What Happens When a Bank Fails: Understanding the FDIC's Role in the Case of Silicon Valley Bank (SVB)

Update: Joint Statement by the Department of the Treasury, Federal Reserve, and the FDIC indicating resolution of SVB to protect ALL depositors. Access to all funds will start Monday, March 13. No losses will be borne by taxpayers.  In the same announcement, it was announced Signature Bank was closed today by its state chartering authority. All depositors will be made whole. As with the resolution of Silicon Valley Bank, no losses will be borne by the taxpayer.

‍When a bank fails, the state regulatory agency where the bank is chartered has the authority to declare the bank insolvent. On Friday March 10, the California of Financial Protection and Innovation declared Silicon Valley Bank (SVB) insolvent and the Federal Deposit Insurance Corporation (FDIC) was appointed as receiver. Hence, the FDIC stepped ‘into the shoes’ of SVB. The FDIC’s main goal is to protect insured depositors. When a bank is closed by a regulatory agency, it takes place on a Friday after the bank is closed for business. FDIC’s role in taking over as receiver is done with the highest level of secrecy and does not happen overnight.

The reasoning for the FDIC taking over an insolvent bank as receiver and declaring it so at the end of business on a Friday is to eliminate a “run on the bank,” avoid confusion for customers who may be conducting business at the bank, panic amongst employees, and to preserve bank documents. Furthermore, it provides the FDIC two nonbusiness days to review documents at the bank, continue interviewing key employees, and decide on a course of action for the bank. It takes weeks, if not months, for the FDIC to prepare to ‘step into the shoes’ of a bank. There are numerous FDIC employees involved (e.g. examiners, auditors, attorneys, among others) who spend hundreds of hours preparing for the role as receiver.

The events leading up to the morning hours on Friday when the FDIC was appointed as receiver for SVB were unique because there was a ‘run on the bank (SVB)’ that started on Thursday, March 9 after SVB informed shareholders on Wednesday, March 8 that the bank had suffered a $1.8 billion loss on sales of US treasuries and mortgage-backed securities and it needed to raise $2.25 billion of capital. After SVB became insolvent on Friday, there has been an overwhelming amount of information provided to the public. The history of the FDIC has been shared over and over and regulators, along SVB, have been placed under a ‘microscope’ to determine what went wrong. Many unfamiliar terms have been provided to the public who may or may not understand exactly what they mean. There is a great deal of confusion and uncertainty regarding, 'What happens now?'

‍At this critical juncture, panic is not the answer. Clear thinking and organizing information about your accounts are key. Attention should be placed on having a current mailing address, email, and telephone number with the bank. The FDIC Claims Portal can be used by a depositor to make the necessary updates or changes.

Customers can expect the following when a bank fails:

• The FDIC will continue to notify each depositor in writing via mail using the depositor’s address with the bank. If SVB is acquired by another bank, the assuming bank also notifies depositors.
• Insured depositors will have access to their insured deposits. Key word is insured depositors first. The standard insurance amount is $250,000 per deposit and it includes principal and any accrued interest. Ownership categories include: single accounts, certain retirement accounts, joint accounts, revocable trust accounts, irrevocable trust accounts, employee benefit plan accounts, corporation / partnership / unincorporated association accounts and government accounts. See FDIC Your Insured Deposits.
• Consumers can use the FDIC's Electronic Deposit Insurance Estimator (EDIE) to calculate insurance coverage to specific deposit accounts. EDIE is not for investments, even if purchased from an FDIC insured bank.
• Uninsured depositors will be paid an advance dividend during the week of March 13th; a claim is not necessary to receive it. A receivership certificate will be provided for the remaining uninsured funds. As the FDIC sells the assets of SVB, future dividends may be made.
• If you are a creditor and provided a service or product to SVB, you must submit a claim to the receiver online or by mail. Electronic communication can be sent to the FDIC via email at nondepclaimsdal@fdic.gov.
• Non-deposit investment products, even if purchased from an insured bank, include: stocks, bonds, mutual funds, crypto assets, life insurance, annuities, municipal securities, safe deposit box contents, U.S. Treasury bills, bonds or notes. These investment products are not insured by the FDIC.

Certain accounts that are not considered bank deposits (may include sweep products and/or custody accounts) may remain partially or fully accessible during a receivership. The treatment of those accounts will depend on the language in the customer agreements. Therefore, clients should consider implications for the processing of payroll or other outbound banking services.

FDIC’s Financial Institution Letter FIL-9-2009 explains the practices for determining deposit and other liability account balances (e.g. sweep arrangements) at a failed insured bank. See Federal Register Rules and Regulations for additional information on processing of deposit accounts at a failed insured bank. The FDIC’s examination procedures provide guidance to examiners in reviewing the disclosure requirements for all sweep account contracts by institutions as to whether swept funds are deposits and the status of the swept funds if the institution was to fail under Disclosure Requirements for Sweep Accounts. The FDIC will act quickly to arrange the sale of SVB to another bank.

In the event that does not happen, federal law (FDIC's Federal Deposit Insurance Act) requires the FDIC to make payments of insured deposits as soon as possible. Typically within two business days from the day of the failed bank.

The rules for deposit insurance coverage are further clarified in 12 CFR Part 330. The FDIC uses the records of SVB to make deposit determinations. If you have less than $250,000, you do not need to file a claim. Customers with accounts over $250,000 should contact the FDIC at 866-799-0959 for further instructions. You may still use your ATM/Debit card for a limited time. Online banking and bill pay services will resume Monday. You need to quickly replace services like automatic payment and bill pay, ATM/Debit cards, and direct deposit and social security.

If you have brokered CD accounts, you should contact your broker for additional information. For detailed information see FDIC's Q&A. In the meantime, you may want to have copies of your last SVB bank accounts, to include bank statements in order to be prepared when or if you contact the FDIC. It is extremely unfortunate the events that transpired leading to the insolvency of SVB. Many businesses are hurting and searching for answers to continue serving their customers.

At Regology, we are focusing on a positive conclusion.