Special Edition Executive Letter: WBA’s Response to SVB Failure
By Rose Oswald Poels
The Wisconsin Bankers Association (WBA) is closely tracking developments related to the failure of Silicon Valley Bank and will continue to keep our membership informed.
How Silicon Valley Bank Differs from Wisconsin Banks
What happened with Silicon Valley Bank is a very unique situation. The bank was heavily connected to the tech sector, which made it vulnerable to the booms and busts of that sector. Less than 10% of its deposits were insured as they were very large deposits (largely from venture capitalists that deposited tech investment money in the bank). In contrast, Wisconsin banks have a far higher percentage of insured deposits. Because Silicon Valley Bank was heavily connected to the tech sector — both on the loan and deposit side — it was not well diversified. Again, this is a stark difference from Wisconsin banks of all sizes, which are much more diversified across different business and personal sectors.
The banking system overall and Wisconsin banks are safe, sound, and resilient. This situation is truly idiosyncratic to Silicon Valley Bank. It grew incredibly fast in a very short time frame, going from $56 billion in 2018 to over $209 billion in 2022. In the span of just one year, they nearly doubled in size, from December 31, 2020 to December 31, 2021, when they went from $114 billion to $209, which is unheard of. No Wisconsin bank has grown like this. So, while Silicon Valley Bank had reached the large bank category, it got there so fast that the bank wasn’t in the large bank asset size long enough for the regulators to push through all the requirements (like stress testing). A bank needs four consecutive quarters over the asset threshold — and then there is a phase-in period. Silicon Valley Bank was still in that phase-in period and not yet subject to full-blown scrutiny.
FDIC Insurance Protects Bank Customers
The FDIC acted swiftly and decisively, which is good to protect the banking system and customers of Silicon Valley Bank. Banks are encouraged to make sure their frontline staff are prepped to answer questions about FDIC deposit insurance coverage, and may refer to the following talking points:
- Customers’ deposits are protected by FDIC insurance. In the 88-year history of the FDIC, no one has ever lost a penny of an insured deposit.
- The FDIC insures up to $250,000 in eight separate account categories per depositor per bank. The FDIC is completely funded by the banking industry.
- Every bank pays risk-based premiums every quarter to support the fund.
- The FDIC insurance fund and all of the agency’s costs come entirely from premiums paid by banks.
- The industry knows that a strong FDIC and deposit insurance fund are essential to the banking system. Banks stand ready to do whatever it takes to ensure the health of the fund and strength of the FDIC. The FDIC is stronger than ever before.
- The FDIC insurance fund stood at an all-time high of $124.5 billion as of June 2022.
- The FDIC has a $100 billion line of credit with the U.S. Treasury, which would, by law, have to be repaid by the banking industry if ever used. The banking industry is well capitalized.
- In total, more than 99 percent of banks are “highly capitalized” and far above the most stringent regulatory standards.
Bankers may point customers to the FDIC’s Understanding Deposit Insurance resource, Deposit Insurance FAQs, and SVB FAQs.
Bankers may also learn more about the state guaranty fund and consider proactively calling their larger bank customers’ CFOs to talk about options such as excess deposit insurance, reciprocal deposit programs, or — in the case of municipal government money — the collateral the bank already has insuring the full amount on deposit. Also, when applicable, bankers may talk to their business customers about how they have a very solid, diversified portfolio that doesn’t have strong exposure to the tech sector.
What Happens Next
In a statement issued on March 12, 2023 by the Department of the Treasury, Federal Reserve, and FDIC, it was announced that FDIC will complete its resolution of Silicon Valley Bank in a manner that protects all depositors. Depositors will have access to all of their money starting Monday, March 13. No losses associated with the resolution of Silicon Valley Bank will be borne by the taxpayer. A similar systemic risk exception will be made for Signature Bank, New York, New York, which was closed on March 12 by its state chartering authority. Shareholders and certain unsecured debtholders 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.
Finally, the Federal Reserve Board on March 12 announced it will make available additional funding to eligible depository institutions to help assure banks have the ability to meet the needs of all their depositors.
Banking Industry Remains Strong
As I recently stated in commentary on FDIC data, Wisconsin’s banking industry is in a solid position. These anomalous events at out-of-state banks do not change that. The banking system in Wisconsin and across the U.S. remains well capitalized and resilient, and the regulators’ quick response is expected to reassure the public. As always, WBA is committed to keeping our members informed on issues impacting the industry and providing resources to support your work at your bank and in your communities.
