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Biden Fails to Quell Fears of SVB 'Contagion' With US Investors Hit Hard, Ex-Bank Gov. Says

© Sputnik / Nina ZotinaDollar banknotes
Dollar banknotes - Sputnik International, 1920, 13.03.2023
The collapse of the Silicon Valley Bank (SVB) has prompted fears of contagion which persist despite US President Joe Biden's Monday assertion that the situation is under control, the former governor of the Central Bank of Cyprus and professor emeritus of the University of Leicester Panicos Demetriades told Sputnik.
US President Joe Biden delivered a speech on March 13 concerning the collapse of Silicon Valley Bank last week. The SVB became the second-largest bank failure in US history. But, according to the president, Americans should be confident that the banking system is safe.

"This is a big test of the new bank resolution framework that has been introduced not only in the US but also in Europe and nearly everywhere," said Demetriades. In the framework, "investors bear the losses, the taxpayers do not bear losses and depositors are protected only to the extent that is possible (...) We don't know [what to expect] because it [the framework] has never been used in the US before, to the best of my knowledge. But now we're talking about the 16th largest bank in the US. It is systemic. So there is a fear of contagion. I've listened to [Treasury Secretary] Janet Yellen's statement yesterday, and it's clearly confirmed that they're trying to allay those contagion fears that this would spread to the system."

A property managment representative gestures while asking reporters to clear the entrance area to Silicon Valley Bank in Santa Clara, Calif. - Sputnik International, 1920, 13.03.2023
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The Biden administration has insisted that it has taken all necessary measures to curb the potential contagious effect of the SVB collapse.
On Monday, Biden placed emphasis on his team's effort to protect US workers and small businesses and explained how it looked to shield customers' deposits and not put taxpayer dollars at risk. The president also noted that those responsible would be held accountable: "If the bank is taken over by the Federal Deposit Insurance Corporation (FDIC), the people running the bank should not work there anymore," Biden said.
The president also noted that investors in the bank won't be protected. "They're not meant to protect investors," highlighted Demetriades. "They [the investors] should have known the risks. This is capitalism. The taxpayer should not be protecting investors. It is absolutely not right, however you look at it. What happened in 2008 is that we learned that we had to bail out banks because there was no system in place to deal with banks that were too big to fail."
Dollar pyramid - Sputnik International, 1920, 12.03.2023
Second Largest Bank Collapse in US History: What Happened to SVB, and What Comes Next?
The scheme proposed by the Biden administration has been used before in Europe, but not in the case of a large bank, according to Demetriades.
The biggest bank in Europe that had dealt with a similar framework was Banco Populare in Spain, which was apparently the tenth-largest bank in the country. Spain dealt with the bank collapse without putting any taxpayer money into it. However, investors, shareholders and bondholders lost out, while deposits were protected. Banco Populare was sold to Santander Bank for €1 and business continued.

"Inevitably, investors would be nervous throughout the system because the question is whether other banks will follow. And I'm afraid no one can answer this question [of what is to come] at the minute. And it is clear that the American authorities are worried by their statement, they're trying to reassure the public. They are trying to reassure depositors that their deposits are safe. But they cannot reassure investors by the very nature of the new legislation. They cannot and they should not reassure investors because we live in the new world of bail in now. So investors should be bailed in, should take in losses from bank failures, taxpayers should be protected. But we have to wait and see in the next few days how things unravel," Demetriades concluded.

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