“It takes 20 years to build a reputation and five minutes to ruin it.” – Warren Buffet.
The financial system operates on confidence; when confidence is lost, change happens fast—case in point, Silicon Valley Bank (SVB). In just 36 hours, the 16th largest bank in the United States collapsed and placed into receivership, with the FDIC taking control of its assets and liabilities. Here’s an informal examination of how the SVB Bank run started, how FDIC insurance works, and some unseen knock-on effects to look for.
How it started
- March 8th, SVB announces a need to raise funds, liquidating $28 billion worth of investments.
- March 9th, Customers (start-up businesses) attempt to withdraw $42 billion (roughly 25% of the bank’s total deposits). This puts SVB’s cash balance at negative $1 billion, with SVB stock falling 60%.
- March 10th, trading halts when shares fall another 60% pre-market. FDIC regulators shut down the bank, taking control of all assets and liabilities.
Contrary to popular belief, the most common reason financial institutions fail is not poor performance or fraud but duration mismatch; banks borrow short-term money (assets) to lend long (liabilities). When yield curves invert, short-term money yields more than long-term money, exacerbating this mismatch.
SVB is unique because most of its customers are technology startups and venture capital firms. In 2021, there was a boom in technology startups, and venture capital as stock valuations accelerated due to massive amounts of liquidity being injected into the system because of stimulus measures. Deposit growth at the bank was high and driven by liquidity events of their clients (IPO’s SPACS’, VC fundraising & acquisitions financing).
In 2021, SVB’s customers did not need loans as they were awash in cash. With few options to loan money out to customers (who had plenty of cash), SVB needed “safe” assets on their balance sheet, such as U.S. Treasury Bonds. Due to bond math, as interest rates rose, these treasury bonds decreased in value, selling at a loss in 2023 to meet withdrawal requests. Most of these withdrawals were not in FDIC-insured accounts.
- Silicon Valley Bank Deposit as of Dec 31st, 2022
- Federally Insured Deposits: $8 billion
- Uninsured Deposits: $165 Billion
How It’s Going
On Sunday, Match 12th, two federal banking agencies (The US Federal Reserve and the FDIC) stated that all depositors of SVB will have full access to their funds, whether insured or uninsured. These actions were made under the systemic risk exception of the FDI Act and will be paid through a special assessment on other banks. The Federal Reserve has also set up $25 billion in funding to prevent this same occurrence from happening at other banks. The BTFP (Bank Term Funding Program) will allow banks to use U.S. Treasuries, U.S. agency securities, and U.S. agency mortgage-backed securities as collateral at par to meet withdrawal requests for the next 12 months.
The FDIC
While the FDIC has guaranteed uninsured deposits for SVB and Signature Bank due to the systematic risk exemption, they may wish to avoid setting a precedent and, in turn, not guarantee uninsured deposits at other banks that fail in the future. As such, it may be prudent to familiarize yourself with the rules of FDIC insurance coverage.
The FDIC is an independent agency of the US Government, like the Corporation for Public Broadcasting (PBS), the Postal Service, or the National Railroad Passenger Corporation (Amtrak). This means it has a separate legal personality and independent sources of revenue. It is not supported by public funds but through member banks or, in extreme cases, the Federal Financing Bank (FFB).
What the FDIC Covers:
- Checking Accounts
- Negotiable Order of Withdrawal (NOW Accounts)
- Savings Accounts
- Money Market Deposit Accounts (MMDA)
- Certificate of Deposit (CD)
- Cashier’s Checks, Money Orders, and other official items
What the FDIC Does NOT Cover:
- Stock Investments
- Bond Investments
- Mutual Funds
- Life Insurance Policies
- Annuities
- Municipal Securities
- Safe Deposit Boxes
- US Treasury Bills, Bonds, or Note
The standard deposit insurance amount is $250,000 per depositor, per insured bank, for EACH ownership category.
- Ownership Category
- Single Accounts
- Certain Retirement Accounts
- Joint Accounts
- Revocable Trusts
- Employee Benefit Plan Accounts
- Corporation / Partnership / Unincorporated Associated Accounts
- Government Accounts
The FDIC adds together all the single accounts owned by the same person at the same bank and insures them up to $250,000. So, if your savings, CDs, and checking accounts exceed $250,000 at a single bank, anything above $250,000 is uninsured. For example, putting it all together, a Husband and Wife could deposit up to $3,500,000 in a single FDIC bank with the following breakdown.
| Title | Account Ownership Category | Owner(s) | Beneficiaries | Maximum Insurable Account |
|---|---|---|---|---|
| Husband | Single Account | Husband | $250,000 | |
| Wife | Single Account | Wife | $250,000 | |
| Husband & Wife | Joint Account | Husband & Wife | $500,000 | |
| Husband POD | Revocable Trust Account | Husband | Wife | $250,000 |
| Wife POD | Revocable Trust Account | Wife | Husband | $250,000 |
| Husband & Wife Living Trust | Revocable Trust Account | Husband & Wife | Child 1, 2, 3 | $1,500,000 |
| Husband IRA | Certain Retirement Account | Husband | $250,000 | |
| Wife IRA | Certain Retirement Account | Wife | $250,000 | |
| Total | $3,500,000 | |||
Conclusion
The Federal Reserve and the FDIC are acting as they should to maintain confidence in the financial system. However, they have gone a step further by creating the BTFP framework to offer Treasuries as collateral, meaning that banks don’t need to sell at a loss. While not being an official bailout, this may encourage consumers and businesses to ignore FDIC insurance limits while creating some resentment since, once again, laws were changed to prevent bank losses.
A more immediate concern is the logistics of the receivership process, namely the defaulting lender concept. Hundreds, if not thousands, of companies were issued letters of credit backed by SVB to be used as security deposits on leases. To fulfill their lease obligations with respect to maintaining a letter of credit, Tenants may have to obtain new letters of credit from other lenders’ banks, transferring collateral to do so.
In the FDIC receivership process, there is a 90-day period starting the day the FDIC takes possession of a failed banks assets, in this case, March 13th, upon which counterparties may not terminate, accelerate, or declare a default under ANY contract within the failed institution without the consent of the FDIC.
In addition, as receiver, the FDIC has broad authority to repudiate contracts to which SVB is a party, which could include credit agreements. In essence, any immediate action to declare SVB as a “Defaulting Lender” under a credit agreement may not be recognized or permitted without the FDIC’s consent for at least 90 days, leaving many landlords and tenants in limbo.
The good news is that office landlords are in no hurry to evict office tenants, while some tenants may see the bankruptcy of SVB as an avenue toward getting their leases canceled.
SVB and Signature Bank were both key commercial real estate lenders, with SVB having $2.6 billion in commercial-backed loans and Signature Bank having $35.7 billion in commercial real estate loans.
Bank branches and office real estate must also be accounted for.
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