U.S. banking regulators move to avert financial panic

Transcript

NIALA: Good morning! Welcome to Axios Today!

It’s Monday, March 13th.

I’m Niala Boodhoo. Here’s what we’re watching today: China gets a major diplomatic win. Plus: atmospheric rivers are bringing more rain, snow and flooding to California. But first, U.S. banking regulators try to avert financial panic. That’s today’s One Big Thing.

U.S. banking regulators try to avert financial panic

NIALA: It's been a minute since we've heard the phrase bank collapse or the idea that the government has to bail out a bank.

But after a weekend of speculation and anxiety following the collapse of Silicon Valley Bank on Friday. Last night, federal banking regulators, including the Treasury, the Federal Reserve, and the Federal Deposit Insurance Corporation determined that FDIC insurance funds will be used to protect SVB depositors from losing their money.

Axios Chief Economic Correspondent Neil Irwin and our Chief Financial correspondent Felix Salmon are here to explain how SVB collapsed and what this means for our entire financial system. Hello, gentlemen.

NEIL IRWIN: Hi Niala.

FELIX SALMON: Hi Niala.

NIALA: So Felix, how could a major bank that worked with thousands of venture capital firms collapse within a couple of days?

FELIX: It was a big failure of risk management. What they did was they took a whole bunch of deposits, tens of billions of dollars of deposits, and invested them in mortgage bonds, and then those mortgage bonds went down so far in value that it looked very much as though the value of the mortgage bonds was lower than the value of the deposits, that their assets were worth less than their liabilities, which means that they were insolvent.

And when people are banking with a bank that looks like it might be insolvent, they take their money out of that bank. And so what we saw on Thursday was by far the largest bank run that we have ever seen in the history of this country: $42 billion in one day. And the biggest bank run ever in American history up until Thursday was Washington Mutual in 2008, and that was $16 billion in 10 days.

NIALA: Neil, how did the Fed's interest rate hikes make this banker's investment strategy more vulnerable?

NEIL: So what happened is, in 2021, SVB Silicon Valley Bank was buying all these mortgage securities that yielded about 1.5%, 1.6%. Remember, mortgage rates were super low, the securities tied to them also at very low rates. What happens to bonds is when interest rates rise. The value of old bonds falls. So, Silicon Valley Bank had these very safe assets. They had these securities that are gonna pay off, that are doing just fine. But, uh, their value on paper had dropped. And so that's what caused this panic that really enveloped this institution that been around since 1983. And that's what created this bizarre moment on Friday that led to a shocking, uh, policy intervention Sunday night.

NIALA: How much did social media play a role in accelerating this bank run?

NEIL: It's not just social media, it's, it's this broader, you know, Silicon Valley is a very insular community in some ways. And so you had this network of venture capitalists, the companies they fund, all kind of looking at this stuff at the same time, trading notes, you know, exchanging text messages and, and private messages saying, this looks like I don't wanna have my money exposed to this. You know, most banks have, are much more diversified in their, in their deposit base, where it's coming from. This is partly a function of Silicon Valley Bank being geographically concentrated and industry concentrated.

NIALA: What does the move from federal regulators mean for SVB depositors now then?

NEIL: The federal government has said that they will use the FDIC's insurance fund to make sure that every depositor, even if you have more than a quarter million dollars, which is the federal insurance limit, will be made whole. So if you're a company that has $10 million in your account at Silicon Valley Bank, the federal government is saying, even though it's against the rules, we're invoking this special exception in the, in the law to, to make sure that we're taking care of you and you as a depositor we made whole by the U.S. government.

NIALA: So yesterday, treasury Secretary Janet Yellen, appeared on CBS Sunday morning. Her main message was that our banking system is safe and strong. How does this affect that narrative?

NEIL: The overall capital position of U.S. banks is strong. Like the, she's not wrong. This isn't 2008. This isn't a situation where they made a bunch of bad loans that are now coming due. They bought a bunch of securities that are super safe, and they're fine as long as they have time. But if people start withdrawing their money, then they could face a cash crunch. But the federal government last night stepped in and prevented that cash crunch from happening.

NIALA: So is this a bailout?

FELIX: The Biden administration is making the case that it's not a bailout. That all of the money is coming from the FDIC insurance fund, and the FDIC insurance fund comes from the banks. By the same token, the government is coming in and effectively making whole, a whole bunch of people who probably would not have been made whole absent for this government action.

NEIL: I think it's a government bailout, but not of the banks, but of the depositors in that bank whether that is appropriate is a question people will debate for a long time. But that's the policy decision that, that Biden administration decided is best for the future of the U.S. economy.

FELIX: One of the things that we realized when Silicon Valley Bank failed was that people with more than $250,000 in the bank are not necessarily rich people. Like often what we're talking about is businesses here and these businesses need to make payroll and if they had no more than $250,000, a lot of them could not make payroll and very, very normal rank and file employees would not get paid. And the idea of deposit insurance was always to protect normal folks, and so that's one of the reasons why the government stepped in.

NIALA: Felix, Neil, thanks very much.

NEIL: Thanks Niala.

FELIX: Thanks Niala.

NIALA: In a moment: China brokers a major deal in the Middle East.

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China gets a major diplomatic win

NIALA: Welcome back to Axios Today! I’m Niala Boodhoo.

Last week, China helped restore diplomatic relations between Iran and Saudi Arabia after seven years of tension. Axios’ Bethany Allen-Ebrahimian has why this matters.

BETHANY ALLEN-EBRAHIMIAN: This marks a major diplomatic victory for China in the Middle East, which has traditionally been a stronghold for U.S. diplomacy. This is the first time that China has brokered a major international agreement, particularly between countries with such a complex history. The relationship between these two countries has been fraught for decades as both are jockeying for power in the Middle East and both have differing visions for Islam and view themselves as correct representatives for Islam.

The U.S. is downplaying China's role in this agreement saying that it's not about China, but this is a major diplomatic victory for China because it shows China intends to and indeed can play a constructive role on the world stage. If this détente between Iran and Saudi Arabia can last, it could potentially help reduce some of the violence and instability that we've seen across the region.

And if it fails, then Beijing looks like it has failed too. So this is, the Chinese government really kind of planting a flag in the ground saying, okay, we're gonna be present here and the troubles of the Middle East now we have some, at least reputational stake in.

NIALA: That’s Axios’ China Reporter Bethany Allen-Ebrahimian.

And in other news out of China: President Xi Jinping on Friday officially assumed his third term, giving him another five years as the country’s leader. He was elected unanimously by the National People's Congress, China’s rubber stamp legislature in China that meets annually.

And: yesterday China also appointed a new defense minister – General Li Shangfu, who was sanctioned by the U.S. government in 2018 for buying Russian weapons. Bethany tells us this is a strong signal from China that it does not care at all about U.S. sanctions.

Atmospheric rivers bring more rain, snow and flooding to California

NIALA: One more thing before we go today: California has been pummeled this season by rain, snow and flooding because of atmospheric river storms… and this past weekend’s weather in North and Central California left thousands without power and at least two people dead. The area’s now bracing for another storm today.

Sheri in Sacramento County sent us a video over the weekend.

SHERI: Because of the rain and the wind you can see that some construction workers hang a metal fence where they were working and it all blew over. I just wanted you to get the full effect of how us in Northern California are sick of rain… and wind.

NIALA: I can’t even imagine how sick people on the West Coast are of this weather. But - if it’s any comfort – recently released data from the U.S. Drought Monitor shows more of the state - especially in Central California - is no longer suffering from drought conditions.

As always, tell us what’s going on where YOU are by sending a text, a voice memo, or even a video to me at (202) 918-4893.

I’m Niala Boodhoo - thanks for listening - stay safe and we’ll see you back here tomorrow morning.