US government steps in to protect depositors of collapsed banks

March 21, 2023 (MLN): The collapse of Silicon Valley Bank and Signature Bank in the US has prompted authorities to take unprecedented measures to protect depositors.

The Treasury Department, Federal Reserve, and Federal Deposit Insurance Corporation (FDIC) have all stepped in to assure depositors that they will have access to their money, with no losses to be borne by taxpayers.

This move is in stark contrast to the bailout measures taken during the 2008 financial crisis, where shareholders and bondholders were spared while institutions were propped up.

Despite the government's assurances that depositors will be made whole, some experts have criticized the intervention as a bailout. They argue that depositors are being protected at the expense of shareholders and bondholders. The FDIC is using resources from the Deposit Insurance Fund to ensure that depositors are not impacted, but this may result in higher fees for banks in the future. At the end of 2022, the fund had a balance of $128 billion, which is 1.27% of the $10 trillion in insured deposits.

While the government's intervention has prevented contagion in the short term, concerns have been raised about the potential long-term impact on bank behavior. The increased moral hazard resulting from the government's actions may lead to riskier behavior from banks in the future, which could have negative consequences for the financial system as a whole.

The collapse of Silicon Valley Bank has also prompted an investigation by the Justice Department, with President Joe Biden calling on Congress to impose tougher penalties for senior bank executives whose mismanagement contributed to their institutions failing.

While depositors have been protected, holders of debt issued by the two banks are expected to suffer significant losses, and the entire market value of both institutions has been wiped out.

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