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Today, Silicon Valley Bank is bankrupt, the second largest bank failure in American history.

What happens to its depositors? Will they be able to withdraw (some of) their money? How long will they have to wait? In what form will they receive it?

Chris W. Rea
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user253751
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4 Answers4

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Update from the FDIC over the weekend: all the deposits will be made available to SVB depositors on Monday. The risk would be borne by the FDIC which will make a special assessment on its members if additional funds are needed. I.e.: the banks will pay for this out of their own pocket (which will be filled back from customers' fees and interest charges, obviously). The shareholders and bondholders of the bank are wiped out, and according to the statement all the senior management will be "removed" (fired? Jailed? We'll have to wait and see).

The US government seems to also set up a new fund to help banks bridge short term liquidity events like the one that toppled SVB. Given that over the weekend another bank collapsed, it may be quite timely.

The FDIC will make the money for insured depositors (up to $250K per depositor) available on Monday. For the rest there's going to be an advance dividend payment and the rest will be distributed as the FDIC liquidates the bank's assets. See the FDIC press release for details.

Some details from the comments:

  • FDIC insures up to $250K per depositor per institution. It's that insured part that will be available on Monday (the bank was taken over by the FDIC on Friday before start of business and was closed on Friday).
  • Most SVB depositors are companies and about 95% of the deposits are not insured by the FDIC, and those will have to wait until the liquidation unfolds.

Historically, when FDIC takes over failed banks, depositors were eventually made whole in almost all cases. However this is a process that takes time. In the other answer the case of Washington Mutual (WaMu) was mentioned - but it is not similar. WaMu's failure was anticipated for weeks, and both WaMu and FDIC were working on potential acquisition. FDIC took over the bank once its acquisition plan by Chase has been finalized, and turned the bank over to Chase immediately. There were no losses to depositors (Chase assumed all deposit liabilities) and in fact that transition was seamless.

The SVB case is different. It failed due to a bank run which was caused by a couple of actions and decisions of the SVB itself, all happening within just a couple of days. There's no prepared and finalized liquidation plan, no buyers already lined up, and in this case the FDIC is planning, at list for now, to do what it was set up to do: take care of the insured depositors first, deal with the rest later.

The main issue that may cause problems for individuals here is the ripple effect. The companies they work at or depend on for payments may in turn depend on SVB for their own cashflow and the fact that the deposits are tied up in the FDIC process may cause ripple effects and liquidity struggles for the affected SVB customer companies. For most parts this should be mitigated by the affected companies themselves through either bridge loans or selling their deposit claims, or infusion of capital, or proper diversification of deposits so that the tied up part would not be the only cash stash they have. For some companies these tied up amounts may be significant (e.g.: Roku has almost half a billion there) - these companies are at risk due to exposure.

littleadv
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    Can you also add what’s worst case depositors could lose? Some ppl spread rumors that $150B is lost (the uninsured portion), some talk about selling for $202B or whatever. $SIVB is $16B down on their MBS portfolio, that seems like the worst case scenario: $16B might be wiped from $170B of deposits – Pavel P Mar 11 '23 at 03:40
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    @PavelP this is loss on paper, if some bank wants to take up these assets it may be that there would be no loss of deposits, similarly to what has happened with WaMu mentioned in the other question. Problems start if no bank wants to take over. Then all these losses on paper would start materializing, maybe even more because it's a distress sale and a complete liquidation, and uninsured depositors will get prorated payouts based on the total liquidated value compared to the deposits owed. All of uninsured $150B is very unlikely to be lost, some 5-15% is very likely if no bank takes over. ... – littleadv Mar 11 '23 at 04:58
  • @PavelP ... (cont) The main problem right now for uninsured depositors is their own liquidity. Some were able to pull funds, others keep their deposits diversified enough, but many use SVB as their main bank and those are going to have a real problem. Even if they don't lose a cent of their deposit, they don't have access to these cents (or large portion of) until the liquidation is complete and it means they may have their own liquidity issues. By the time the funds are actually available to them they may already be forced into bankruptcy. – littleadv Mar 11 '23 at 05:01
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    @littleadv "All of uninsured $150B is very unlikely to be lost, some 5-15% is very likely if no bank takes over." This should be an answer. For example, Joe Programmer's $200K bank account is guaranteed safe, but Roku's $487 million might not be. – RonJohn Mar 11 '23 at 17:55
  • @RonJohn that's a speculation. My answer mentions the insurance limit and the process as published by the FDIC. Those who ask questions here probably don't have 487m in their SVB bank account. – littleadv Mar 11 '23 at 19:13
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    @littleadv Yes, but their paychecks may very well be drawn on SVB. – le3th4x0rbot Mar 11 '23 at 21:50
  • Including some of these comments in the answer would make it much better. As it is, there is actually less info than the FDIC press release! – le3th4x0rbot Mar 11 '23 at 21:55
  • Is it prorated rather than giving everyone the same amount up to what they originally had? I assume the prorating is done on the uninsured portion? – Solomon Ucko Mar 12 '23 at 05:46
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    @SolomonUcko the uninsured part is prorated, yes. – littleadv Mar 12 '23 at 07:30
  • All of uninsured $150B is very unlikely to be lost, some 5-15% is very likely if no bank takes over - can you add this to your answer? – Pavel P Mar 12 '23 at 16:17
  • @PavelP I'd rather not, it's more of my (un)educated guess than anything. I have no visibility into the FDIC process, and am just spitballing here. – littleadv Mar 12 '23 at 20:55
  • "The risk would be born by the FDIC" *borne – Acccumulation Mar 13 '23 at 02:36
  • Huh? A few depositors (those with balance <250k) will get their balance back. 90% of of deposits in SVB were over 250k This is very common knowledge and was mentioned on every media outlet in the US the last few days. https://time.com/6262009/silicon-valley-bank-deposit-insurance/ (google a million hits) Something changed ? – Fattie Mar 13 '23 at 14:17
  • My small bank was closed suddenly many years ago (by state regulators). The FDIC check was as simple to get as any other bank transaction. But, and this is not trivial for many, the check was marked with the warning that I was accepting the settlement amount by cashing the check. Those with mutual funds or lots of outstanding transactions had to make sure they agreed with the settlement. The bank tellers did help with this reconciliation. I did have to hunt down my 3 outstanding checks and pay them with a different financial institution. – danak Mar 13 '23 at 16:00
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    @Fattie yes, FDIC will cover the deposits for all depositors of the bank, including the uninsured ones. – littleadv Mar 13 '23 at 16:12
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I was affected by the largest bank failure.
Or to be more precise, I was not.

The branches didn't close (much). The web site kept working. I never lost access to my money. My auto-payments kept getting paid and my checks cleared. And then one day I go to the branch and they're sticking a Chase sign on it. They issued me new ATM and credit cards with the Chase logo. After another couple of years, 1-800-788-7000 stopped working and I had to learn a new phone number.

The checks didn't change. The routing number didn't change. It's still the same.

All this happened because of the behind-the-scenes labor of FDIC, who acted as the bankruptcy receiver and facilitated a sale of WaMu's banking business unit to JPMorgan (doing business as Chase). In the WaMu bankruptcy, no depositors lost money - not even those with holdings over $250,000. At least according to the FDIC.

EDIT: Annnnnd.... the same thing just happened here. Regulators just said ALL deposits will be protected. The US banking system works, because regulators actively make sure it works. When I gave this is an anecdote, a few people thought it was irrelevant and wouldn't apply. Well, it did.

Note that "Depositors" are treated in a special way and are not simply another of the bank's creditors. (i.e. the payments they make to landlords, employees and contractors). So for instance if you were the janitorial service that cleans Silicon Valley Bank offices, and they are $50,000 in arrears on cleaning fees, the bank might not pay you (at least not in full; there's a creditor pecking order.) But if your janitorial service banks there and has $50,000 on deposit with Silicon Valley Bank, your deposit is not at risk.

Harper - Reinstate Monica
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    note: this last paragraph does not imply that the money exists. If it does not exist, you will not get paid it. – user253751 Mar 11 '23 at 00:30
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    @user253751 Edited. If it's on deposit, you'll get paid it. – Harper - Reinstate Monica Mar 11 '23 at 00:34
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    I still don't think it's right. Banks take your deposits and then buy securities (or make their own securities, but let's not go into that). The value of the securities is now lower. It can be lower than the amount of deposits. In this case, if you had more than $250k you do not get your full deposit - you get a dividend of whatever is left after FDIC sells all the securities, the office furniture and the confidential customer tracking data and gives up to $250k to each depositor. – user253751 Mar 11 '23 at 00:36
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    No anxiety, just https://xkcd.com/386/ . Note that 93% of the money in Silicon Valley Bank was not insured, because its customers are mostly companies that have more than $250k. It is possible that FDIC sells all the stuff and gets more than the needed 202 billion dollars; it's also possible that it gets less. – user253751 Mar 11 '23 at 00:57
  • @user253751 you realize that comic is a joke, right? More likely than not, Cueball is in the wrong :) A huge fraction of the money in WaMu was not insured either, yet nobody lost anything. That was repeated in other banks in the 2000s. This is a smaller bank failure, and FDIC does know what they're doing. – Harper - Reinstate Monica Mar 11 '23 at 01:00
  • Let us continue this discussion in chat. – user253751 Mar 11 '23 at 01:01
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    I still have WaMu checkbooks, lol... But with SVB, most clients are companies and businesses, not individuals, and for most depositors the deposits are way more than the insured $250K per entity. So there's going to be a disruption, and there's going to be a period of time when not all the funds are immediately available, and it may take a while until they are, if ever. It may be a significant disruption to the affected businesses. – littleadv Mar 11 '23 at 02:01
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    BTW, worth noting that in case of WaMu there was no receivership, the bank was sold to Chase as is. In this case, the bank is not being sold (they actually tried to sell themselves before being shut down and failed), the bank is seized by the State regulators and sent to FDIC in receivership. So the process is different and while Chase guaranteed that all the depositors would remain whole in case of WaMu - there's no such guarantee for SVB. At least not for now, maybe someone will take it from FDIC as a bargain. – littleadv Mar 11 '23 at 02:10
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    @littleadv True, it's a different case... but FDIC has a long history of very successful bank rescues, so the assertion that it won't work out this time, just seems like a bit of a bold claim. Especially since banks face tighter rules than they did in 2008. But that's comments. In my answer I stand behind my claim that anyone's first $250k is not at risk. – Harper - Reinstate Monica Mar 11 '23 at 02:41
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    @user253751 The fact that SVB served a commercial market is a good thing. Companies, particularly those with millions of dollars of cash, are generally smart enough to understand the risk of bank failures, and also generally minimize their cash holdings to maximize returns. Companies also know how to do things like cash sweeps between multiple banks and purchase private depository insurance. – user71659 Mar 11 '23 at 03:50
  • SVB failed because there was a run on the bank -- when rumors of problems spread, everyone tried to take their money out and they ended up with a negative cash balance. It wasn't just the operating cash they use to pay their janitors. – Barmar Mar 11 '23 at 14:58
  • @user253751 based on news reports I'm changing that last paragraph. I never said (in the answer) that depositors were protected beyond $250k, but that makes it more clear. – Harper - Reinstate Monica Mar 11 '23 at 19:10
  • @littleadv based on news reports I walked back that last paragraph. – Harper - Reinstate Monica Mar 11 '23 at 19:13
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    @Barmar right, it's very common for banks fo have your money, just in non-liquid form that takes some time to convert to cash. But such problems work themselves out in time. Momma-bear FDIC rolling in and taking over the place should calm nerves and create time needed for that to sort itself out. Again, FDIC has a long history of saving ALL depositor money with cost to the government at $0.00. – Harper - Reinstate Monica Mar 11 '23 at 19:22
  • Not just a run. It seems they are in a reasonably deep financial hole and tens of billions down. – gnasher729 Mar 11 '23 at 22:36
  • if I had 300k deposited would the first 250k be insured and only the 50k overflow subject to availability? – Jasen Mar 12 '23 at 00:35
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    @Jasen right. FDIC says everyone will have their first $250k Monday. Given their $212B assets, even "tens of billions" is a small fraction. Banking laws are pretty tight which is why this crazy-train got stopped at 10-ish percent. – Harper - Reinstate Monica Mar 12 '23 at 00:39
  • Even people with less than 250K will still lose on insurance. Such as a company that processes payroll to dozens or more companies out of a single SVB account – Michael Fulton Mar 12 '23 at 23:31
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    I'm still paying bills with checks that say "Washington Mutual". – Acccumulation Mar 13 '23 at 02:39
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    I was a WAMU customer and never even noticed any changes, until the sign outside my branch changed to Chase. I left WAMU only because I had a Chase credit card and did not want all the eggs in one basket. – danak Mar 13 '23 at 15:54
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UPDATE: Announced in a joint statement by Treasury, Federal Reserve and FDIC on Sunday, March 12 at 6:15 PM EDT:

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.

So all depositors, even those over the FDIC limit, will have access to all of their money immediately.

MTA
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    LOL saw that coming. Like I said in my answer. Our banking system works. – Harper - Reinstate Monica Mar 13 '23 at 06:00
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    Particularly if you're a bank! – Fattie Mar 13 '23 at 14:22
  • @Harper-ReinstateMonica "works" is a maybe tenuous word for business's money being saved by the government hitting its emergency override button out of fear of contagious collapse. And the new the long-term alternative, "the Fed will loan you money pretending your depressed value bonds are worth full value" is not exactly the most confidence inspiring solution ever. Moral hazard, anyone? – mbrig Mar 14 '23 at 01:31
  • @mbrig, the bonds are worth full value -- if you can afford to hold them to maturity. The thing that crashed SVB is that they had an abrupt need for the money locked up in those bonds. – Mark Mar 14 '23 at 03:44
  • @Mark the time value of money doesn't change just because the government can afford to hold them to maturity. There's plenty of other people/companies/etc that could hold them to maturity, but they're still not going to pay par value for them, because "coupons+1000$ in 10 years" is worth less than "$1000 right now". Now, they're not actually buying them, they're offering loans with them as collateral, pretending the collateral is worth more than its current market value.... not the craziest thing, but not nothing either. – mbrig Mar 14 '23 at 04:18
  • @mbrig, the time value of money is not the same thing as the cash value of money. The fact that better investments exist does not change the fact that if you purchase one of the SVB bonds you will get the full value when the bond matures. – Mark Mar 14 '23 at 21:11
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In the 1970s, a German bank (Herstatt Bank) went bankrupt. However while the couldn’t pay deposits, there were also plenty of people with long term debt to the company. After about 30 years, all these debts got repaid to the bank, and all in all 97% was repaid to people with deposits.

From what I read, svb had 200bn deposits and 170bn assets, so depositors should get 85% back over the next years.

gnasher729
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