Is the U.S. at risk of another financial panic? We'll learn more today. |
 | | Silicon Valley Bank.Jim Wilson/The New York Times |
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Today is a day of uncertainty for the American economy. |
Will more banks have to close, as Silicon Valley Bank did last week and Signature Bank did yesterday? How will financial markets react? What will the federal government do? And will the current turmoil prove to be fleeting — or turn into a true crisis? |
In today's newsletter, I'll walk through the basics of the potential financial panic sparked by the failure of SVB (as Silicon Valley Bank is known) and summarize the latest Times coverage. |
SVB, founded in California in 1983, became one of the country's 20 largest banks mostly by lending money to start-ups. SVB was sometimes willing to back start-ups that more traditional banks were not — and some of those companies went on to great success. |
SVB's problems date to 2021, when many technology start-ups were flush with cash and deposited large amounts of it with the bank. SVB, in turn, tried to increase its profits by investing those deposits elsewhere. But as the Federal Reserve increased interest rates to fight inflation over the past two years, SVB's investments began to lose value. (Kevin Roose's column helpfully tells the longer version of the story.) |
The bank's clients became worried in recent days that it would no longer have enough money to repay its customers, and a classic bank run occurred. On Friday, federal regulators said they would take over SVB. |
Bank runs are especially dangerous because they feed on themselves, sowing panic as people worry that their own deposits may be at risk. Even healthy banks can become endangered because they also do not keep enough cash on hand to repay all customers at once. If banks kept all their deposits locked up in a safe, they could not earn the money that allows them to pay interest. |
 | | Janet Yellen, the Treasury secretary.Valerie Plesch for The New York Times |
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Federal regulators — at the Fed, Treasury Department and other agencies — tried to stem the worries last night by announcing that all customers of both SVB and Signature would have access to their money today. Before the announcement, it was unclear what would happen to deposits of greater than $250,000; a pre-existing guarantee from the Federal Deposit Insurance Corporation covers only deposits below that amount. |
Some SVB clients had indicated that they would be unable to pay their employees if they lost their money, which could lead to spiraling economic problems. |
Last night's announcement has the benefit of reducing the likelihood of a panic today. It also prevents seemingly innocent victims — the workers and executives at companies that used SVB or Signature as their bank — from being hurt. Federal officials emphasized that they would not use taxpayer money to repay those companies. Ultimately, the money will instead come from a mix of the two banks' assets and from a broader insurance program financed by other banks. |
But if the panic spreads, taxpayers would be on the hook, as happened during the financial crisis of 2007-9, because the insurance program would be too small to cover the losses. That risk highlights the fact that there are two different policy questions to keep in mind in coming days — one immediate and one longer term. |
The immediate question is how to keep this situation from turning into a full-blown crisis. History suggests that an aggressive and generous government response, like the guaranteeing of all SVB deposits, probably has the best chance of success. The 2007-9 crisis never turned into a depression, partly because of the aggressiveness of the Fed and both the Bush and Obama administrations. |
… and avoiding the next one |
The longer-term question is how to reduce the chance of future crises, and the historical lessons here are different. The U.S. has suffered so many financial panics over the past few decades, dating to the savings and loan crisis of the 1980s, because the country tends to regulate its banks so lightly. |
In the case of SVB, regulators allowed it to make risky bets with its deposits (while the bank's executives insisted that the bets weren't risky). More generally, SVB and other banks are often not required to maintain enough of a financial cushion to withstand a crisis. Financial cushions — effectively, cash or other forms of insurance — tend to reduce banks' profits, which is why bankers resist them. But without a healthy cushion, a bank can collapse during a crisis, and taxpayers must sometimes bail it out. When that happens, the bankers and their investors often emerged unscathed. |
Once SVB began to falter, financial industry executives and investors again began clamoring for government help. In the short term, the government may indeed need to step in to avoid a spreading crisis. But the less immediate questions may be uncomfortable for the bankers: How can the people who caused this crisis bear financial responsibility for it? And how can the U.S. economy end this cycle of booms that benefit banks and busts that hurt everyone else? |
Noah Smith, an economist and Substack writer, offers this useful bit of history in his newsletter: |
In 2008, the bankers who made the bad decisions that led to the financial crisis generally got to keep their (very lucrative) jobs after getting bailed out. And their banks continued to exist as well, and even got government to guarantee them some profits going forward. Even as normal people suffered mass unemployment and the loss of their careers and livelihoods, many of the people responsible for the disaster kept collecting million-dollar checks and being in respected positions of power, now with government guarantees. If that seemed unfair, it's because it was unfair. |
- Asian stocks were mixed, with indexes in Tokyo down and markets up in Hong Kong. In Europe, major indexes were sharply lower.
- Futures are suggesting that the U.S. market may open flat from Friday's close, which capped the market's worst week this year.
- HSBC will buy SVB's British subsidiary (for one pound).
- Some of the worst casualties of Silicon Valley Bank's collapse are start-ups developing climate change solutions.
- Etsy, Roku, Vox Media: These are some of the companies that had money at SVB.
- Treasury Secretary Janet Yellen said the U.S. banking system was safe and well capitalized. President Biden will speak about the issue this morning.
- These bank failures are the result of leaders in Washington weakening the financial rules, Senator Elizabeth Warren argues in Times Opinion.
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Thanks for spending part of your morning with The Times. See you tomorrow. |
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Matthew Cullen, Lauren Hard, Lauren Jackson, Brent Lewis, Claire Moses, Ian Prasad Philbrick, Tom Wright-Piersanti and Ashley Wu contributed to The Morning. You can reach the team at themorning@nytimes.com. |
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