US customers of Silicon Valley Bank which are not covered by a government-backed insurance scheme have been rushing to sell their deposits to pay salaries and other operating expenses after the lender was shuttered by regulators.
SVB will reopen on Monday for insured depositors under the newly formed Deposit Insurance National Bank of Santa Clara, but it is not yet clear whether or when customers with more than $250,000 in their accounts will be able to access all of their money.
Some are trying to sell at steep discounts to raise cash. On Friday, uninsured SVB deposits were being quoted at a price of between 55 and 65 cents on dollar, according to Cherokee Acquisition, a claims trading platform in bankruptcy cases. Other deposits were being offered for between 70 and 75 cents on the dollar, according to a person familiar with the situation.
Start-up founders have resorted to selling uninsured deposits as they need to pay staff as early as next week. “I’ve had a few companies sell [for] 90 cents on the dollar to make sure they make payroll. All of these companies have the SVB effect,” said one venture capital investor.
Less than 24 hours after the bank’s collapse, founders were receiving cold emails from investors offering to buy up their deposits, according to messages seen by the Financial Times.
Fulcrum Capital, an Austin-based special situations fund, contacted start-ups on Saturday offering to pay an unspecified percentage of the total deposits they held at SVB and to “take the duration/recovery risk. We can fund within a week (48 hours good)”, it wrote.
Jefferies is one of the financial groups who expressed an interest in buying some of the deposits.
“At the request of many of our VC clients, Jefferies is working to help their portfolio companies find innovative ways to meet crucial demands such as short-term payroll obligations by helping them to monetize or finance their deposits as the receivership process progresses,” it said.
According to one industry source, when the bank reopens under FDIC control, standard banking services will be available including checking and wire services.
Any sale of SVB to another bank could also unfreeze customer deposits.
Sheila Bair, who led the FDIC during the 2008 financial crisis, urged uninsured depositors not to “precipitously sell”.
“The recoveries could be significant, even if not completely sufficient to pay off the uninsured. So I think it’d be premature for an uninsured to be selling at a steep discount,” Blair said.
SVB had already suffered a bank run on Thursday, when deposit holders initiated withdrawals that ultimately totalled $42bn, almost a quarter of the $173.1bn in deposits SVB had at the end of 2022.
The vast majority of SVB deposits are uninsured, partly because its client base is dominated by big deposit customers such as venture capital firms and the start-ups they backed. At the end of last year, almost 96 per cent 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 “flighty” and more prone to quickly withdraw at the first sign of stress compared with customers with insured capital, who are seen as more “sticky”.
The Treasury department, 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 meet severe deposit outflows”. Chair Jay Powell reiterated that view in congressional testimonies this week, saying “American banks are strongly capitalised”.
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 these funds will be available, as was promised on Friday, according to one person familiar with the matter.
FDIC officials have been going through the bank’s records with SVB employees, reviewing the bank’s daily business in order to prioritise and be prepared for any looming deadlines and making any necessary legal filings.
For uninsured deposits, the FDIC has said it will pay them an “advance dividend” within the week which will be a percentage of their deposits. By comparison, uninsured customers at IndyMac Bank, the California-based bank which failed during the 2008 financial crisis, received an initial dividend worth 50 per cent of their deposits and paid out more funds at a later date.
On a hastily arranged Friday evening conference call for clients, lawyers at Cooley, a Silicon Valley firm, said sorting out deposit recoveries usually took the FDIC six to 12 months. However, given the complexity of SVB, this resolution 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 harm for uninsured account holders.
The firm also noted that besides traditional savings and checking deposits, SVB provided other types of accounts including money market funds, custodial arrangements and repos.
One complication has been the FDIC’s decision to put the insured deposits with the Deposit Insurance National Bank of Santa Clara while leaving the uninsured deposits in receivership. This could complicate a sale given buyers, especially during the 2008 period, would typically seek to purchase 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 that they can meet payroll next week. Groups have sought advances from venture capital backers, pursued bridge loans and even borrowed on credit cards to meet immediate liquidity needs, according to multiple sources.