federal reserve

The collapse of Silvergate, Signature Bank and Silicon Valley Bank have caused a lot of fear to spread throughout financial markets, especially considering that the White House has had to intervene with Biden making a statement. Now, the Federal Reserve has created a $25 billion backstop to prevent future damage to the banking sector.

Biden explained that everyone in management positions at Silicon Valley Bank will be fired immediately as the FDIC takes over, and that further steps are to be introduced in order to ensure that this can’t happen again.

Federal Reserve bails out Silicon Valley Bank and Signature Bank

The FDIC usually has an insurance policy in which depositors are secured for up to $250k, meaning that all depositors can relax if they have less than $250k in the bank, but if they have any more they are liable to lose their assets in the event of a bank implosion.

However, the Federal Reserve has grown concerned that this figure may not be high enough and that everyone should be covered given the systemic importance of the bank.

Will $25 billion be enough to calm the markets?

There has been a lot of debate about the merits of this policy, and whether or not it is a good idea to create such a situation of moral hazard in the first place.

In particular, commentators such as Erik Vorhees have made the case that the Federal Reserve should not interfere with the banking sector to this extent, lest they encourage bankers not to manage risk appropriately and to create a bifurcation between banks that are “too big to fail” and that those that aren’t deemed a systemic risk.

It remains to be seen whether or not this was the right decision over the long term, and depends on one’s perspective: few people are in favour of rewarding poor risk management, but when the stakes are so high there is less room for manoeuvre.

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