March 29, 2023

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US banks demand single action to protect Silicon Valley from bankruptcy contagion

US banks demand government action to protect Silicon Valley from bankruptcy contagion

The Association of Mid-Size American Banks has asked the Federal Banking Regulatory Commission to guarantee all its customers’ deposits for two years, even for amounts above the $250,000 threshold, to avoid an epidemic of Silicon Valley bankruptcies.

In a letter to officials from the Mid-sized Banks Alliance of America (MBCA), Bloomberg reported on Saturday that the move would “immediately stem the outflow of deposits from small banks, leading to stability in the banking sector and significantly reducing the likelihood of bank failures.”

The bankruptcy of Silicon Bank (SVB) and Signature Bank created a crisis of confidence in the sector.

Many customers of similarly sized banks have withdrawn their money and deposited it in large institutions like JP Morgan or Bank of America, which are too big for the government to ignore bailing out in the event of a collapse.

This week, the market value of First Republic Bank, which mainly serves high-net-worth clients, plunged 80% amid fears of a contagion crash. The bank ranks 14th among the largest US banks by assets.

Currently in the United States, deposits up to $250,000 are protected by the Federal Deposit Insurance Corporation (FDIC), the bank regulator.

“Despite the health and safety of the banking sector in general, confidence in all but the largest banks has eroded,” Bloomberg said, citing a coalition of banks.

Specifically, the coalition called on the FDIC, the Federal Reserve and Treasury Secretary Janet Yellen to work to “immediately restore confidence.”

A group of banks is proposing to fund this practice by increasing the amount of contributions banks pay to the FDIC.

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On Thursday, 11 major US banks pledged to deposit a total of $30 billion into First Republic accounts.

Bank of America, Citigroup, JPMorgan Chase and eight others are hoping to show their faith in the country’s banking system, a joint statement said.