Silicon Valley Bank ("SVB") was a state-chartered commercial bank based in Santa Clara and is a member of the Federal Reserve System, with total assets of approximately $209 billion and total deposits of approximately $175.4 billion as of December 31, 2022. Its deposits were federally insured by the FDIC subject to applicable limits. On March 8, 2023, SVB announced a loss of approximately $1.8 billion from a sale of investments. On the same day, SVB's holding company announced it was conducting a capital raise.
Despite SVB being in sound financial condition prior to March 9, 2023, investors and depositors reacted by initiating withdrawals of $42 billion in deposits from SVB on March 9, 2023, causing a run on SVB. As of the close of business on March 9, SVB had a negative cash balance of approximately $958 million. Despite attempts from SVB, with the assistance of regulators, to transfer collateral from various sources, SVB did not meet its cash letter with the Federal Reserve.
Accordingly, holding that
- SVB's liquidity position is inadequate, and it cannot reasonably be expected to pay its obligations as they come due
- SVB is insolvent
SVB is conducting its business in an unsafe manner due to its present financial condition, the California Commissioner of Financial Protection and Innovation ("Commissioner") on March 10, 2023:
- Closed SVB and took possession of the property and business of SVB
- Appointed Federal Deposit Insurance Corporation ("FDIC") as the receiver.
What Happens To Your Deposits?
General Procedure For Closing Of Banks
In general, most banks are closed on a Friday, and depositors have access to their insured deposits on Monday. During a typical bank closing, the FDIC takes possession of the premises and records of the bank and then determines the insured status of deposits. Since the FDIC is also the receiver of the bank, it processes the claims of uninsured depositors and other claimants. The payment to insured depositors and the processing of claims that exceed the insurance limit begin the next business day after closure. Over the closing weekend, the final insurance determination must be made. In a payout, deposit amounts identified as fully insured are either passed to an agent bank in an insured deposit transfer or paid to depositors in the form of a check mailed to the depositor's address of record. If an account appears to exceed the coverage limit or if other questions exist, the FDIC contacts depositors directly; additional information may be required before the full claim is paid.
Creation of DINB
FDIC has been appointed as a receiver of SVB. This means that FDIC assumes the task of selling/collecting the assets of SVB and settling its debts, including claims for deposits in excess of the insured limit. As the insurer of the bank's deposits, the FDIC pays insurance to depositors up to the insurance limit. FDIC created the Deposit Insurance National Bank of Santa Clara ("DINB"), where all SVB's insured deposits have been transferred. All insured assets, in accordance with the coverage limit, will be accessible to depositors starting March 13. The main office and all branches of SVB will reopen on Monday, March 13, 2023. All operations of SVB will now be controlled and managed by DINB.
What Happens To Insured Deposits?
In the event of a bank failure, the FDIC acts quickly to protect insured depositors by arranging a sale to a healthy bank, or by paying depositors directly for their deposit accounts to the insured limit. Usually, FDIC pays insurance within a few days after a bank closing (usually the next business day) by either (i) providing each depositor with a new account at another insured bank (here the DINB) in an amount equal to the insured balance of their account at the failed bank, or (ii) issuing a check to each depositor for the insured balance of their account at the failed bank. Customers will have full access to their insured deposits no later than Monday (March 13, 2023) morning.
What Happens To Uninsured Deposits?
First, the FDIC will pay uninsured depositors an advance dividend within the next week. An "advance dividend" means a portion of how much the FDIC estimates it'll be able to recover. Second, uninsured depositors will receive a receivership certificate for the remaining amount of their uninsured funds. As the FDIC sells the assets of SVB, future dividend payments may be made to uninsured depositors.
If a depositor has uninsured funds, they may recover some portion of their uninsured funds from the proceeds from the sale of failed bank assets. For example, if a depositor has only a single account with a balance of $255,000, he or she would be paid $250,000 through FDIC insurance and would receive a claim against the estate of the closed bank for the remaining $5,000 which is not insured. The depositor would be given a receiver's certificate as proof of this claim and would receive payments as the assets of the bank are liquidated. However, it can take several years to sell off the assets of a failed bank. As assets are sold, depositors who had uninsured funds usually receive periodic payments (on a pro-rata "cents on the dollar" basis) on their remaining claim. For instance, when the California bank IndyMac failed in July 2008, it, like SVB, did not have an immediate buyer. The FDIC held IndyMac in receivership until March 2009, and large depositors eventually only received 50 percent of their uninsured funds back. In contrast, when Washington Mutual was bought by JPMorgan Chase, account holders were made whole.
It is recommended that customers with uninsured funds contact FDIC and speak with a "Claims Agent" who may direct depositors to download and submit a form, as needed, to assist in expediting the processing of claims.
The FDIC is trying to find another bank over the weekend that is willing to merge with SVB. While the FDIC hopes to put together such a merger by Monday to safeguard unsecured deposits; currently there is no certainty on this.
Priority And Timeline Of Payments
Payments of uninsured funds (dividends) depend on the net recovered proceeds from the liquidation of the bank's assets and the payment of bank liabilities according to federal statute. While fully insured deposits are paid promptly after the failure of the bank, the disbursements of uninsured funds may take place over several years based on the timing of the liquidation of the failed bank assets. By law, after insured depositors are paid, uninsured depositors are paid next, followed by general creditors and then stockholders. In most cases, general creditors and stockholders realize little or no recovery.
Are Your Deposits Insured?
The amount of insured and uninsured deposits was undetermined at the time of closing and will be determined once the FDIC obtains additional information from SVB and customers. However, 89% of the bank's $175 billion in deposits were uninsured as of the end of 2022.
What Is Your Insurance Coverage And How Do We Calculate It?
SVB is an FDIC-insured bank. The standard insurance amount is $250,000 per depositor, per insured bank, for each account ownership category. A consumer/depositor does not have to purchase deposit insurance. The consumer/depositor is automatically covered if a consumer/depositor opens a deposit account in an FDIC-insured bank, such as SVB.
Not all accounts and all deposits with SVB are insured. FDIC insurance covers traditional deposit accounts. To be eligible for FDIC deposit insurance coverage, one must make sure that they are placing their funds in a deposit product at the bank. The following are examples of deposit products that are insured by the FDIC
- Checking accounts
- Savings accounts
- Money market deposit accounts
- Certificates of deposit
- Prepaid cards
Deposit insurance is calculated dollar-for-dollar, principal plus any interest accrued or due to the depositor, through the date of default. It is possible to have more than $250,000 in deposit insurance. The FDIC's Electronic Deposit Insurance Estimator helps determine the individual insurance coverage for specific accounts: The consumer/depositor will need to enter certain information such as (i) type of account, (ii) business name, (iii) EIN/TIN, (iv) account balance, and (v) who the account is held by. The tool will then let you generate a report to understand your insurance coverage.
Money Placed In The Name Of A Trust
In determining the insurance coverage for a deposit account opened in the name of a formal trust agreement, either revocable or an irrevocable trust, the FDIC may request the owner or trustee of the trust agreement to provide the FDIC a current copy of the trust document which the FDIC would review to confirm the applicable amount of deposit insurance coverage. The FDIC would review the trust agreement for determining the number of beneficiaries and, if applicable, the interests of each beneficiary. The owner or trustee of either a formal revocable trust or an informal trust deposit may be required to complete a declaration of testamentary trust statement.
Money Placed Through A Fiduciary
A "fiduciary" is a person who serves as an agent on behalf of their clients in opening or purchasing a deposit account at an insured bank. In order to determine the deposit insurance coverage for such deposits, the FDIC obtains from the fiduciary supplemental information such as a list of the owners of each deposit and the interest of each owner in the deposit account. When the fiduciary provides the needed information, the FDIC will pay insurance through one of the means previously described. FDIC does not pay the deposit insurance directly to the owners or customers. Rather, the FDIC will pay the deposit insurance coverage to the fiduciary and the fiduciary will be responsible for distributing the deposit insurance payments to their customers.
Payments Initiated Prior To SVB's Closing
Any outstanding checks or payment requests presented after a bank failure will be returned unpaid and will be marked to indicate that the bank is closed. This is because the FDIC needs to freeze all deposit accounts at the time the bank is closed to pay the depositors for the insured deposit balances in their accounts as soon as possible.
When a failed bank's deposits are assumed by an open bank (such as DINB), some or all of the offices typically reopen the next business day and there is usually no interruption in the processing of checks drawn on the failed bank prior to its closing. This would include any processing of checks or transfers by a depositor in SVB made prior to March 10, 2023, and such transfers are likely to go through starting March 13, 2023.12 An exception to this procedure may include checks that were drawn against a deposit account that has been determined to be uninsured or an account that the deposit insurance determination is pending.
As per SVB's Wire Transfer Submission Deadlines all domestic wires submitted prior to the cut off deadlines mentioned in the table below will be processed same day. Any submissions after these deadlines will be processed the next business day.
Accordingly, some wire transfers made by March 9, 2023, at noon showed in depositors' other bank accounts as pending by 4 pm PT. SVB also informed some clients that their transfers initiated on Thursday could be delayed.14 transfers initiated on Friday are still pending and have not yet gone through.
The Effect Of SVB's Closing On Interest Accruing On Deposits
The FDIC's insurance coverage includes principal and interest through the date of the bank failure up to the applicable insurance limit for each deposit. The accrual of interest ceases on all accounts once the bank is closed. If an open bank acquires deposits from the failed bank, the acquiring bank becomes responsible for re-establishing interest rates and beginning the accrual of interest after the date of the failure of the bank. The acquiring bank may change the interest rate on the acquired deposits, but the depositor may withdraw their insured funds without penalty if they chose to do so. If no acquiring bank is found for the deposits and the FDIC pays the depositors directly for their insured amounts, interest does not accrue past the date of failure.
For example, when Bank of the Eastern Shore, Cambridge, MD17 and Washington Federal Bank For Savings18 failed, principal and interest on insured accounts, through the closing were also fully insured by the FDIC, up to the insurance limit.
Source: : Inventus Law, PC