Treasury Secretary Janet L. Yellen said on Sunday that regulators were working throughout the weekend to deal with the fallout from the collapse of Silicon Valley Bank but tried to assure the public that the American banking system was “safe and well capitalized.”
The Federal Deposit Insurance Corporation on Friday took over Silicon Valley Bank, putting nearly $175 billion in customer deposits under the regulator’s control. The bank’s failure, the largest since the depths of the financial crisis in 2008, has raised concerns that other financial firms could suffer similar fates as rising interest rates put pressure on the banking sector and as nervous depositors consider pulling out their money.
While customers with deposits of up to $250,000 — the maximum covered by F.D.I.C. insurance — will be made whole, there’s no guarantee that depositors with larger amounts in their accounts will get all of their money back.
Ms. Yellen, speaking on the CBS program “Face the Nation,” would not say what steps regulators might take to protect depositors, including many whose funds are now frozen at the bank. But she said she was mindful that many small businesses are counting on funds held at Silicon Valley Bank and that regulators were working to address those concerns.
The Treasury secretary suggested that an acquisition of Silicon Valley Bank was one of a range of possible outcomes and that regulators were trying to address the situation “in a timely way.”
Ms. Yellen’s comments came as economists, analysts and former government officials raced to determine what options the government would have to stem broader fallout from the bank’s failure. Many worried that a wave of nervous depositors could rush to pull their funds from regional banks, turning what might otherwise be a one-off disaster into a widespread problem that would tear through the banking sector and economy.
The key question is “is this going to be handled in a way that alleviates concerns and prevents runs elsewhere?” Kristin J. Forbes, an economist at the Massachusetts Institute of Technology who studies contagion, said on Sunday morning.
Ms. Forbes said that the government ought to have two goals: Reassuring the public that Silicon Valley Bank was unusual and not an example of a wider problem, and promising that there would be enough available money pumping through the system — liquidity, in industry terms — to prevent broader issues.
While some of Silicon Valley Bank’s problems tied back to rising interest rates, the institution was also atypical in key ways. It had a large number of big and uninsured depositors, who tend to pull their money out amid signs of trouble.
By contrast, Ms. Yellen emphasized in her remarks on Sunday that the banking system as a whole was “resilient.”
Even so, investors and economists worried that companies that have big and uninsured bank deposits themselves might grow nervous as they watched some Silicon Valley Bank customers face down losses — prompting them to pull their own deposits out of other regional banks.
Some said that it would be important for the government to find a way to make sure that even Silicon Valley Bank’s uninsured depositors were paid back in full to prevent a destabilizing rush of withdrawals.
“Why would you take the risk?” said Megan Greene, global chief economist for the Kroll Institute, said of other businesses with uninsured deposits. “It seems to me like a no-brainer to make all depositors whole.”
But it was unclear how the government might go about paying back Silicon Valley Bank depositors fully, assuming it wanted to do so. Finding a buyer to take over the bank’s accounts was one clear option, but as Ms. Yellen alluded to, it was neither guaranteed to be successful nor the only possible route.
Some economists suggested that the Federal Reserve could use some sort of emergency backstop program, which the central bank can use to funnel short-term cash to borrowers in need during unusual moments, with the approval of the Treasury secretary.
But a central bank backstop might not be attractive in the current situation: Emergency lending programs from the Fed provide loans, not payouts. There are limitations on such programs that insist they must be broad-based, and which prevent their use for insolvent companies.
Another idea being floated by analysts on Sunday was the possibility that the F.D.I.C. could find a way to pay back depositors. While the regulator is typically required to unravel failed banks in the cheapest way possible — which means leaving the private sector on the hook for losses on uninsured deposits — it can get around that using what is called a “systemic risk exception.”
The rule, which was used repeatedly during the 2008 crisis, essentially allows the government to pay back uninsured depositors if failing to do so would have serious adverse consequences for the economy or financial stability.
But invoking the exception requires jumping a number of hurdles: The Treasury secretary, in consultation with the president, the F.D.I.C., and the Federal Reserve Board, must sign off on the decision to use it.
“If the Fed signs off, I would think the Fed really sees it as systemic,” said Steven Kelly, a senior research associate at the Yale Program on Financial Stability, explaining that it was not clear that Silicon Valley Bank’s failure is in fact a threat to the stability of the broader financial system at this point. “They tend to take the determinations really seriously.”
And there are other steps that regulators could take to reassure investors in the safety of the system and prevent more sweeping bank runs, perhaps even if depositors at Silicon Valley Bank are not paid back in full.
“I think the more urgent task is to reassure uninsured depositors more broadly,” said Daleep Singh, chief global economist at PGIM Fixed Income and a former economic official from both the Biden administration and the New York Fed.
To do that, the Fed could also emphasize that banks can tap the Fed’s so-called discount window. That program allows commercial banks to take investment-grade securities — including Treasury bonds — and pledge them to the Fed in exchange for cash to meet short-term liquidity needs.
Banks often shy away from the discount window because they think that using it could signal that they are in a weak position. But in 2020, as the coronavirus shut down much of the economy, the Fed tried to encourage institutions to use it by making its terms more attractive. Back then, a group of large banks tapped it in concert to try to underline that using it was not a sign of weakness.
The Fed should be “putting the discount window in neon flashing lights,” Mr. Singh said.
As of midday Sunday, the government appeared to be racing behind the scenes for a solution as top officials tried to reassure the public that the situation would not end in disaster.
“Americans need to feel confident that the banking system is safe and sound, that it can meet the credit needs of households and businesses and that depositors don’t have to worry about losing access to their money,” Ms. Yellen said. “Those are goals that we all embrace.”
