Why are Corporations Hoarding Trillions in Cash?
February 7, 2025
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The fall of the Silicon Valley Bank happened very suddenly. The bank had gone from a healthy functioning bank to near bankruptcy within 48 hours! As a result, the credibility of the entire American banking system has been brought into question. This is because commercial banks are not like regular organizations. In most cases, they cannot be allowed to go bankrupt. This is because almost every commercial bank has several stakeholders and hence their bankruptcy has an important effect on the entire ecosystem.
In this article, we will have a closer look at how the Silicon Valley Bank collapse affects the various stakeholders within the banking ecosystem.
The Federal Deposit Insurance Commission (FDIC) insures deposits up to $250000 in financial institutions. Hence, when the Silicon Valley Bank first collapsed, the communication sent was that the depositors will have access to $250,000 in their accounts. The rest of the money was going to be returned over a longer period of time. However, as soon as this news was released, there was panic spread across the entire startup ecosystem. This is because most of Silicon Valley Bank’s customers were startups.
Now, most of these startups had more than $250000 in their respective bank accounts. Hence, they were very worried since a large chunk of their deposits were uninsured. The management at many of these startup companies had made comments that they will not be able to make payroll if their funds are not released.
As a result, the Fed came up with a statement and mentioned that the depositors will be able to access all their money whether insured or uninsured. Hence, the FDIC and the Fed have ensured that the interests of depositors are not compromised in any manner whatsoever.
If the bank is sold out at a later date, then the same will be communicated to the borrowers when required. Also, in the case of loans such as lines of credit, the bridge bank which has been created in place of Silicon Valley Bank will continue extending credit in order to ensure minimal disruption of services to the borrowers.
In the case of Silicon Valley Bank, the senior management i.e. chief executive officer, chief financial officer, etc. have already been fired. The mid and junior-level staff have been retained by FDIC for a couple of months and they are being paid 150% salary. Once again, Fed has gone out of its way to ensure that the employees are getting a fair deal.
Hence, by definition, they must also absorb all the losses when mistakes are made. Also, the shareholders appoint the Board of Directors and the senior management. As a result, they should be considered to be responsible for their actions and the losses which might accrue because of the same.
The Silicon Valley Bank had a total net worth of $16 billion. It is estimated that $15 billion has already been lost during the crisis. Hence, the shareholders stand to lose almost all of their investment and the Fed is unlikely to intervene to change this.
The Fed has decided that FDIC will first pay all the losses. At a later stage, the amount paid for uninsured losses will be calculated. After that, a fund will be created wherein all the other banks will have to chip in to make good the loss faced by FDIC. This is a cost to all the banks.
However, the cost of paying a small contribution might be much smaller than the cost of losing customers and deposits since the confidence in the banking system has been broken. The Fed has ensured that the banking system will be self-sufficient when it comes to bearing losses. None of the losses will be transferred to the taxpayers or the general public.
The fact of the matter is that the Fed and the FDIC have ensured that all the stakeholders are treated fairly. However, this is just a plan as of now. It needs to be seen whether it can be implemented with the same spirit with which it was planned.
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