The U.S. Federal Reserve and the Federal Deposit Insurance Corp are discussing the creation of a fund to backstop more deposits if more banks fail in the wake of the collapse of Silicon Valley Bank.
Silicon Valley Bank collapsed and was shut down by regulators on Friday after a capital crisis led to the second-largest failure of a financial institution in United States history.
Throughout 2022, the Federal Reserve raised interest rates seven times.
The rate hikes are causing problems for bankers as investors rush to move their money into higher-yield bonds.
After the Federal Reserve created the problem in the first place, they are now discussing a new vehicle to allow regulators to backstop deposits if more banks fail.
According to a report from Bloomberg, the new vehicle would help contain widespread panic and reassure depositors.
However, the Silicon Valley Bank collapse could just be the first domino.
First Republic’s stock fell 50% on Friday following the news of Silicon Valley Bank’s failure.
People scrambled to withdraw their money at First Republic branch in Brentwood on Saturday.
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First Republic released a statement to calm investors, highlighting its ‘continued safety and stability and strong capital and liquidity positions.’
But the problem for depositors with balances greater than $250,000 is that the FDIC does not insure them. These balances will be classified as creditors if a bank collapses.
Tech entrepreneur Andrew Yang urged the government to intervene, warning of mass layoffs in the tech sector and a “financial contagion.”
“In the absence of some kind of action, you’ll see thousands of mass layoffs and defunct companies, a wiped out generation of start-ups,” Yang warned.
Meanwhile, Democratic Sen. Elizabeth Warren called for Silicon Valley Bank management to face harsh punishment, according to CNN.
“SVB executives must be held accountable for any malfeasance or mismanagement that led to this failure,” Warren said in a statement.
“I expect there will soon be a better assessment of how much help is available for customers in Massachusetts and across the nation,” Warren added.
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