What will happen next for SVB customers after Feds ruled out bailout? Will tech start ups be able to meet payroll, will uninsured customers get their money back and will there be a market meltdown?
- The Federal Deposit Insurance Corporation (FDIC) said the Silicon Valley Bank will reopen Monday under the Deposit Insurance National Bank of Santa Clara
- SVB depositors will then have full access to their insured deposits
- The bank collapsed on Friday after a 60 percent drop in shares
After the federal government revealed it will not bail out Silicon Valley Bank despite fears of a market meltdown, its customers, investors and bankers are frantically waiting for an update about what happens next.
SVB, the 16th largest bank in the US, collapsed on Friday after a 60 percent drop in shares.
It is due to reopen on Monday under the newly created Deposit Insurance National Bank of Santa Clara, according to the Federal Deposit Insurance Corporation (FDIC).
Insured depositors with up to $250,000 in their accounts will be able to access their money at that time, the FDIC said.
But the majority of the deposits at the bank were not insured and it is unclear when those customers will be able to access their money or if they will even be able to get all of it back, CNBC reported.
A worker (center) tells people that the Silicon Valley Bank headquarters is closed on Friday after the bank was shuttered by regulators and had its assets seized by the FDIC
Silicon Valley Bank CEO Greg Becker speaks at a conference in 2018. The bank’s collapse is the second largest bank failure in US history
The SVB collapse was the worst US financial institution failure since 2008, with the bank controlling $209 billion in total assets at the end of 2022.
President Joe Biden, California Gov. Gavin Newsom, the Treasury Department and the Federal Deposit Insurance Corporation (FDIC) — which now controls the bank’s assets — have been holding crisis talks as the try to get other financial institutions to buy out SVB.
But industry experts warn that the government only has until Monday to prevent ‘a domino effect’ among other regional banks and the wider markets.
Despite this, Yellen told CBS News Sunday morning, that a bailout like the one in 2008 is not on the table – though she said she is concerned about the investors.
‘Let me be clear that during the financial crisis, there were investors and owners of systemic large banks that were bailed out… and the reforms that have been put in place means we are not going to do that again,’ she said.
‘But we are concerned about depositors, and we’re focused on trying to meet their needs.’
Here Dailymail.com explains what could happen next:
What happens next at Silicon Valley Bank?
To protect insured depositors, the FDIC created the Deposit Insurance National Bank of Santa Clara (DINB).
When the bank was shuttered Friday, the FDIC immediately transferred all insured deposits of Silicon Valley Bank to the DINB.
Starting on Monday, the main office and all branches of Silicon Valley Bank will reopen under the control of the DINB.
‘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,’ the FDIC said in a statement.
Customers with accounts in excess of the insured amount of $250,000 should contact the FDIC toll-free at 1-866-799-0959.
Treasury Secretary Janet Yellen announced Sunday the government will not bail out the bank
President Joe Biden is said to be discussing the issue with California Gov. Gavin Newsom
Newsom (pictured in October) said in a statement that ‘Everyone is working with [the] FDIC to stabilize the situation as quickly as possible to protect jobs, peoples’ livelihoods and the entire innovation ecosystem’
Will SVB’s start-up customers get their money back?
Following the shutdown, the FDIC said SVB depositors will have full access to their insured deposits no later than Monday morning.
The federal agency insures each depositor up to at least $250,000.
For customers that have deposits larger than $250,000, which likely includes many of the bank’s startup company customers, what happens next is less clear.
Depositors with funds above the insured amount will receive a dividend within the next week, and a receivership certificate for the remaining amount.
As the FDIC sells off the assets of Silicon Valley Bank, future dividend payments may be made to uninsured depositors.
The FDIC said that at the time of the shutdown, the amount of uninsured deposits at the bank was undetermined.
In theory, it is possible that uninsured deposits could eventually be repaid in full, because the bank’s total assets are larger than the amount it owes depositors.
At the time of failure, SVB had $209 billion in total assets and owed depositors about $175.4 billion, according to the FDIC.
However, some of those assets could be difficult to liquidate, such as ownership stakes in companies that are not publicly traded, or loans to early-stage startups.
Ultimately, only time will tell how much of the uninsured deposits are returned to customers.
The Silicon Valley Bank New York office sits empty in New York on Friday. But following the shutdown, the FDIC said SVB depositors will have full access to their insured deposits no later than Monday morning
The S&B 500 Bank Sector Index on Friday (above), dropping less than 1% after shedding 6.6% on Thursday in its biggest one-day loss in more than two years
Will tech start-ups be able to meet payroll?
SVB is a main bank for start-ups and many with their cash tied up could struggle to meet payroll. Some have already indicated they risk having to lay off staff.
In Seattle, Shelf Engine CEO Stefan Kalb found himself immersed in emergency meetings devoted to figuring how to meet payroll instead of focusing on his start-up company’s business of helping grocers manage their food orders.
‘It’s been a brutal day. We literally have every single penny in Silicon Valley Bank,’ Kalb said Friday, pegging the deposit amount that’s now tied up at millions of dollars.
He is filing a claim for the $250,000 limit, but that won’t be enough to keep paying Shelf Engine’s 40 employees for long. That could force him into a decision about whether to begin furloughing employees until the mess is cleaned up.
Tara Fung, co-founder and CEO of tech startup Co:Create that helps launch digital loyalty and rewards programs, said her firm uses multiple banks besides Silicon Valley Bank so was able switch over its payroll and vendor payments to another bank Friday.
Fung said her firm chose the bank as a partner because it is the ‘gold standard for tech firms and banking partnerships,’ and she was upset that some people seemed to be gloating about its failure and unfairly tying it to doubts about cryptocurrency ventures.
Other companies have high percentages of their cash in Silicon Valley Bank, and they need access to more than the amount protected by the FDIC.
‘If the government allows people to take at least half of the money they have in Silicon Valley Bank next week, I think everything will be fine,’ Varsavsky said Saturday. ‘But if they stick to the $250,000, it will be an absolute disaster in which so many companies won’t be able to meet payroll.’
Andrew Alexander, a calculus teacher at a private San Francisco high school that uses Silicon Valley Bank, wasn’t overly worried. His next paycheck isn’t scheduled for another two weeks, and he’s confident many of the issues can be resolved by then.
But he worries for friends whose livelihoods are more deeply intertwined with the tech industry and Silicon Valley.
‘I have a lot of friends in the startup world who are just like terrified,’ Alexander said, ‘and I really feel for them. It’s pretty scary for them.’
People walk through the parking lot at the Silicon Valley Bank headquarters in Santa Clara on Friday after the bank was shut down by financial regulators
Charts released by SVB show sharp declines in overall VC investments (top) and the outflow of SVB client funds (bottom) over the past year as interest rates rose
What happens if there is no buyer for SVB?
If there is no buyer for SVB, then the FDIC will be selling off the bank’s assets to raise money to repay uninsured depositors, CNBC reported.
Some assets that are highly liquid and could be sold quickly with little loss are the tens of billions of dollars in agency mortgage-backed securities.
Loans are other assets but are less liquid and may be more difficult to sell, and something that could take several weeks. It could also end with uninsured deposits being repaid less than 100 percent.
What is the impact on the markets and other banks?
Financial institution executives warn that the federal government only has until Monday morning to find a prospective buyer for the failed bank before other small, regional banks may feel the effects.
Billionaire hedge fund manager Bill Ackman said if the government fails to reach an agreement by Monday morning, there will be an ‘economic meltdown’ within hours.
The worry is that customers will rush to withdraw cash from their accounts fearing instability across the banking system with the very real possibility of a domino effect.
Ackman, whose hedge fund Pershing Square Capital Management oversees roughly $16 billion in assets, explained that allowing SVB to fail without protecting all depositors shows that uninsured deposits are unsecured illiquid claims.
For banks that are FDIC-insured, only $250,000 per account is guaranteed.
But according to SVB’s latest annual report, 96 percent of its total $173 billion in deposits was uninsured.
Billionaire hedge fund manager Bill Ackman is predicting an economic meltdown following the collapse of Silicon Valley Bank on Friday
Ackman believes there could be a ripple effect across other smaller banks within the industry and is urging the government to take action by Monday to prevent such a bleak scenario
In the UK, finance minister Jeremy Hunt (pictured in February) said he was working with Prime Minister Rishi Sunak and the Bank of England to ‘avoid or minimize damage’
Meanwhile, Britain’s government on Sunday was scrambling to minimize the damage on the country’s tech sector. Prime Minister Rishi Sunak said the British government was working to find a solution to limit the potential hit to companies resulting from the failure of SVB’s UK subsidiary.
Advisory firm Rothschild & Co is exploring options for the subsidiary, as insolvency looms, two people familiar with the discussions told Reuters. The BoE has said it is seeking a court order to place the UK arm into an insolvency procedure.
In Asia, the SVB failure has left many Chinese funds and tech start-ups in the lurch, as the bank was a key funding bridge for groups operating between China and the U.S, the Financial Times reported on Sunday.
The Chinese joint venture of SVB said on Saturday it has a sound corporate structure and an independently operated balance sheet.
Having ramped up expectations for further interest rate hikes in the United States and Europe, investors are contemplating whether turmoil in the banking sector could force central banks into a re-think.
Investors will be laser-focused on the ECB which looks set to deliver another hefty interest rate hike on Thursday. A surprise surge in underlying inflation in February has left policymakers fretting that price pressures could prove persistent.
The ECB will be vigilant to the risks of possible contagion and will make sure liquidity is plentiful in the system, said Marchel Alexandrovich, European economist and partner of Saltmarsh Economics.
And if there is a difficult week in the markets, ECB President Christine Lagarde may ‘deliver a somewhat more cautious message,’ he said.
UK finance minister Jeremy Hunt’s UK budget may be overshadowed by the SVB fallout in Britain. Hunt is expected to prioritize keeping public finances steady, resisting giveaways that could destabilize sterling, stocks or gilts.
But wide estimates for new public borrowing needs make the outlook for government bonds uncertain.
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