US government protects any bank collapse like Silicon Valley Bank

This article was last updated on March 13, 2023

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US government protects any bank collapse like Silicon Valley Bank

According to the Federal Reserve, customers of the now-collapsed Silicon Valley Bank (SVB) in the US can rest assured that their account balances are guaranteed and accessible from midnight local time.

However, shareholders and bondholders will not be protected, as stated by the central bank. Panic ensued after a series of undersold bonds and the release of billions in stocks caused investors and major customers to withdraw their funds from the start-up bank, which mainly catered to tech start-ups.

Before the weekend, the Federal Deposit Insurance Corporation (FDIC) put SVB under its supervision and froze its assets. While the US government will reimburse the total amount of credits and losses will not be borne by taxpayers, deposits up to only $250,000 were guaranteed after the government takeover.

The British government also announced an emergency support package for affected start-ups. The collapse of SVB is attributed to its investment in apparently low-risk government bonds, which suffered from the US government’s strong interest rate increases.

As demand for money from SVB’s customers increased, the bank sold the bonds at a loss and announced a $2.25 billion equity offering to quickly raise capital, ultimately leading to solvency problems and the bank’s shutdown.