BAILOUT TALK ROILS D.C. AFTER COLLAPSE OF SILICON VALLEY BANK

Experts worry about moves that could spur broader destabilization

Federal officials faced growing pressure Saturday to bail out even the biggest customers of the collapsed Silicon Valley Bank, igniting debate over Washington’s role in tamping down potential threats to the broader U.S. financial sector.

Tech executives, former government officials and at least two Democratic lawmakers called for safeguarding depositors with money at stake in the collapse if a buyer for the bank’s assets isn’t found by Monday, arguing that it’s the only way to limit a cascade of bigger problems.

Companies that did business with Silicon Valley Bank are already warning that the bank’s failure may force thousands of layoffs or furloughs, and prevent many workers from receiving their next paycheck.

Some experts worry that large numbers of companies could move to transfer their money from regional banks similar to SVB to safer, giant commercial banks Monday, leading to a fresh round of destabilization.

A move to make Silicon Valley Bank’s depositors whole without a buyer would probably require Congress to pass legislation drawing on an insurance fund paid into by all banks and backed by U.S. taxpayers — a fund that typically only covers deposits up to the Federal Deposit Insurance Corp.’s limit of $250,000. But more than 90 percent of SVB’S accounts were over that limit.

Critics of using the fund to help larger depositors argue that it would establish a troubling precedent, leading other banks in similar circumstances to expect federal authorities to swoop in and save them as well.

Another possibility is that larger Wall Street banks, fearing wider contagion, acquire what’s left of SVB and make all of its depositors whole. That could be a tricky bet, however, and bigger banks might ask for the federal government’s help before agreeing to a potentially unprofitable purchase.

“All the choices are bad choices,” said Simon Johnson, an economist at the Massachusetts Institute of Technology who previously served as chief economist of the International Monetary Fund. “You don’t want to extend this kind of bailout to people. But if you aren’t doing that, you face a run of really big — and really hard to predict — proportions.”

Created during the Great Depression to provide a federal backstop on bank runs, the FDIC is meant to insure only a portion of customer deposits — both to reduce the risk to taxpayers and to encourage customers to do due diligence and not put their deposits in banks that take irresponsible risks.

But officials at the FDIC — which, in a stunning move Friday, took over Silicon Valley Bank during normal trading hours — are facing some calls to go beyond giving smaller customers their money back.

On Friday, the FDIC said in a statement that everyone with an insured deposit — meaning accounts worth less than $250,000 — would have full access to their money by Monday morning. The statement said that uninsured depositors — those with accounts bigger than $250,000 — would get some of their money back, but it did not specify how much. Uninsured depositors make up the overwhelming majority of the bank’s customers.

SVB held roughly $150 billion in uninsured deposits, according to the company’s latest financial statement, issued late last month.

In deciding how to respond, federal authorities will have to weigh what the extent of the risk posed by the collapse is to other parts of the banking sector and U.S. economy. Experts differ sharply on the answer to that question.

“The question the Fed has to deal with is how broadly is this happening. Is it a problem with just a couple banks, which is unfortunate but manageable, or is there a broader movement here which might be systemic, in which case they have to step in and use the powers they have,” said Barney Frank, the former Massachusetts congressman who played a leading role in writing the legislation to regulate Wall Street following the 2008 crisis.

Frank said he told senior officials at the Federal Reserve on Friday that the risk to the broader financial system could be “more widespread.”

A slew of federal regulators — including those with the FDIC, Federal Reserve and Treasury Department — have scheduled private briefings with top lawmakers since the bank’s collapse, including the House Financial Services Committee, which oversees banking, according to two people familiar with the matter who spoke on the condition of anonymity to describe the conversations.

California Gov. Gavin Newsom said in a statement Saturday that he’d been discussing the situation with the Biden administration. “Everyone is working with FDIC to stabilize the situation as quickly as possible, to protect jobs, people’s livelihoods, and the entire innovation ecosystem that has served as a tent pole for our economy,” the statement said.

Spokespeople for the Fed, FDIC and Treasury declined to comment on the prospect of government aid for the uninsured deposits.

JEFF CHIU AP A person from inside Silicon Valley Bank talks to people waiting outside an entrance to the bank in Santa Clara on Friday.