After Silicon Valley Bank’s closure, uninsured depositors will have a long wait

By Peter Schroeder

WASHINGTON (Reuters) – Silicon Valley Bank’s high level of uninsured deposits helped spark the rush that led to the bank’s closure, and now all of those depositors are having to hold their breath to see if bank regulators can recover enough to make her healthy again .

The Federal Deposit Insurance Corporation’s announcement on Friday that the bank was closing gave few details about what will happen to bank customers who held more than the government-guaranteed $250,000 per account.

In previous major bank failures like IndyMac and Washington Mutual, the FDIC found other firms to take over the assets and keep the deposits intact. But failing that leaves uninsured depositors with some of the funds the FDIC can raise by selling the bank’s assets.

SVB Financial Group’s Silicon Valley Bank had a relatively large amount of uninsured deposits as it wooed tech workers and venture capital firms. The FDIC said Friday the amount of uninsured deposits at the bank is “undetermined,” likely complicated by a rush by bank customers to remove uninsured funds. However, data the bank filed with the FDIC in late 2022 showed that 89% of its $175 billion in deposits were uninsured.

All insured deposits will be fully accessible no later than Monday morning, but the FDIC said uninsured depositors will receive a “receipt” and that future dividend payments can be “made” to pay off uninsured funds if the bank’s assets are sold. Customers with uninsured deposits were urged to call the FDIC.

An SVB spokeswoman referred questions to the FDIC. An FDIC spokeswoman did not respond to a request for comment.

Regulatory experts say account holders with uninsured funds are typically not individuals. Typically, accounts with such large funds are for businesses that need cash for payroll and other expenses. But Silicon Valley Bank’s relatively well-off clientele might be the exception, and the push for full repayment was already coming from some quarters.

“We need to make sure that all deposits that exceed the FDIC limit of $250,000 are honored,” tweeted US Rep. Eric Swalwell, a California Democrat. “Banking is about trust. If depositors lose confidence in the safety of their deposits above 250,000 then we are in trouble.”

In addition to selling the assets piecemeal, another possible move by the FDIC would be to find another firm to take over all or a portion of the assets. This step is typically preferred by regulators as a smoother process that ensures depositors are minimally disrupted and generally unharmed. However, this process can be lengthy and leave uninsured depositors in the dark.

“This will likely be similar to the collapse of IndyMac Bank in 2008,” said Joseph Lynyak, a partner at Dorsey & Whitney who specializes in bank failures. It took several weeks to find an investor.”

“The FDIC is likely negotiating a similar arrangement as we speak, with the result that virtually all of Silicon Valley Bank’s assets and liabilities will be transferred to the acquiring bank in a short period of time.”

(Reporting by Pete Schroeder in Washington; Editing by Megan Davies and Matthew Lewis)


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