Here's Who Will Pay for the SVB Bailout

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KEY POINTS

  • SVB's sudden collapse required the Federal Deposit Insurance Corporation (FDIC) to step in to protect all its depositors.
  • The FDIC may sell or auction off SVB's assets to other financial institutions to help cover the costs.
  • The FDIC is funded by banks paying for deposit insurance coverage and may charge a special assessment should it need more funds.

Silicon Valley Bank (SVB) was one of the leading technology-focused banks in the U.S. It catered to startups, venture capital firms, and other technology companies in Silicon Valley and beyond. On March 10, 2023, Silicon Valley Bank (SVB) failed after a bank run, marking the second-largest bank failure in United States history and the largest since the financial crisis of 2008. Here is how the bank collapsed so quickly and who is on the hook for its bailout.

What happened?

The bank, which had $209 billion in assets at the end of 2022, failed due to a combination of factors, including a lack of diversification, rising interest rates, and a classic bank run. SVB's sudden collapse was driven by "the first Twitter-fueled bank run." Due to high interest rates, the bank's tech-focused customers withdrew their money held by SVB to fund their operations. To shore up its balance sheet, SVB had to sell $21 billion worth of bonds.

Unfortunately for the bank, its bond portfolio was averaging 1.79% return, far below the 10-year Treasury yield of 3.9% at the time of the sale. As a result, on March 8, SVB announced that it took a $1.8 billion loss and was planning on raising $2.25 billion in fresh capital. This spooked multiple prominent venture capitalists. They took to Twitter, advising their companies to pull their money out.

Customers withdrew $42 billion in deposits from their bank accounts in just one day, leaving the bank with a cash balance of negative $1 billion. Just 48 hours after SVB's announcement, the California Department of Financial Protection & Innovation and the Federal Deposit Insurance Corporation (FDIC) closed SVB, effectively ending the 40-year-old bank.

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FDIC guarantees funds

After the collapse of the 16th largest bank, lawmakers worked furiously to contain the spread of the panic and help the thousands of companies who needed access to their funds. The heart of the issue was that a whopping 94% of deposits held by individuals and companies at the bank remained uninsured by the FDIC, which only covers up to $250,000.

These funds were crucial for businesses to pay their employees, among other expenses. On March 12, 2023, the Treasury, Federal Reserve, and FDIC announced that depositors would have full access to their money starting Monday, March 13, waiving the $250,000 FDIC limit and guaranteeing all uninsured deposits.

Now what?

The Fed, FDIC, and Treasury stated that, "No losses associated with the resolution of Silicon Valley Bank will be borne by the taxpayer." A senior Treasury Department official also stated "For the banks that were put into receivership, the FDIC will use funds from the Deposit Insurance Fund to ensure that all of its depositors are made whole." In other words, the FDIC is expected to receive sufficient funds from the liquidation process that will cover most of the expenses related to guaranteeing the deposits. The winding down may involve selling or auctioning off SVB's assets to other financial institutions to cover the costs.

The joint statement also noted, "Any losses to the Deposit Insurance Fund to support uninsured depositors will be recovered by a special assessment on banks, as required by law." While it's not clear how much the cost of the special assessment could be, some experts believe that the cost may have to come out of the pocket of bank customers, but it is too early to tell.

The Deposit Insurance Fund (DIF) is a financial safety net that is guaranteed by the United States government. While the fund is backed by the U.S. government, it receives its funding from two sources: assessments from FDIC-insured institutions and interest earned on U.S. government investments. When choosing a savings account, it is important to find an FDIC-insured bank.

The financial world was rocked when it was announced that SVB and Signature Bank were facing financial troubles. Now the FDIC will sell assets of SVB to help recover the costs and if short, could charge additional assessments. It is still too early to tell how much it would cost.

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