Lines Outside Silicon Valley Bank Is the Last Thing Biden Wants to See

Shortly before opening time Monday, branches of Silicon Valley Bank (SVB) across the country already had lines of customers outside after its takeover by the Federal Deposit Insurance Corporation (FDIC) following the bank's highly publicized collapse—and subsequent takeover by the federal government—over the weekend.

It's something no national leader wants to see, experts say: Lines outside of a failing bank can sometimes indicate a phenomenon called a "bank run," in which account holders rush to financial institutions in an effort to restructure their savings or withdraw money before it's too late—and potentially destabilize the U.S. financial industry in the process.

Such a sight is something President Joe Biden hoped to avoid—particularly as his administration fights to keep the country from falling into the recession some speculated was coming following record-high inflation and a red-hot jobs market.

On Monday, Biden delivered remarks stating that all depositors at SVB and Signature Bank, which was also taken over by the feds last week, were made whole, while those who were responsible for the collapse would be fired.

"Americans can have confidence that the banking system is safe," Biden said Monday.

Some noted SVB was unique, and that regulations were in place to avert a sort of domino effect that could trickle down to regional banks and inflict a larger crisis. On Sunday, Treasury Secretary Janet Yellen made the rounds on national television to reiterate the belief that the feds would be able to contain a larger banking crisis, and that banking reforms passed in the wake of the Great Recession were sufficient to avert broader concerns with the U.S. banking industry.

"This was an example where very sophisticated depositors, venture capitalists, took their money out at a rate of over a million dollars a second because it was obvious this bank was insolvent," economist Douglas Holtz-Eakin, President of the American Action Forum and former commissioner on the congressionally chartered Financial Crisis Inquiry Commission, told Newsweek. "That's not the situation elsewhere."

Others, however, were unconvinced, raising questions about the future implications of SVB's collapse on the financial industry as a whole.

"Even if a crisis is averted this week, wonder if the damage to the real economy from SVB is done," strategist Viraj Patel, tweeted Sunday. "Banks think twice about lending. Firms/consumers think twice about borrowing. Confidence/animal spirits falling further."

Online, signs of falling consumer confidence seemed to be everywhere.

On social media, financial influencer accounts and conservative pundits highlighted falling stock prices and particularly, the NASDAQ's decision to halt stock trades in some vulnerable regional banks Monday as a sign people should feel differently. The price of digital currencies like Bitcoin surged as people began shifting their money elsewhere, while some influencers on social media began pushing gold investment schemes as an alternative to banking.

Such a phenomenon, however, is exactly what led to SVB's collapse. Once a stalwart of California's start-up community relied on for everything from payrolls to pension funds, a miscalculation by bank officials to sell billions of dollars in bonds at an apparent loss last week sparked a panic among account holders, leaving the bank physically unable to cover the obligations of those looking to pull money out.

Though the government itself stepped in to avert a broader crisis—announcing the infusion of billions of dollars in insurance to stabilize the bank's obligations over the weekend—the damage had been done, with Monday's display exhibiting a broader loss of confidence in the U.S. banking industry that had only recently recovered after the 2008 financial crash.

"All the elements for a sustained crisis in economic confidence are present," Richard Curtin, director of Consumer Sentiment Surveys at the University of Michigan, told Newsweek. "Consumers were already anticipating a slowdown in the economy, but as long as the impact on jobs was expected to be modest, they favorably looked toward relief from the stubbornly high inflation rate. The financial crisis made the economic outlook much more negative."

After SVB's collapse—which came shortly after the closure of cryptocurrency-friendly Silvergate Bank earlier in the week—federal regulators announced the shutdown of Signature Bank, another deep-pocketed commercial lending firm with a presence in 40 states, sparking fear of greater vulnerabilities in other financial institutions across the country.

Regional bank stocks tumbled amid fears investors would not be compensated for their losses, prompting the NASDAQ to shut down trading. And in a Sunday interview with Politico, former FDIC Chairman William Isaac told the outlet he believed more banks are bound to collapse in what he believed could be the precipice of another 1980s-style banking crisis.

Others were cautious not to hasten the process. During the 2008 crisis, news outlets in Lower Manhattan notably declined to report on Wall Streeters withdrawing funds en masse from banks for fear of inciting a broader panic. Meanwhile on Friday and ahead of the opening bell Monday, financial news outlets tread lightly over news of SVB's pending collapse out of the explicit fear of inciting a panic that could inflame the financial sector.

"It is easy for any of us to cause a [bank] run at this very moment," CNBC Mad Money host Jim Cramer—one of the most-watched financial advisers in the country—said on his program Monday.

Holtz-Eakin told Newsweek it's important that those navigating the SVB fallout continuously acknowledge how it's different from the 2008 financial crisis. Where the root of that crisis was the mortgage and lending market—which connected mismanaged banks to the rest of the financial sector—the collapse of SVB and other banks could be seen as isolated incidents of mismanagement.

Companies like Silvergate, SVB and Signature, he said, all had very limited client bases that were facing issues simultaneously.

To maintain the public's confidence, the Biden administration—and federal regulators—will have to keep a close eye on the industry to avoid a similar incident.

"[These banks] really weren't ... well-managed," Holtz-Eakin said. "[SVB] had this incredibly weird business model or they only have one kind of customer, these tech startups, which almost got in trouble at the same time. They didn't have any diversification of either their funding sources or their risk, which was really weird. So the question here is whether there are other banks that are next. That's the only question that's really scary."

More broadly, the best solution for the federal government, Curtin said, is a holistic one.

"There are no good policy choices since the multiple economic problems require policies to shift in opposite directions," said Curtin. "The most effective solution would be to adopt policies that restore confidence in the government's economic leadership. That is the standard recommendation that has been handled badly."

"It is not simply a matter of words, but of actions that are seen as effective counter measures," he added. "Various renditions of oft-repeated phrase that the 'economy is fundamentally sound' does not restore confidence but acts to deepen consumer uncertainty. Ideally, this task would be undertaken by the president or an official specifically charged with coordinating the government's response across agencies."

Update, 03/14/23, 10:36 a.m. ET: This article was updated with comment from Richard Curtin.