Bad Money Moves: The Winners of the Banking Crisis

How Big Companies Enjoyed Backstops on Billions as SVB Went Under Amid Bank Crisis

Federal Regulators have been touted for doing a good job in controlling the banking crisis by stepping in and guaranteeing all deposits above $250,000 as the Silicon Valley Bank went under. The move was deemed necessary at the time, seen as the only way to help protect American workers and small businesses.

FDIC SVIB Backstop

However, it has since emerged that the biggest beneficiaries were big companies with significant financial muscle that were not in danger. Sequoia, one of the largest venture capital firms, was one of the beneficiaries with its $1 billion in deposits with the lender covered by federal deposit insurance. The fact that the insurance company also protected Chinese heavyweight Kanzhun Ltd continues to rattle policymakers.

Silicon Valley Bank and its parent SVB Financial Group had a combined $4.6 billion in deposits. In the bankruptcy filing, the bank insisted that the $2 billion in deposits that the parent company had with the bank should be returned.

The revelations are part of a document mistakenly released by the Federal Deposit Insurance Corp that provides a glimpse of some of the biggest depositors at Silicon Valley Bank. At the time, Treasury Secretary Janet Yellen affirmed the government’s response to the banking crisis as necessary to avert a major catastrophe for the financial sector.

Nevertheless, backstopping at the time was deemed necessary to help protect American households with over $250,000 in deposits. Had the deposit not been backstopped, many people would have lost their homes or struggled to improve their standards of living on everything being wiped clean with SVIB going under.

On the other hand, critics are questioning the move to backstop all deposits, including that of foreign entities. Former Vice President Mike Pence was one of the biggest critics insisting that backstopping all depositors amounts to a bailout, something that the current administration has always pushed back against.

Raising FDIC Backstop Limit

Similarly, there is debate about whether there is a need to raise the insurance limit for businesses if the insurance policy is to work in protecting households. There are also calls to ensure that the backstop does not apply to foreign entities, especially Chinese companies.

After backstopping all the depositors, the FDIC was left with a bill of $15.8 billion. Consequently, it has already proposed taxing some of the biggest banks billions of dollars in fees to help replenish the bedrock insurance deposit. The extra fees are to be collected annually over eight periods to help mitigate any liquidity concerns.

Likewise, the collection of the fees would have a small hit on the income of the largest banks. Additionally, the push to collect the money could be halted if less money is needed at the end to replenish the FDIC.

The banking crisis has since cooled off after rattling the financial markets amid concerns that it would trigger a broader market crisis, as was the case in 2009. In the last financial crisis, banks were at the center, a move that resulted in heavyweights like the Lehman brothers going under as the Treasury Department pushed back on a bailout.

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