Aftermath of Silicon Valley Bank’s collapse.

According to Treasury Secretary Janet L. Yellen’s statement on Sunday, regulators attempted to reassure the public that the American banking system was “safe and well capitalized” despite working all weekend to deal with the aftermath of Silicon Valley Bank’s collapse.

Silicon Valley Bank was taken over by the Federal Deposit Insurance Corporation on Friday, putting the regulator in charge of nearly $175 billion in customer deposits. As rising interest rates put pressure on the banking sector and nervous depositors consider withdrawing their money, the bank’s failure, which was the largest since the depths of the financial crisis in 2008, has raised concerns that other financial firms could suffer fates similar to the bank’s.

Customers with deposits of up to $250,000, the maximum amount covered by F.D.I.C. insurance, will be reimbursed, but depositors with larger amounts in their accounts cannot be guaranteed to receive their entire money back.

During her appearance on the CBS program “Face the Nation,” Ms. Yellen declined to specify any measures that regulators might take to safeguard depositors, including many of those whose funds are currently frozen at the bank. However, she stated that she was aware that regulators were working to address concerns regarding the fact that numerous small businesses rely on funds held at Silicon Valley Bank.

Another person stated that the government was considering safeguarding uninsured bank deposits by Sunday in the event that the effort to locate a buyer was unsuccessful. However, no decision had been made yet.

On Sunday, officials from the government, economists, and analysts raced to figure out what options the government would have to mitigate the larger effects of the bank’s failure. Many were concerned that a frenzied wave of depositors might rush to withdraw their funds from regional banks, transforming what might otherwise have been a one-time calamity into a widespread issue that would rip through the economy and banking sector.

The most important question is, “Is this going to be handled in a way that averts runs elsewhere and alleviates concerns?” On Sunday, an economist at the Massachusetts Institute of Technology named Kristin J. Forbes stated.

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Continue reading the main story for more information. According to Ms. Forbes, the government ought to have two objectives: reassuring the public that Silicon Valley Bank was unique and not a sign of a larger issue and promising that enough money would flow through the system—known as liquidity, in the industry—to prevent larger problems.

While rising interest rates were a factor in some of Silicon Valley Bank’s issues, the company was also notable for its atypicality. It had a lot of big, uninsured depositors who typically withdraw their money when there are signs of trouble.

On the other hand, in her remarks on Sunday, Ms. Yellen emphasized that the banking system as a whole was “resilient.”

However, investors and politicians were concerned that businesses with large, uninsured bank deposits might become frightened as they watched Silicon Valley Bank customers suffer losses, leading them to withdraw their own deposits from other regional banks.

Representative Ro Khanna, a Democrat from California, stated, “The risk is to regional banks, having their assets flee.”

On Saturday night, around 11 p.m. in Washington, he and other members of the state’s congressional delegation joined a call with F.D.I.C. officials to discuss the situation.

According to Mr. Khanna, the regulator’s primary concern was locating a buyer for the bank. But Mr. Khanna said that if that didn’t work, the government needed to find a way to say that all depositors would be paid back in full by Monday morning’s market opening. He stated that the F.D.I.C. was only willing to commit to partially repaying depositors as of Saturday night.

Mr. Khanna stated in an interview, “We said that wasn’t going to be enough.” The F.D.I.C., Treasury, and Fed have been passing the buck too much; in reality, these things are done by consensus.

In order to prevent a destabilizing flurry of withdrawals, a number of economists agreed that it would be crucial for the government to find a means to guarantee full repayment to even the uninsured depositors of Silicon Valley Bank.

“Why would you risk it?” The Kroll Institute’s global chief economist, Megan Greene, spoke of other businesses with uninsured deposits. It seems straightforward to compensate all depositors.

However, even if the government wanted to, it wasn’t clear how it would proceed with fully repaying Silicon Valley Bank depositors. The obvious choice was to find a buyer to take over the bank’s accounts, and government officials expressed optimism that it would succeed.

On Sunday, House Speaker Kevin McCarthy stated that the “best outcome” would be for a third party to acquire the failing bank.

On Fox New’s “Sunday Morning Futures With Maria Bartiromo,” Mr. McCarthy said he had spoken with Federal Reserve Chair Jerome H. Powell and Ms. Yellen. He said, “I’m hopeful something can be announced today.”

However, the government’s decision to sell Silicon Valley Bank was not without risk, nor was it the only option.

With the approval of the Treasury secretary, some economists suggested that the Federal Reserve could use some kind of emergency backstop program to provide short-term cash to borrowers in need in unusual circumstances.

However, in the current scenario, a backstop provided by the central bank may not be appealing: The Federal Reserve’s emergency lending programs provide loans, not payments. Programs of this kind are restricted in that they can’t be used on insolvent businesses and insist that they have to cover a wide range of businesses.

On Sunday, analysts also mentioned the possibility that the F.D.I.C. could find a way to reimburse depositors. A “systemic risk exception” allows the regulator to circumvent the requirement that it dismantle failed banks in the most cost-effective manner possible, which would leave the private sector responsible for losses on uninsured deposits.

During the financial crisis of 2008, this rule was used a lot. It basically says that the government can pay back uninsured depositors if doing so would be bad for the economy or financial stability.

However, invoking the exception necessitates overcoming a number of obstacles: The decision to use it needs the approval of the Treasury secretary, the president, the F.D.I.C., and the Federal Reserve Board.

Steven Kelly, a senior research associate at the Yale Program on Financial Stability, stated that it was unclear at this point whether Silicon Valley Bank’s failure poses a threat to the stability of the broader financial system. “If the Fed signs off, I would think the Fed really sees it as systemic.” They typically take the decisions very seriously.

Even if Silicon Valley Bank depositors are not paid back in full, regulators could still take other measures to reassure investors about the system’s safety and prevent larger bank runs.

Daleep Singh, chief global economist at PGIM Fixed Income and a former economic official from both the Biden administration and the New York Fed, stated, “I think the more urgent task is to reassure uninsured depositors more broadly.”

The Fed might also emphasize that banks can use the Fed’s so-called discount window to accomplish this. In order to meet short-term liquidity requirements, this program gives commercial banks the ability to pledge investment-grade securities, such as Treasury bonds, to the Fed in exchange for cash.

Because they fear that using the discount window could indicate that they are in a weak position, banks frequently avoid using it. However, in 2020, as the coronavirus wiped out much of the economy, the Fed attempted to entice institutions to use it by making its terms more appealing. It was tapped in concert by a group of large banks at the time in an effort to emphasize that using it was not a sign of weakness.

The Fed ought to be “placing the markdown window in neon blazing lights,” Mr. Singh said.

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