Silicon Valley Bank is shut down by regulators, FDIC to protect insured deposits

CNBC ^ | March 10, 2023 | Jesse Pound

[PJ-Comix]

Silicon Valley Bank has been closed by regulators, which have taken control of the bank’s deposits, the Federal Deposit Insurance Corporation announced Friday.

The California Department of Financial protection and Innovation closed SVB, and named the Federal Deoposit Insurace Corporation as the receiver.

The FDIC has created the Deposit Insurance National Bank of Santa Clara, which now holds the insured deposits from SVB.

[PAR35]

The FDIC insurance cap is almost always waived for individual depositors.

No. They do take priority over most other creditors but fall below administrative expenses of the Receiver. (And then there is the subrogation rights arising from the insurance payout.)

[Rockingham]

My view of bank regulation gradually became jaundiced over the years. The people doing the work tend to be of fine quality as individuals, but, due to political and bureaucratic constraints and occasional malpractice or corruption, the overall system works so slowly that, like the CDC, instead of preventing an outbreak of illness, the best that it can usually do is to try to ease the suffering a bit and quarantine the afflicted in order to slow the spread.

I'll spare you a litany of personal anecdotes but offer the topical point that the collapse of Silicon Valley Bank was predictable. Indeed, the interest rate risk to loan and investment portfolios that brought it down ought to have been recognized and warned of by regulators as an obvious and likely result of a return of inflation after a too long maintained policy of low interest rates by the Fed and other central banks.

Now, hedge fund, bank, and regulatory staffs are working late and running models to assess the potential for contagion and other systemic risks. A bright second semester sophomore in macroeconomics in college though could see the problem coming. Yet regulatory authorities would not or could act lest they be seen as unfriendly to the Biden administration's inflationary policies.

Will banking regulators be able to heroically plug the leaks in the dikes and prevent a market panic and potential impairment or collapse of one or more sectors of the financial system? Will a general bailout be necessary? Maybe, maybe not. The drama and angst though will serve a useful purpose in obscuring the greater issue: why weren't smart and powerful agencies able to anticipate and act against such an obvious danger?

[Rockingham]

In law and concept that is true, but I believe that they have the power to waive the cap and often do in practice.

[PAR35]

For your “often” do you have an example? The only time I can think of anything like that was the First Republic fiasco where the then FDIC Chairman let his mouth get ahead of his brain. Or are you thinking about when they went from $100,000 to $250,000 on a temporary basis (later made permanent).

[Rockingham]

If memory serves, I believe that instead of putting a bank into liquidation and giving the depositors a haircut, the FDIC declares the bank insolvent and takes ownership under its receivership power. The FDIC then sells the bank with deposits fully protected by the new owner and the loan portfolio stripped out or its value backstopped by cash and guarantees from the FDIC.

The shareholders get wiped out, of course, and the FDIC can also seek to collect cash by unwinding recent transactions like stock sales and such by executives and insiders. The effect is like a summary reorganization in bankruptcy, with claw backs and a new lender or owner injecting capital and setting many of the terms and details.

As applied to the Silicon Valley Bank, my guess is that the FDIC and other state and federal regulators by now have the necessary administrative and federal court orders in place and that the FDIC has negotiated a sale of the bank. An announcement will be made by tomorrow afternoon, with new signage and executives from the new owner in place for the start of business on Monday morning.

For the right new owner, a Silicon Valley Bank with a clean balance sheet is a great acquisition because of its blue chip customer base and deep entree into the venture capital industry.

[PAR35]

There’s always a cost analysis - what assets does an assuming bank want, what liabilities is it willing to assume, and is the deal better for the FDIC than keeping the assets.

Unless someone was already kicking the tires, I’d run from any bank that would take this with only a couple of days of due diligence.

DINBs are rare enough that I really don’t know where they are going next with this one. I do expect a significant advance dividend on uninsureds next week. But I don’t even know how they are going to do that. Transfer to the DINB as paying agent? Transfer to someone else as paying agent? Mailing paper checks?

[Rockingham]

In spite of uncertainties, the FDIC has the ability to set terms that hedge risks and are lucrative enough to draw well-qualified competing bidders for the Silicon Valley Bank.

Liquidation is the worst option because it loses the value of the bank as an ongoing operation and risks contagion and a meltdown that crushes other banks and companies. This is a real danger with potential systemic consequences. Major SVB business customers are already getting crushed, regional and midsize banks are in the cross hairs, and the similarly upscale and supposedly safe San Francisco based First Republic Bank is said to be experiencing a bank run at their LA branch.

The best way for the FDIC to deal with the Silicon Valley Bank is to make sure that it reopens and operates as normal on Monday morning -- with new owners and fresh signage; free donuts, cookies, and coffee in the morning, followed by bottled water, sodas, and finger sandwiches by 11 AM; experienced executives projecting affability and assurance; and so over staffed and flush with cash that no depositor wanting their money out experiences any delay or limits.

Banks that do that in a crisis survive and find that jittery depositors are back in force in days.

[dfwgator]

This is how a Depression starts.

[Brown Deer]

Jim Cramer Tells People To Buy Silicon Valley Bank’s Stock Just Before It Collapsed! Of Course!

https://youtu.be/i2d7gPelw58

[PAR35]

I got to wondering last night if you were talking about a Whole Bank P&A. Dug one out this afternoon via Google

https://www.fdic.gov/resources/resolutions/bank-failures/failed-bank-list/cnbbartow-p-and-a.pdf

Even in those, there was a schedule of deposits not assumed.

I don’t know if there were any uninsured depositors in that one, but if so, yes, it looks like they would have been made whole if there weren’t on the referenced schedule 2.1

[WildHighlander57]

Is the structuring done by designating two beneficiaries?

https://www.fdic.gov/resources/deposit-insurance/trust-accounts/

[Rockingham]

If I recall correctly, there was some fraud or at least sharp practice that contributed to the failure of the Citrus Bank that you found as an example for the sale of an entire bank. In such a case, any depositors implicated in misconduct tend to get their monies frozen pending scrutiny in an examination and receivership process. All other depositors get treated as innocent and their funds are freely and fully available.

As for the Silicon Valley Bank, Bloomberg is reporting that as I predicted, the FDIC is auctioning it off, with final bids due this afternoon and the bank expected to be open as usual on Monday morning. This is the best approach. I cannot imagine any result other than honoring all deposits in full. Nevertheless, it is not a bailout because shareholder equity will be extinguished, pending executive equity compensation canceled, and the proceeds from recent stock sales by bank insiders may get clawed back.

Notably, the current legal framework gives the FDIC and the Fed enough flexibility to protect depositors in full, and the economic and financial case for doing so is compelling. If not, there is a great risk of contagion and a cascade of financial failures leading to a systemic crisis. The people in charge and with equity stakes in the SVB will get hammered though, which is condign punishment for bad management.

[PAR35]

Generally, it’s ownership of the account. Being an authorized signatory doesn’t prove ownership.

So Husband - 250,000
Wife - 250,000
Husband and Wife - $250.000

Different rules for beneficiaries under at trust, which I don’t recall at this point, except I think there are different rules for non-profits and whether they are domestic or foreign.

If the bank fails, the FDIC is going off of the official paperwork for the account, and doesn’t care what you and the bank intended to do. And generally banks that fail aren’t known for perfect paperwork.

[little jeremiah]

Thank you for the explanation, and sorry not to get back to you. Been sort of ... busy here.