March 15, 2023 Global Stocks and Banking News

After Silicon Valley Bank went bankrupt on Friday, its customers were filled with fear. But on Monday, they could breathe a sigh of relief — the Treasury Department, Federal Reserve and Federal Deposit Insurance Corporation had said over the weekend that it would make every customer whole, even beyond $250,000. insured by the FDIC.

While good news for account holders, this extraordinary decision raised questions for some, who wondered why the FDIC broke its rules for SVB and its customers.

Eric Krahn, a computer systems engineer from Iowa, asked that question during a primetime event on CNN on Wednesday.

“Why are this bank and account holders given special treatment to be fully recovered?” He asked. “How does this inspire confidence in our system? »

Lynnette Khalfani-Cox, CEO of AskTheMoneyCoach.com, wondered the same thing, she said on the show.

“I think there’s a bit of moral hazard here,” she said, referring to the idea that banks might take on more risk if they think they’ll be bailed out (more than my colleague Allison Morrow on this concept is below).

As to why the FDIC made the decision it did? The feds didn’t want SVB’s failure “to have a domino effect,” Khalfani-Cox said. “Federal regulators deemed them in the systemic risk category, so they granted an exemption.”