US gov’t creates moral minefield after SVB and Signature bailout

While your favorite public-facing VC was having a complete meltdown and talking about buying guns on Twitter, financial regulators and governing bodies met behind closed-doors to stop what was beginning to resemble a regional-level bank run.

Their move became clear on Sunday when a joint decision was announced, ensuring that all depositors at Silicon Valley Bank (SVB) and Signature were fully covered – regardless of $250,000 limits on FDIC insurance.

The alteration seems to have driven the governmental bodies into an extremely morally hazardous minefield.

• The FDIC only guarantees the return of up to $250,000 to depositors if a bank goes under.
• The wealthy VCs that held accounts at SVB and Signature demanded the US government do away with the cap and cover all deposits.
• Mega-rich supporters like Mark Cuban chimed in; the US government acquiesced.

Are all deposits at all US banks covered now?

Well, no, they aren’t. Similar to the global financial crisis of 2008, the FDIC, Fed, and Treasury are using a series of extraordinary measures to mitigate a crisis and, at least for the time being, intend to rollback these procedures when the problems have been resolved.

Unfortunately, this decision has created a conundrum for government financial institutions: promise that every deposit in America in insured, or make Silicon Valley Bank and Signature the exception to the rule, giving the appearance of special treatment for a subset of the wealthy elite.

“The route taken is the simplest,” financial commentator Frances Coppola told Protos. “They’ve given these banks a collateral uplift and handed them a free pass.”

Even the same venture capitalists who demanded their centimillion or billion dollar deposits be covered at SVB or Signature seem to be calling for all US depositors to receive the same promises, with well-known VC, definitely not-a-libertarian, and All-In podcast cohost David Sacks saying, “The Fed may or may not realize it, but it’s created a two-tier banking system.” This is indeed the case.

Crisis averted; crisis created

The immediate bank-run danger appears to have been dealt with. Most banks that were seeing their stocks and depositors rushing for the exits have rebounded in the market, including, but not limited to, First Republic, Pacific West, Western Alliance, and Customers. But a new crisis is afoot, where regulators will have to determine if the banking system needs an overhaul in the wake of recent collapses.

“The problem,” said Coppola, “is that banks always have to leverage deposits somehow… if they won’t do it by lending, then they’ll do it some other way. The ramifications of this [crisis and its resolution] are quite dreadful – there will be consolidation in the US banking system,” she warned.

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Update 4:50 PM UTC, March 16: Title updated to include Signature.