The collapse of the Silicon Valley Bank has triggered concerns about the state of US economy. The Biden administration refused a federal bailout of the lender but announced that its depositors will have all access to the money beginning today.
The moves comes as another lender, the Signature Bank was shut by New York regulators on Sunday. It is the third bank after SVB and Silvergate to be shut within a span of three days.
What is a financial bailout?
In simple terms, bailout means a financial support to a company facing potential bankruptcy threat. It may be in the form of loans, cash, bonds or stock purchases. It may or may not need reimbursement and is accompanied by government regulations.
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Why no bailout for SVB?
Ever since SVB was shut by the FDIC, there have been loud calls for a bailout to save the bank. However, US treasury secretary Janet Yellen said the government was not considering this option due to the reforms made after the 2008 financial crisis.
“During the financial crisis, there were investors and owners of systemic large banks that were bailed out… and the reforms that have been put in place means that we’re not going to do that again,” she told CBS in an interview.
Following the 2008 failure of Lehman Brothers and the ensuing financial meltdown, US regulators required major banks to hold additional capital in case of trouble.
What is a Bank Funding Term Programme?
The Federal Reserve Board has announced the creation of a Bank Term Funding Program (BTFP) to make additional funding to eligible depository institutions to help assure banks have the ability to meet the ends of the depositors. Under this programme, loans of up to one year in length to bank, saving associations, credit unions and other eligible depository institutions will be provided.
With approval of the US treasury secretary, the Department of Treasury will make available up to $25 billion from the Exchange Stabilisation Fund as a backstop for the BTFP.
How did Biden administration secure investors?
A joint statement by the US treasury secretary, the Federal Reserve chairman and the Federal Deposit Insurance Corporation chief read that the would have access to their cash on March 13, and that taxpayers would not be liable for any losses accrued as a result of the action.