BY FREDA MIKLIN
On Friday, March 10, shortly before noon, Silicon Valley Bank (SVB) in Santa Clara, California was shut down by the California Department of Financial Protection and Innovation, who named the Federal Deposit Insurance Corporation (FDIC) as receiver. FDIC then created another entity, Deposit Insurance National Bank of Santa Clara, to hold the insured deposits from SVB. Those actions are standard operating procedure when a bank fails.
SVB had $209 billion in total assets shortly before it was closed, including $175.4 billion in deposits, according to the FDIC. The bank developed a liquidity problem when a large number of its customers withdrew their funds in the days leading up to its closure, causing what is known as a run on the bank.
FDIC insures all bank customers for up to $250,000 in deposits. One of the immediate problems that arose after SVB was shut down was that it was unknown how much of SVB’s deposits were above the insured limit, and it was unclear whether those depositors would recover all their money.
That changed on Sunday afternoon, March 12, when U.S. Secretary of the Treasury Janet L. Yellen, together with the Federal Reserve Board Chair Jerome H. Powell and FDIC Chair Martin J. Gruenberg issued a statement saying that, after consulting with President Biden, “Secretary Yellen approved actions enabling the FDIC to complete its resolution of SVB in a manner that fully protects all depositors. Depositors will have access to all of their money starting Monday, March 13. No losses associated with the resolution of SVB will be borne by the taxpayer.”
The FDIC will not protect shareholders and “certain unsecured debtholders” of SVB. Bank management will be replaced. If there are losses ultimately sustained as a result of paying all depositors, including those whose deposits exceed the insured limit of $250,000, those amounts “will be recovered by a special assessment on banks, as required by law,” the statement said.
The Federal Reserve Board announced it would take the further step of “making available additional funding to eligible depository institutions to meet the needs of all their depositors,” most likely to prevent the possibility of a run on other banks brought on by depositors who have been unnerved by the failure of SVB.
While most banks hold diverse assets, SVB’s deposits and loans were highly concentrated in the tech area, including a large number of start-ups.
Earl Wright, Chair of the Board of AMG National Trust Bank in Greenwood Village, told The Villager that, “The uniqueness of the SVB failure is tied to the age-old problem of short term liabilities (deposits) tied to longer term investments (loans and fixed income assets) having a longer maturity and decreasing in value as interest rates increased due to Fed action. This setting, along with SVB’s credit rating being lowered, spooked depositors and resulted in a classic run on the bank with panic withdrawals.”
Looking at the bigger picture, Wright added, “Indications are that all SVB assets appear to be solid investments which suggests all this will be worked out over time.”
Jay Davidson, board chair and CEO of First American State Bank, pointed us to an article in the Wall Street Journal on March 11, Where Were the Regulators as SVB Crashed?, which said, in part, “SVD’s failure boils down to…it grew too fast using borrowed short-term money from depositors…and invested in in long-term assets…” With, “mounting losses on bond holdings,” while the liability side of SVB’s balance sheet contained deposits which were “nearly 90% uninsured.”
Lost in the shuffle of the news about SVB was the failure of two other banks within a five-day period. Silvergate Bank, with assets of $13.3 billion, also in California, ceased operations on March 8, but did not need to be bailed out by the FDIC. Signature Bank in New York, with assets of $110 billion was closed by regulators on March 12. Both those banks were reported to have significant business relationships with the cryptocurrency industry. All depositors of both banks were guaranteed to have access to all their funds.