On Monday, Federal Deposit Insurance Corporation Chairman Martin Gruenberg revealed that the company guaranteed up to $13.3 billion in uninsured deposits for the defunct Silicon Valley Bank’s top ten account holders.
The failure of Silicon Valley Bank, where the vast majority of account balances exceeded the FDIC-backed $250,000 threshold, prompted the government-backed company to secure all accounts in order to prevent further bank runs. Silicon Valley Bank was forced to sell a long-term bond portfolio at a significant loss in order to cover deposit requests.
Gruenberg testified before the Senate Banking Committee that approximately $18 billion from the Deposit Insurance Fund was used to guarantee accounts at Silicon Valley Bank, while another $1.6 billion was taken from the Deposit Insurance Fund to back accounts at Signature Bank, which failed shortly after Silicon Valley Bank due to large depositor withdrawals. The Deposit Insurance Fund is funded by bank fees rather than taxpayer dollars.
Gruenberg also revealed that $13.3 billion of the $18 billion set aside to protect Silicon Valley Bank or nearly 74% of the funds used to help customers, were used to back deposits for only ten accounts.
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“The systemic risk determination enabled the FDIC to extend deposit insurance protection to all of the depositors,” he told lawmakers. “The depositors protected by the guarantee of uninsured depositors included not only small and mid-size business customers but also customers with very large account balances.”
According to Reuters, a number of large companies kept sizable amounts of cash assets with Silicon Valley Bank: Roku, which manufactures digital media hardware, had a balance of $487 million, BlockFi, a bankrupt cryptocurrency lender, had $227 million in funds, and SunRun, a residential solar company, had $80 million in deposits.
Gruenberg added that the financial system “remains sound” despite the recent volatility, but that some banks are seeing higher levels of withdrawals.
“Banks report instances of corporate depositors, in particular, moving some or all of their deposits to diversify their exposures and increase their deposit insurance coverage. Banks have also reported clients moving their deposits out of the banking system and into government money market funds,” he told lawmakers. “In general, the largest banks appear to be net beneficiaries of deposit flows, increasing the amounts on deposit, or held in custody, at the global systemically important banks and at large regional banks.”
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Funds have indeed flowed toward larger financial institutions amid uncertainty about the status of some medium-sized banks, raising concerns about increased banking sector consolidation.
In remarks to the American Bankers Association last week, Treasury Secretary Janet Yellen pledged that actions similar to the one that protected Silicon Valley Bank customers “could be warranted if smaller institutions suffer deposit runs that pose the risk of contagion.”
Investors interpreted her remarks as an implicit guarantee of all deposits, but she later told the Senate Appropriations Committee that she had “not considered or discussed anything” related to “blanket insurance or guarantees of all deposits.”
Silicon Valley Bank’s bond portfolio had dropped significantly in value as the Federal Reserve raised interest rates. According to a study conducted by analysts at the National Bureau of Economic Research, assets in the banking system are now $2 trillion less than their book value as a result of the rollback in monetary stimulus, which had previously been maintained to stimulate the economy during the lockdown-induced recession.
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