The financial world has been in disarray for months on end. Signs this turmoil is nearing its close only seem to be responded to with more woes. We’ve seen it with the collapse of crypto, for starters. Yet, even those who abstain from digital assets know the pain that faced the tech market and speculative stocks in the last year. The hardships facing the investing world have churned out eye-catching stories of failures, most notably that of the FTX collapse. And last week, we saw this continue by way of SVB Financial’s (NASDAQ:SIVB) Silicon Valley Bank meltdown.
This new fiasco bridges both traditional stock institutions and crypto powerhouses under one umbrella, and fallout continues to ripple across the country. The club of companies holding assets with the bank is no small one. Thus, the government is rushing to speedily respond and hopefully dislodge assets from the insolvent bank to minimize the damage.
Silicon Valley Bank (SVB) had been forged on the efforts of the tech economy boom in the 1980s. In four decades, it worked its way up to being the sixteenth-largest banking institution in the world. And over the course of a few short days, it unwound into nothingness.
Last Wednesday, SVB told investors that it would need an eye-watering $2.25 billion in funding just to shore up its balance sheet. The news rapidly devolved into a bank run, which regulators responded to by seizing the bank’s assets. This effort, brought on by California banking regulators, was headed by the Federal Deposit Insurance Corporation (FDIC). Now, the government entities are tasked with a Herculean task of keeping the banking system propped up and restoring client confidence in order to mitigate the damage.
Silicon Valley Bank Becomes Bridge Bank Through FDIC Effort
Silicon Valley Bank is no longer, that much is certain. Government officials have been stern in their tone: they are unwilling to give the company a bailout. The more preferred course of action is in preventing further bank runs on other American institutions. The arguments of semantics around whether or not the FDIC’s action qualifies as a bailout are still up in the air. The corporation is nonetheless moving, and quickly.
There are a lot of Big Tech dollars tied up in SVB, as the bank’s name implies. Founded in San Jose, the bank grew in the belly of the tech beast. Since then, it has served as the institution of choice for Big Tech and younger players like crypto companies. And as it stands, the FDIC only ensures protection of deposits of $250,000 or less. More than 85% of the funds held by SVB are uninsured.
Still, the FDIC is working to prevent more damage, and so it is looking to make SVB’s clients whole. It’s doing this by establishing a bridge bank called Silicon Valley Bank, N.A. Bridge banks are a method by which the FDIC can operate a failed bank until clients are made whole. The FDIC, in doing this, emphasizes that no burden will be borne by taxpayers in making these creditors whole. While the move doesn’t put investors entirely at ease, it is the first tangible step taken by the FDIC in mitigating a larger disaster. Companies will be able to withdraw assets via the bridge bank starting Monday.
On the date of publication, Brenden Rearick did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.