The Federal Deposit Insurance Corporation (FDIC) in the United States of America has intervened to avoid a potential financial crisis likely to brew in the US following the collapse of the Silicon Valley Bank of Santa Clara, California.
In a statement made available to BusinessDay on Friday, the FDIC said that the California Department of Financial Protection and Innovation had to intervene today by closing the bank to the general public.
The FDIC said, “To protect insured depositors, the FDIC created the Deposit Insurance National Bank of Santa Clara (DINB). At the time of closing, the FDIC, as receiver, immediately transferred to the DINB all insured deposits of Silicon Valley Bank.”
It promised that all insured depositors would have full access to their insured deposits no later than Monday morning, March 13.
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However, it said that for the uninsured depositors, a certain amount would be paid to them next week, and that amount would be accompanied with a “receivership certificate for the remaining amount of their uninsured funds.”
The remaining amount would only come from any sales of assets belonging to the Silicon Valley Bank.
“As the FDIC sells the assets of Silicon Valley Bank, future dividend payments may be made to uninsured depositors,” the statement read.
The DINB takes over the operation of the bank’s branches and assets, reassuring depositors and investors of their funds and continued support.
The FDIC said, “The DINB will maintain Silicon Valley Bank’s normal business hours. Banking activities will resume no later than Monday, March 13, including online banking and other services. Silicon Valley Bank’s official checks will continue to clear. Under the Federal Deposit Insurance Act, the FDIC may create a DINB to ensure that customers have continued access to their insured funds.”
The FDIC promised to provide more information about the bank’s assets and liabilities, taking into context the $209 billion in total assets and about $175.4 billion in total deposits as of December 31, 2022.
The bank is the second bank after Almena State Bank in Almena, Kansas, to close.
What is the Silicon Valley Bank (SVB)? The SVB is one of the largest commercial banks in the United States of America based on local deposits of businesses and individuals in California, where it has its headquarters in Santa Clara.
How does SVB make money? SVB makes money from loans it gives to customers, mostly tech start-ups, at an interest rate. Like any other bank, it receives deposits from the public, but in this case it rates them as uninsured and insured depositors.
The bank gets this cheap money from venture capitalists and invests a portion in loans given to interested businesses, while a chuck is invested in bonds at 1.2 percent, but because of the constant rise in interest rates by the Fed Reserve Bank, most of these funds are locked in and can only be accessed at maturity. A situation that makes them not liquid, thereby making it difficult for depositors and investors to collect their monies as and when they want them.
As a result of these increases in interest rates by the Fed since last year, the inflow of cheap money has slowed down, thereby making it more and more difficult for cheap deposits to come in. This also comes as its investment portfolios continue to experience losses.
“Many of SVB’s depositors are venture capital-funded tech companies. When tech stocks and start-up valuations were soaring — in 2021, for instance — seemingly endless rounds of venture capital rolled in to prop up unprofitable tech startups. SVB’s cheap deposit base swelled.
But the brutal sell-off in tech stocks and downturn in startup valuation have slowed the flow of venture capital.
That means money-losing tech companies are rapidly burning through the cash that previously sat as deposits at SVB, with a few fresh investor checks rolling in to help them out and puff up SVB’s deposit base.
Simultaneously, rising rates have driven down the value of loans and bonds that the bank holds in its portfolio,” Axios said.