Silicon Valley Bank is a particularly scary failure. Here's why.
- SVB had almost 90% of its deposits uninsured by the FDIC.
- Bank of America has about 32% of its deposits uninsured via this US government backstop.
The collapse of Silicon Valley Bank is no normal bank failure. SVB Financial was a special kind of financial institution, and this was one reason for its demise.
Most US banks take in customer deposits and lend money out. Most bank accounts have less than $250,000 in them. That's the amount that the US government, through the FDIC, insures. So when things go wrong, bank customers can rely on getting all their money back, up to $250,000. This prevents classic bank runs, where everyone worries their money is locked up and they all pull the cash at once.
SVB was very different. Many of its customers were startups, venture capital firms and rich tech founders. Their bank accounts very likely had more than $250,000 in them. That means FDIC insurance didn't have the same power to calm a panic, compared to a typical bank where the average depositor probably has $2,000 to $50,000 in their checking and savings accounts.
So, Thursday happens and some SVB depositors start to worry. What normally happens? Everyone stops and thinks "Well it's OK because the FDIC has my deposits insured up to $250,000 and I have $20,000 in there. So I'll keep my bank account there." But in the case of SVB, many depositors had way more than $250,000, so they really freaked out. One tech founder on Thursday summed it up on Twitter:
"Every company I know is scrambling to get their cash balances under 250k and the rest of cash off-platform or into big bank funds ASAP," he wrote on Twitter.
SVB vs Bank of America
Take at look at SVB's deposits from the company's latest annual report. You will see the problem. It had very little FDIC protection from a bank run.
At the end of 2022, SVB had uninsured deposits in its US offices of $151.5 billion, versus total deposits of $173 billion. That's 88% of all SVB deposits that didn't have FDIC insurance.
That is a LOT.
Look at JPMorgan at the end of last year: Estimated uninsured deposits of $1.38 trillion versus total deposits of $2.34 trillion. That's about 59% of deposits not insured by the FDIC. For Bank of America, just 32% of US deposits are not insured by this government agency.
This is not the typical deal
This problem can also be seen in the FDIC's statement on Friday when it shut down SVB and took over the bank's operations.
"All insured depositors will have full access to their insured deposits no later than Monday morning, March 13, 2023. The FDIC will pay uninsured depositors an advance dividend within the next week," the FDIC said. "Uninsured depositors will receive a receivership certificate for the remaining amount of their uninsured funds. As the FDIC sells the assets of Silicon Valley Bank, future dividend payments may be made to uninsured depositors."
This is not the typical deal. Usually the FDIC will say something along the lines of "all depositors will get all their money back, up to $250,000."
Instead, for SVB, the FDIC is saying that some or many SVB bank customers will get some sort of dividend next week, plus a "receivership certificate" that will give them the right to get paid more cash once the FDIC sells the assets of the bank.
If you had $1 million in a bank account at SVB, would you feel safe right now, even after the FDIC has taken it over? Would you want all your cash back, or a "receivership certificate," especially if you had to make payroll next week?
Let me know if you're an SVB customer: I'm at abarr@insider.com and on Twitter @alistairmbarr
Correction: March 10, 2023: An earlier version of this story misstated the percentage of JPMorgan deposits that are uninsured by the FDIC.