I was talking to a friend Monday about the Oscars, but I hadn’t paid too much attention (aside from loving the awards for Brendan Fraser & Everything, Everywhere All At Once), because I was too busy delving into the news around the collapse of Silicon Valley Bank (“SVB”). With my background both in the Bay Area and with startups, I knew this was BIG news. Plus anytime anything financial fails or breaks, I have to find out what happened.  

My friend hadn’t followed the bank collapse too closely, saying “I know econ like you know history”, she knew she’d need some dedicated time to look into it. Hint – history isn’t really my thing, unless it’s econ related. The following conversation ensued:

I feel like me saying “I did some digging” is my personal equivalent of Hermione Granger saying “I went to the library”. Same thing, except I dug through mostly WSJ articles. 

I was partly right – the Federal Reserve Bank, “the Fed” is the regulator in charge of banks and controlling the money supply. They most famously are in charge of setting interest rates. A quick refresher – The Fed is the central bank of the United States composed of 12 regional banks, and is not technically part of the government, though the members of the board are selected by the president & confirmed by the Sentate. Jerome H. Powell is the current Chair of the Fed. SVB was regulated by San Francisco branch of the Federal Reserve, whose president is Mary C. Daly. The Fed is the bank to other banks, and is in charge of a variety of transactions, including acting as a clearinghouse for electronic payments. Separately, the Treasury Department is a branch of the US government in charge of managing federal funds, and the current Treasury Secretary is Janet Yellen. 

The first piece of reporting I saw about SVB was from WSJ, Silicon Valley Bank Closed by Regulators, FDIC Takes Control. This article reports “The Federal Deposit Insurance Corp. said it has taken control of the bank via a new entity it created called the Deposit Insurance National Bank of Santa Clara. All of the bank’s deposits have been transferred to the new bank, the regulator said.”

So the FDIC is the one that closed the bank, and has all of the money. 

The links embedded to the article are to other, later WSJ articles. In determining where they got the information, I found the original press releases from FDIC, which apparently anyone can go read, but would never see if it wasn’t for reporting such WSJ. Here’s the original Friday, March 10th, 2023 FDIC press release. 

FDIC Creates a Deposit Insurance National Bank of Santa Clara to Protect Insured Depositors of Silicon Valley Bank, Santa Clara, California

WASHINGTON – Silicon Valley Bank, Santa Clara, California, was closed today by the California Department of Financial Protection and Innovation, which appointed the Federal Deposit Insurance Corporation (FDIC) as receiver. To protect insured depositors, the FDIC created the Deposit Insurance National Bank of Santa Clara (DINB). At the time of closing, the FDIC as receiver immediately transferred to the DINB all insured deposits of Silicon Valley Bank.

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. 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.

Silicon Valley Bank had 17 branches in California and Massachusetts. The main office and all branches of Silicon Valley Bank will reopen on Monday, March 13, 2023. The DINB will maintain Silicon Valley Bank’s normal business hours. Banking activities will resume no later than Monday, March 13, including on-line banking and other services. Silicon Valley Bank’s official checks will continue to clear. Under the Federal Deposit Insurance Act, the FDIC may create a DINB to ensure that customers have continued access to their insured funds.

As of December 31, 2022, Silicon Valley Bank had approximately $209.0 billion in total assets and about $175.4 billion in total deposits. At the time of closing, the amount of deposits in excess of the insurance limits was undetermined. The amount of uninsured deposits will be determined once the FDIC obtains additional information from the bank and customers.

The next FDIC press release on the matter was a Joint Statement by the Department of the Treasury, Federal Reserve, and FDIC issued on Sunday March 12th, 2032, which is why I saw all 3 organizations referreced in some reporting.. Key excerpts pertaining to my question are:

After receiving a recommendation from the boards of the FDIC and the Federal Reserve, and consulting with the President, Secretary Yellen approved actions enabling the FDIC to complete its resolution of Silicon Valley Bank, Santa Clara, California, in a manner that fully protects all depositors. Depositors will have access to all of their money starting Monday, March 13.  No losses associated with the resolution of Silicon Valley Bank will be borne by the taxpayer.

…Shareholders and certain unsecured debtholders will not be protected. Senior management has also been removed. Any losses to the Deposit Insurance Fund to support uninsured depositors will be recovered by a special assessment on banks, as required by law.

Finally, the Federal Reserve Board on Sunday announced it will make available additional funding to eligible depository institutions to help assure banks have the ability to meet the needs of all their depositors.

So the Treasury Department approved actions for the FDIC to ensure all SVB deposits, and the Fed can help float the cash if needed. 

As of December 31, 2022, Silicon Valley Bank had approximately $209.0 billion in total assets and about $175.4 billion in total deposits For each individual depositor, only amounts up to $250K are insured by the FDIC. According to a Reuters article, data submitted to the FDIC by the bank at the end of 2022 showed that 89% of its $175 billion in deposits were uninsured. The total amount in the FDIC fund are $128B. FDIC is not taxpayer money, it’s put in by banks. The joint statement says that any losses in the FDIC fund will be repaid by banks. However, after 2008 Congress passed a law to allow the FDIC to borrow federal funds for up to $500B.  

The original WSJ article also said:

“Customers tried to withdraw $42 billion—about a quarter of the bank’s total deposits—on Thursday alone, the California regulator said in a filing Friday. The flood of withdrawals destroyed the bank’s finances; at close of business Thursday, it had a negative cash balance of nearly $1 billion and couldn’t cover its outgoing payments at the Fed, according to the filing.”

I couldn’t figure out at first what “the filing” referred to, since I couldn’t find it in any of the FDIC press releases. I finally found it, it’s from the order issued by the State of California– Department of Financial Protection and Innovation officially closing the bank.  Paragraph 1.2 of the order, in full, gives us the clearest picture of what happened. 

“On March 8, 2023, the Bank announced a loss of approximately $1.8 billion from a sale of investments (U.S. treasuries and mortgage-backed securities). On March 8, 2023, the Bank’s holding company announced it was conducting a capital raise. Despite the bank being in sound financial condition prior to March 9, 2023, investors and depositors reacted by initiating withdrawals of $42 billion in deposits from the Bank on March 9, 2023, causing a run on the Bank. As of the close of business on March 9, the bank had a negative cash balance of approximately $958 million. Despite attempts from the Bank, with the assistance of regulators, to transfer collateral from various sources, the Bank did not meet its cash letter with the Federal Reserve. The precipitous deposit withdrawal has caused the Bank to be incapable of paying its obligations as they come due, and the bank is now insolvent.”

This final piece helped clear up one point I was truly wondering – the Fed also serves as a clearinghouse for payments. Essentially, as payments were being processed, the SVB asked the Fed to “send these payments out”, then couldn’t give the Fed the cash for those payments, to the tune of $1B. So I can’t be certain, but my gut assumption is that the Fed was most likely the regulator behind the command to pull the plug, even though the FDIC and Department of Financial Protection and Innovation officially closed the bank. 

Bank runs happen because of panic, and panic tends to breed more panic. A bank run on one bank is a small crisis, but can quickly and easily lead to a run on the entire banking system. Swift action from all regulatory bodies sought to renew faith in our financial system and prevent an economic system collapse. 

• Finance News