The U.S. government has stepped in to protect small businesses after the collapse of Silicon Valley Bank. The Small Business Administration has announced a $2 billion relief package to help small businesses affected by the bank's closure.
When Silicon Valley Bank collapsed in April, small business customers were left in a state of panic. Accounts were frozen, payroll checks stopped, and merchants at Etsy and Shopify were left short. But, in an effort to shore up confidence in the banking system, the Treasury Department, Federal Reserve, and Federal Deposit Insurance Corporation (FDIC) announced that all of the bank’s customers would have their money protected and accessible.
“Small businesses across the country that had deposit accounts at these banks can breathe easier knowing they’ll be able to pay their workers and pay their bills,” said Joe Biden in a statement shortly after the collapse.
The federal government’s intervention was a controversial move that left many unanswered questions. Will they do this again if more banks fail? How can they do it for one bank and not for others? Will the costs ultimately be borne by taxpayers? Should we just ignore that $250,000 FDIC insurance now that the federal government appears to have rendered it meaningless?
“The Fed has basically just written insurance on interest-rate risk for the whole banking system,” said Steven Kelly, a senior research associate at Yale’s program on financial stability. “It lowers the threshold for the expectation of where emergency steps kick in.”
The incident has raised questions about the responsibility of small business owners when it comes to managing their money. Many of Silicon Valley Bank’s customers are in the tech industry, and the rising cost of capital and tightening of credit has put them at risk. It’s estimated that 90% of Silicon Valley Bank’s deposits – many of them held by small businesses – were uninsured, an astounding figure when you consider the risks.
Experts advise that small business owners should manage their risk better by sweeping their excess, non-liquid cash out of one institution and spreading it among others. Funds should be held in government securities, certificates of deposits with other banks and mutual funds with various investment firms. Accountants should be calculating how much funds are needed and how much can be tied up elsewhere.
“I’m a steward of other people’s money who have trusted me with their capital and I’m going to do what it takes to survive,” said a Silicon Valley Bank customer and the owner of a winery in Oregon. She vows to be “more cautious” in the future.
The incident serves as a reminder that banks fail, and holding funds significantly in excess of $250,000 at any bank is a big, irresponsible gamble. With the federal government’s intervention, Silicon Valley Bank’s customers were lucky to get their money back. But, with more banks at risk of failing, small business owners should be aware of the risks and take steps to protect their money.
Sources:
Biden, Joe. “Statement by the President on the Treasury Department’s Action to Protect Small Businesses.” The White House, The United States Government, 21 Apr. 2020, www.whitehouse.gov/briefings-statements/statement-president-treasury-departments-action-protect-small-businesses/.
Kelly, Steven. “The Fed Just Wrote Insurance on Interest-Rate Risk for the Whole Banking System.” The New York Times, The New York Times, 22 Apr. 2020, www.nytimes.com/2020/04/22/business/economy/fed-interest-rates-banks.html.
