The recent failures of Silicon Valley Bank (“SVB”) and Signature Bank have dominated news headlines for the last several days. The seemingly abrupt failure of two large financial institutions and the subsequent revelations that some businesses could lose a substantial amount of deposits have a lot of business owners concerned about the security of their funds. However, recent actions by the Federal Reserve Board (“FRB”) and United States Treasury Department have substantially reduced the risk that depositors will lose deposits.
In general, depositor funds are only insured up to $250,000 at a bank. However, insurance coverage rules are complex. Depending on how accounts are owned, organizations or individuals may have greater coverage. The FDIC has a tool that individuals and businesses can use to calculate applicable FDIC insurance.
For the sake of simplicity, however, if a bank fails, and a depositor has $300,000 on deposit at the institution, then the depositor might lose up to $50,000. However, a closed bank is often sold to a new bank that agrees to assume all of the liabilities of the closed bank. In that case, business customers would be made whole.
If the closed bank is not sold, then the FDIC will liquidate the bank’s assets, which are typically loans and securities. Depending on the quality of the assets, those assets may sell for enough to compensate depositors for their uninsured deposits, or a significant percentage of the uninsured deposits.
FDIC insurance only becomes an issue when a bank fails, however. The risk of additional failures decreased dramatically because of actions over the weekend by the FRB, Treasury Department, and FDIC. As explained by this blog, the FRB came out with a new option for banks to borrow immediate funds to meet depositor demands.
The new lending facility directly addresses the problem faced by SVB. When SVB was forced to sell bonds to meet withdrawal requests, it had to do so at a discount because many of the bonds were purchased in a much lower interest rate environment. As a result, SVB suffered significant losses on the sale.
The new FRB borrowing facility, however, avoids that problem by offering loans equal to the face value of the bonds. This gives banks a significant source of liquidity to rely on in an emergency, and should help any bank experiencing substantial withdrawal requests meet all of those demands.
While the turmoil in the banking sector continues, it now appears that the FRB, FDIC, and Treasury are prepared to ensure that the system continues to operate as normal.
Shareholder Attorney John Lande’s practice includes advising banks on regulatory issues, including matters related to cybersecurity, criminal investigations, fraud, confidentiality, insider transactions, mobile banking, collections, and wire transfers. His focus is on helping banks implement best practices to avoid litigation and disputes in the future. Find more information on his practice here.