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SVB & Misunderstanding "Depositors"

Updated: Mar 15, 2023

Misunderstanding "Depositors"

At the crux of the discussion surrounding the best possible outcome for SVB depositors is the ongoing interpretation of the anticipated actions of the FDIC, the Federal Reserve and the Treasury Department.

Statements were made on Friday from the FDIC that everyone with an insured deposit i.e. accounts worth less than $250,000 would have full access to their money by this Monday morning March 13. Stating that "uninsured depositors" i.e those holding accounts exceeding $250,000 would get some of their money back, however it did not specify how much, or when.

SVB held more than $200 billion in assets at year-end 2022. It is estimated that the bank has seen roughly $40 billion in outflows, leaving $160 billion in outstanding assets. It has been suggested that roughly 93% of depositors fall outside the $250k limit and are therefore "uninsured". Should the FDIC fail to find a buyer for SVB, now renamed as Santa Clara Bank, the FDIC would have to move to to sell the bank’s remaining assets and use the proceeds to pay the uninsured depositors.This may take considerable time and be achieved at a considerable discount knowing the nature of most assets, and all without taking into account the vexing issue of valuations surrounding long-dated assets on the balance sheet

A great part of the deposits, it is purported, come from venture capitalists and tech start-ups and companies ( broadly viewed as "the wealthy few".) As it stands the mechanism to payout beyond the nominated $250k would most likely require congressional legislation to tap the insurance fund paid into by all domestic banks, but, moreover, by taxpayers. From a purely political perspective, showing financial support to a "wealthy few" investors beyond FDIC insurance may prove a very difficult position for Congress to defend in the public forum.

Subsequently, however, on Sunday The Secretary of the Treasury, Yellen, Fed Reserve Chairman Powell, and FDIC Chairman Gruenbeg made a joint statement proclaiming "decisive action to protect the U.S. economy by strengthening public confidence in the banking system" in short, following interdepartmental consultation Yellen has approved action from the FDIC that "fully protects all depositors''. They announced a "similar systemic risk exception" for Signature Bank. All depositors of Signature Bank "will be made whole, no losses will be borne by the taxpayer" "Shareholders and unsecured debt holders will not be protected. Senior management has also been removed. Any losses to the Deposit Insurance Fund to support uninsured depositors will be recovered by a special assessment on banks, as required by law.

Additionally, the Fed announced on Sunday it will make additional funding to eligible depository institutions to assure banks that they have the ability to meet the needs of their depositors (ref First Republic Bank seeing a small run on Friday) The banks will carry this burden,it appears, should a shortfall occur. Taxpayers will not be suffering. However, bailing out the "wealthy few" is bound to provoke some acerbic reaction on Capitol Hill, but aggressive action from the authorities should assuage fears of a follow-through this week.

SVB Perps are "quoted" at 6-10 cents in the dollar and the Senior debt has traded at 46 cents in the dollar on Monday. We also know that the failure of SVB and Signature Bank (another nail in the coffin of crypto banking liquidity) is sending more than a frisson of trepidation into the banking sector globally.

However, post-2008 most would agree that the regulatory framework surrounding a crisis of this nature is measurably better prepared and the speed at which the authorities have acted is laudable. This is not comparable to Bear Stearns or Lehman Brothers. SVB is a sizable bank for sure, however, it is a relatively new institution and contagion will be more readily contained.

Markets have reacted "positively" to news divulged over the weekend and BTC has benefitted from a crypto "flight to safety". However, keep an eye on crypto liquidity in light of the Signature Bank failure and corresponding fallout in the OTC markets. It appears that the crypto universe continues to unravel; however, this may be seen as an inevitable and necessary process to weed out the myriad ingenues and sub-par protagonists and should result in a much clearer playing field with fewer, stronger players.

Short-term reactions to last week have led some to expect the Fed to pull back on rate hiking in response to the debacle, but we know that the Fed has a close weather eye on data and this should override this temporary distraction (albeit a serious one) from the greater picture of the fight against inflation.

Paul Durrant


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