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SVB Bailed Out by US Government

FDIC, The US Treasury, and the Federal Reserve issued a joint statement Sunday March 12th, 2023 guaranteeing all deposits at the insolvent Silicon Valley Bank (SVB.) Thousands of small businesses will be able to access their full deposit account value starting Monday March 13th, 2023.

The extraordinary announcement guarantees the full value of all deposits, including amounts over the normal $250k FDIC insurance limit. 

Deposit guarantees hope to avoid contagion and recession

SVB entered FDIC receivership Friday after a bank run made them insolvent. Thousands of small businesses faced catastrophic cash losses, missed payrolls, and spent much of this weekend scrambling to raise capital, often at sub-prime rates. (See our article on Why the SVB Receivership Matters.) The federal guarantee of deposits will allow these businesses to continue operations as normal, averting a wave of layoffs and business closures. 

The federal bailout is intended to stop contagion from taking down other financial institutions, like that which caused the 2008 financial crisis. To further press this point, the announcement named a similar exception for Signature Bank, which was closed today, and alluded to “additional funding to eligible depository institutions.” 

However, history shows bailouts do not always stop contagion. In 2008 the federal government bailed out Bear Stearns only to have the contagion spread to Lehman Brothers and dozens of other institutions later on.

Although no one knows if contagion will spread, the government has set a precedent we hope will continue for all small business deposit accounts, not just VC-backed tech startups at a large public bank. 

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