WASHINGTON (CN) — Under fire from some economists about his administration's role in two record-breaking bank failures last week, President Joe Biden assured the American public Monday that the country's financial system is sound.
The Federal Deposit Insurance Corporation, an invention of the Great Depression, quickly took control of California-based Silicon Valley Bank and New York-based Signature Bank — moves that sent shockwaves across the financial sector and put many on guard for a more widespread crisis. The $212 billion worth of assets reported by Silicon Valley Bank in the fourth quarter of 2022 make its collapse Friday the second-largest in U.S. history, after Washington Mutual, which went under with $300 billion in assets at the height of the 2008 financial crisis. Signature Bank's failure Sunday comes in at the third largest.
Biden offered calm in a short address on Monday morning, stressing that the management from both institutions will be fired and those who had deposits in the bank will have access to their money.
“Americans can have confidence that the banking system is safe," he said. “Small businesses across the country that had deposit accounts at these banks can breathe easier knowing they’ll be able to pay their workers and pay their bills."
The president stressed that the clients who deposited money at the banks will be paid through the FDIC’s Deposit Insurance Fund, a more than $100 billion reserve funded by the fees that banks pay and the earnings on their investments such as Treasury securities.
“No losses will be borne by the taxpayers,” Biden said.
When money is deposited at a bank, it doesn't actually stay there but is instead used for investments. Federal law requires that large banks hold more investment capital than deposits so they can cover expenses and payouts in extreme circumstances.
One of the ways banks can make investments is through Treasury bonds, which are government backed and considered low risk. Banks loaded up on the bonds at the start of the Covid-19 pandemic, when the Federal Reserve dropped interest rates to near zero.
Beginning in March 2022, however, the Federal Reserve has been consistently raising interest rates from a range of 0.25% to 0.5% to 4.5% to 4.75% at the end of January. The increasing rates have caused the value of existing bonds to plummet because newer ones pay more interest.
Economists say these tactics are partly to blame for what caused the recent bank collapses.
“Higher rates have also lowered the value of their treasury and other securities which SVB needed to pay depositors,” economist Mark Zandi told CNN. “All of this set off the run on their deposits that forced the FDIC to take over SVB.”
The crisis began Wednesday when Silicon Valley Bank, a key lender for tech startups, announced it would sell a large amount of investments at a loss to shore up its balance sheet. The announcement triggered a panic from venture capital firms, which reportedly advised companies to withdraw money from the bank, causing the company's stock to crater.
Robert Reich, a former labor secretary who served in the Clinton administration, called it “impossible to know” if the failure will lead to a more widespread crisis.
“The speed with which regulators moved over the weekend suggests they’re concerned,” he wrote on his website.
Because the FDIC insures only up to $250,000 in deposits per account, much of the bank’s deposits weren’t backed up by the government.
Peter Summers, an economics professor at High Point University, said Silicon Valley Bank was in a unique position because of its clientele and large accounts. But the Federal Reserve’s interest rate hikes “certainly did have an effect” on the bank’s decision to load up on Treasury bonds, he observed in an interview.
“It was a business decision that looked good a couple of years ago, but they needed to adjust with the times and they didn’t,” he said of the bank.
Summers said the FDIC’s announcement that depositors would have access to their funds sought to “head off any kind of wider panic of the financial system.”
“I don’t think that there will be anything like the widespread panic we saw in 2008,” he said. “This is a very different sort of situation. … I don’t see anything remotely like what we saw in the Great Recession.”
Biden noted that there are no protections for investors who bought stock in the banks.
“They knowingly took a risk and when the risk didn’t pay off, investors lose their money,” he said. “That’s how capitalism works.”
The president also criticized the former Trump administration for supporting the dismantling of the Dodd-Frank legislation passed in the wake of the 2008 financial crash.
“I’m going to ask Congress and the banking regulators to strengthen the rules for banks to make it less likely that this kind of bank failure will happen again and to protect American jobs and small businesses,” he said.
Senator Bernie Sanders, a longtime proponent of stronger banking regulations and opponent of bank bailouts, piled on the former president as well, calling the banking failures “a direct result of an absurd 2018 bank deregulation bill signed by Donald Trump.”
“We cannot continue down the road of more socialism for the rich and rugged individualism for everyone else,” the Vermont Independent said in a press release. “Let us have the courage to stand up to Wall Street, repeal the disastrous 2018 bank deregulation law, break up too big to fail banks and address the needs of working families, not the risky bets of vulture capitalists.”
For his part, Trump predicted on his social media website Truth Social that “WE WILL HAVE A GREAT DEPRESSION FAR BIGGER AND MORE POWERFUL THAN THAT OF 1929. AS PROOF, THE BANKS ARE ALREADY STARTING TO COLLAPSE!!!”
Florida Governor Ron DeSantis, who is expected to seek the Republican presidential nomination in 2024, suggested to Fox News on Sunday that the collapse was related to the bank’s focus on diversity, enquiry and inclusion, and an excess of federal regulations.
“This bank, they’re so concerned with DEI and politics and all kinds of stuff, I think that really diverted from them focusing on their core mission,” DeSantis said. “We have such a morass of federal regulations. … We have a massive federal bureaucracy, and yet they never seem to be able to be there when we need them to prevent something like this.”
Biden highlighted economic gains during his administration and did not take any questions after his address. He is traveling to San Diego on Monday for a previously scheduled meeting with British Prime Minister Rishi Sunak and Australian Prime Minister Anthony Albanese.
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