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After Silicon Valley Bank failed on Friday, its customers were filled with fears. But by Monday, they could breathe a sigh of relief — the Treasury Department, the Federal Reserve and the Federal Deposit Insurance Corporation had said over the weekend that it would make each customer whole, even beyond the $250,000 insured by the FDIC.
While it was welcome news for account holders, the extraordinary move raised questions for some, who wondered why the FDIC bent its rules for SVB and its customers.
Eric Krahn, a computer systems engineer from Iowa, asked this question during a CNN primetime event on Wednesday.
“Why does this bank and account holders get special treatment to be made fully whole?” he asked. “How does this inspire confidence in our system?”
Lynnette Khalfani-Cox, CEO of AskTheMoneyCoach.com, wondered the same thing, she said during the program.
“I do think there’s a little bit of moral hazard here,” she said, referring to the idea that banks may take on more risk if they think they’ll get bailed out (more from my colleague Allison Morrow on that concept is below).
As to why the FDIC made the decision it did? The Federal government didn’t want SVB’s failure to “have a domino effect,” Khalfani-Cox said. “Federal regulators deemed them to be in the category of systemic risk, so they granted an exemption.”