Several lawmakers and investors have criticised the federal government’s rescue of two bankrupt banks last month, claiming that the Biden administration and the Federal Reserve bailed out wealthy clients in California and New York while leaving bank customers in Middle America to foot the cost.
The failures of Silicon Valley Bank and Signature Bank were deemed a risk to not only their customers but potentially the entire financial system, according to government officials, who used new data to support their assertions. According to the data, a run on deposits at those two banks may have sparked a chain reaction of bank failures, devastating small companies and the economy in other regions of the nation.
The estimate of geographic risks from a financial crisis, prepared at the request of The New York Times, was done by economists from Stanford University, the University of Southern California, Columbia University and Northwestern University.
The results highlight the continuing potential for widespread damage to the whole banking system, which has seen many banks’ financial conditions deteriorate as the Fed has hiked interest rates to manage inflation. The value of certain of the government bonds that many banks hold in their portfolios has decreased as a result of those rate rises.
Although the damage has so far been limited, research indicates that larger runs on banks that are susceptible to rate increases might lead to a major reduction in the amount of credit available to business owners, borrowers for homes, and other borrowers. Due to the fact that a large number of counties rely on a very limited number of financial institutions for deposits and loans and that a large number of small enterprises retain their cash close to home, even a tiny bank run might effectively stifle access to credit for entire towns.
According to the researchers, every county in Vermont, Maine, and Hawaii as well as roughly half of the counties in Missouri, Tennessee, and Mississippi might experience this type of credit paralysis.
The study supports the argument that government officials were making based on anecdotes and unreliable information when they planned the bank rescues over that March weekend. In response to growing concerns about a broader financial crisis, the Federal Reserve, the Treasury Department, and the Federal Deposit Insurance Corp. joined forces to make sure that depositors could access all of their money in the event that their banks failed, even if their accounts were larger than the $250,000 maximum for federally insured deposits. Officials from the Fed also declared that they would provide banks with tempting loans if they required assistance meeting depositor requests.
Large businesses, like Roku, that retained all of their funds at Silicon Valley Bank were entirely safeguarded as a result of the actions despite the bank’s failure. Politicians and analysts have criticised this, claiming that it amounts to the government pushing both bank managers and depositors to engage in dangerous behaviour.