Following the failure of the Silicon Valley Bank, the Federal Reserve and FDIC are debating the establishment of a fund to support deposits.
As the largest bank collapse since the 2008 liquidity crisis, Silicon Valley Bank was closed down by regulators on Friday.
According to reports, deposits at the Silicon Valley Bank totaled $173 billion.
A run on the bank is taking place as a result of the Fed interest rate, which is currently at 4.57%, and the 1.56–1.66% yield on $117 billion in Silicon Valley Bank securities.
Silicon Valley Bank was in FDIC receivership by Friday.
By increasing interest rates seven times in 2022, the Federal Reserve was responsible for the bank run.
The 450 basis point rate hike in 2022 will be problematic for bankers since investors prefer to invest their money in higher-yield bonds.
The U.S. Federal Reserve is currently debating a new mechanism that would enable regulators to back up deposits in the event that more banks fail, despite having caused the issue in the first place.
As per Bloomberg News:
“The Federal Reserve and the FDIC are considering setting up a fund that would enable the regulators to support more deposits to banks that have difficulties in the wake of Silicon Valley Bank’s collapse.”
“According to those with knowledge of the situation, regulators spoke with bank executives about the new vehicle. The people expressed confidence that establishing such a vehicle will reassure depositors and aid in containing any panic. They requested anonymity because the meetings were private.”
“The vehicle is a component of the agency’s emergency planning concerning the stability of banks serving the venture capitalist and startup sectors.”
There may be more banks that fail in addition to Silicon Valley Bank.
In response to the failure of Silicon Valley Bank, First Republic’s stock fell by 50% on Friday.
On Saturday, a line of people formed to withdraw their money from the First Republic location in Brentwood.
