US customers of Silicon Valley Bank, who are not covered by a government-backed insurance scheme, have rushed to sell their deposits to pay salaries and other operating expenses after the lender was shut down by regulators.
SVB will reopen on Monday to insured depositors under the newly created Deposit Insurance National Bank of Santa Clara, but it is not yet clear if or when customers with more than $250,000 in their accounts will be able to access all their money.
Some try to sell at deep discounts to raise cash. On Friday, uninsured SVB deposits were quoted at between 55 and 65 cents on the dollar, according to Cherokee Acquisition, a bankruptcy claims trading platform. Other deposits were offered for between 70 and 75 cents on the dollar, according to a person familiar with the situation.
Startup founders have resorted to selling uninsured deposits as they have to pay staff as early as next week. “I’ve had a couple of companies sell (for) 90 cents on the dollar to make sure they’re making a living. All of these companies have the SVB effect,” said one venture capital investor.
Less than 24 hours after the bank’s collapse, the founders received cold emails from investors offering to buy their deposits, according to messages seen by the Financial Times.
Fulcrum Capital, an Austin-based special situations fund, contacted the startups on Saturday and offered to pay an unspecified percentage of the total deposits they had with SVB and to “take the duration/recovery risk. We can fund within a week (48 hours well)”, it wrote.
Jefferies is one of the financial groups that expressed interest in buying some of the deposits.
“At the request of many of our VC clients, Jefferies is working to help its portfolio companies find innovative ways to meet critical requirements such as short-term payroll obligations by helping them monetize or fund their deposits as the liquidation process progresses,” it sounds. said.
According to an industry source, when the bank reopens under FDIC control, standard banking services will be available, including checking and bank services.
Any sale of SVB to another bank can also free up customer deposits.
Sheila Bair, who led the FDIC during the 2008 financial crisis, urged uninsured depositors not to “sell suddenly.”
“The recoveries could be significant, although not quite enough to pay off the uninsured. So I think it would be premature for an uninsured to sell at a big discount,” Blair said.
SVB had already suffered a banking crisis on Thursday, when deposit holders initiated withdrawals that ultimately totaled $42 billion, nearly a quarter of the $173.1 billion. in deposits SVB had at the end of 2022.
The vast majority of SVB deposits are uninsured, partly because its customer base is dominated by large deposit customers such as venture capital firms and the start-ups they supported. At the end of last year, nearly 96 percent were not covered by the FDIC insurance policy, which guarantees deposits up to $250,000. At Bank of America, this figure was around 38 per cent.
Regulators typically view uninsured depositors as “volatile” and more likely to withdraw quickly at the first sign of stress, compared to capital-insured clients, who are seen as more “sticky.”
The Treasury Department, the Federal Reserve and other regulators are closely monitoring the fallout from SVB and any signs of spillover to the broader banking sector.
In a semi-annual report published this month, the US central bank reported that large banks “continue to have ample liquidity to accommodate severe deposit flows”. Chairman Jay Powell echoed that view in congressional testimony this week, saying “American banks are heavily capitalized.”
The Federal Reserve declined to comment, while SVB referred a request for comment to the FDIC.
On Monday, SVB customers whose accounts were insured by the FDIC will have access to their funds. The priority for the FDIC over the weekend has been to ensure that those funds will be available, as promised on Friday, according to a person familiar with the matter.
FDIC officials have reviewed the bank’s records with SVB staff, reviewed the bank’s day-to-day business to prioritize and be prepared for any looming deadlines, and make any necessary legal filings.
For uninsured depositors, the FDIC has said it will pay them an “advance dividend” within the week, which will be a percentage of their deposit. By comparison, uninsured customers at IndyMac Bank, the California bank that failed during the 2008 financial crisis, received an initial dividend worth 50 percent of their deposits and paid out more funds at a later date.
On a hastily arranged Friday night conference call for clients, lawyers at Cooley, a Silicon Valley firm, said that sorting out deposit recoveries usually took the FDIC six to 12 months. But given the complexity of the SVB, that decision could take longer, lawyers warned. They speculated that the FDIC seizing SVB in the middle of Friday, rather than at the traditional end of the day, might have mitigated the damage to uninsured account holders.
The firm also noted that in addition to traditional savings and checking deposits, SVB provided other types of accounts, including money market funds, custody arrangements and repos.
One complication has been the FDIC’s decision to place the insured deposits with the Deposit Insurance National Bank of Santa Clara, while leaving the uninsured deposits in receivership. This could complicate a sale, as buyers, especially in the 2008 period, would typically seek to buy all of a failed bank’s deposits.
The freeze at SVB has rippled through the tech start-up community with several companies scrambling to ensure they can meet payroll next week. Groups have sought advances from venture capital backers, pursued bridging loans and even borrowed on credit cards to meet immediate cash needs, according to multiple sources.