Larry Summers Says Consequences 'Severe' If Silicon Valley Bank Crisis Isn't Properly Resolved

Former Treasury Secretary Larry Summers said that the crisis surrounding Silicon Valley Bank would result in "severe" consequences for the innovation sector of the U.S. economy if regulators don't handle the bank's collapse smoothly. 

In an interview with Bloomberg TV, Summers said the SVB crisis wouldn't create a systemic risk to the broader financial system.

"What is absolutely imperative is that however this gets resolved, depositors be paid back, and paid back in full," he said. 

Summers added there could be some risk to banks' asset values, but any wider repercussions would be muted. 

"It certainly is going to have very substantial consequences for Silicon Valley — and for the economy of the whole venture sector, which has been dynamic — unless the government is able to assure that this situation is worked through," Summers said.

Silicon Valley Bank was closed by the California Department of Financial Protection and Innovation earlier on Friday. The Federal Deposit Insurance Corporation (FDIC) took control of the bank via a new entity called the Deposit Insurance National Bank of Santa Clara.

According to a regulatory filing, the Federal Deposit Insurance Corporation only insures bank deposits of up to $250,000. However, a large share of the money deposited at SVB was uninsured, more than 93% of domestic deposits as of Dec. 31, 2022, reports Bloomberg. 

Also Read: Jim Cramer Recommended SVB Financial In February, An Example Of 'His Reverse Midas Touch'

According to Summers, "there are dozens, if not hundreds, of startups planning to use that cash to meet their payroll next week."

"If that's not able to happen, the consequences will be quite severe for our innovation system," he said. 

"I don't think this is a time for moral-hazard lectures or for talk about teaching people lessons," he said. "We have enough strains and challenges in the economy without adding the collateral consequences of a breakdown in an important sector of the economy." 

Meanwhile, regional banking expert Tim Melvin has told Benzinga that the problems that SVB faced were more specific to the tech and venture capital industry. 

Regional banks in other parts of the country that do not have the same exposure to the tech startup industry are in a good position, Melvins said.

Now Read: EXCLUSIVE: Regional Banking Expert Tim Melvin On Silicon Valley Bank's Collapse — And 5 Bank Stocks Investors Can Buy Right Now

Photo by Brookings Institution on Flickr