The US Federal Reserve yesterday morning stated that it would, through the Federal Deposit Insurance Corporation (FDIC), cover the funds of all depositors in the now defunct Silicon Valley Bank following its collapse last week Friday.
Usually, the FDIC only covers insured deposits to a maximum of $250,000 but in this case, it decided to make an exception as the fallout from the SVB saga threatened to spread across the entire US banking system.
In a statement, the federal reserve mentioned that the exception was taken to protect the U.S. economy by strengthening public confidence in our banking system and ensure that the U.S. banking system continues to perform its vital roles of protecting deposits and providing access to credit to households and businesses in a manner that promotes strong and sustainable economic growth.
Additionally, the bank shareholders and certain unsecured debtholders will not be protected and senior management has also been removed. Any losses to the Deposit Insurance Fund to support uninsured depositors will be recovered by a special assessment on banks, as required by law.
Over the weekend, the SVB debacle sparked debates on whether the government should cover deposits beyond the uninsured amounts, with others arguing that doing so would make the tech industry not learn from its mistakes of adverse risk taking while others argued that depositors, who are mostly tech startups, should not pay for the incompetence of management and shareholders.
The other argument from those supporting the depositors bailout was also that letting depositors take a hit could encourage other depositors in other banks to take out their money too, causing the collapse of multiple banks and eventually, that of the US financial system.