Could SVB collapse have a ripple effect through the economy?

(NewsNation) — The big question people are asking is whether the collapse of Silicon Valley Bank (SVB) could have a ripple effect through the economy.

The collapse seems to be making all mid-sized banks reconsider how they lend money to clients, or whether mid-sized, regional banks could share the same fate.

Should you be worried?

Sunday morning, Treasury Secretary Janet Yellen tried to reassure the public that won’t happen.

“What I do want to do is emphasize that the American banking system is safe and well-capitalized. It’s resilient,” Sec. Yellen said, later adding: “I’ve been working all weekend with our bank regulators to design policies to address this situation.”

The Treasury Department, Federal Reserve and FDIC said Sunday that all Silicon Valley Bank clients will be protected and have access to their funds and announced steps designed to protect the bank’s customers and prevent more bank runs.

“This step will ensure that the U.S. banking system continues to perform its vital roles of protecting deposits and providing access to credit to households and businesses in a manner that promotes strong and sustainable economic growth,” the agencies said in a joint statement.

After the financial collapse in 2008, Congress passed a whole series of new bank regulations meant to make sure banks weren’t taking major risks in their lending and could withstand most economic shocks. It meant regularly testing banks balance sheets as well.

Members of Congress and Biden administration officials Sunday say SVB collapsed partly because some of those safeguards had been cut back or relaxed over the last few years.

“The American people and American businesses can have confidence that their bank deposits will be there when they need them,” President Joe Biden shared in a statement Sunday evening. “I am firmly committed to holding those responsible for this mess fully accountable.”

Biden is expected to deliver remarks on the banking system Monday morning.

This case is very unique in that most of the Silicon Valley Bank’s clients are big tech companies — Many ran up their lines of credit and interest rates rose at a quicker pace than the bank could manage. Any deposits over $250,000, which was 90 percent of them at this bank, went uninsured.

So how could this impact you at home? One way is the stock market, your investments and potentially, your 401ks. Monday will reveal how many more banks the market believes might be at risk.

The former head of the FDIC, the agency that provides insurance for bank deposits, believes there could be more.

Others though, including the director of the office of management and budget, say the 2008 safeguards should still prevent another major collapse.

“After the financial crisis, the reforms put in place have given regulators more tools and our system is more resilient and the foundation is stronger because of it,” Shalanda Young, a director of office management and budget, said.

At this point, no lawmaker or cabinet secretaries thus far are calling for a government bailout of SVB. Some hedge fund managers say that should be the response.

All signs point to this ending with an orderly winding down of the bank, likely a selling off of all or most of its assets to other banks.

With the Federal Reserve gradually raising interest rates over the last year to slow inflation, some think that could change. The Federal Reserve acts independently, but there is some speculation they might want to avoid hiking interest rates too high to avoid more of these mid-sized regional bank collapses.

The Associated Press contributed to this report.


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