All week, a parade of Biden administration officials has tried to get the message across that taxpayers will not shoulder the financial burden of the government’s guarantee that all depositors in two failed banks — Silicon Valley Bank (SVB) and Signature Bank – their funds are immediately available to them.
On Monday, President Joe Biden swore that Silicon Valley Bank account holders “would have access to their money starting today,” and that includes “small businesses across the country who need to bank there and do payroll, pay their bills, and stay open for business.” And Treasury Secretary Janet Yellen wanted to reassure Congress Thursday that “our banking system remains sound and that Americans can rest assured that their deposits will be there when they need them.”
The guaranteed deposits go beyond Federal Deposit Insurance Corporation (FDIC) fund insurance, which promises depositor funds will be covered up to $250,000, and only a very small percentage of these bank customers had accounts under the FDIC maximum. According to a report by S&P Global Market Intelligence, 94% of domestic deposits were uninsured with SVB, while 90% of Signature Bank deposits were uninsured. That’s far higher than the stake held by big U.S. banks — about 47%, according to S&P Global.
Mr. Biden said all of those depositors would be covered by the Federal Deposit Insurance Corporation fund, even though stock and bondholders in the banks would lose their investments: “That’s how capitalism works,” Mr. Biden said.
Some of the companies covered are significant. Roku, a company with about $1.9 billion in cash, said in an SEC filing last week that its $487 million in deposits with SVB are “largely uninsured.” Roku’s other $1.4 billion is “spread across several large financial institutions.” Online video game company Roblox also announced in a March 10 securities filing that about 5% of the company’s $3 billion in cash and securities, or $150 million, is held at the bank. The company said in the filing that the bank’s collapse “will have no impact on the company’s day-to-day operations.”
What is the Deposit Protection Fund and how does it work?
Financial institutions pay into the Deposit Insurance Fund, or “DIF,” on a quarterly basis, and the level of their fees is based on an assessment of the institution’s size and risk profile.
The account exists to repay insured depositors when a financial institution goes bust, explained Greg McBride, chief financial analyst at Bankrate.com.
“This fund comes into play when a bank goes bust because its liabilities exceed its assets,” which ultimately doesn’t have to be the case with SVB and Signature Bank, McBride said.
How much does the deposit insurance fund have now and will it have the funds if more banks fail?
By the end of the fourth quarter of 2022, DIF had $128 billion in its coffers, which according to a senior Treasury Department official, was “enough” to cover SVB and Signature Bank clients.
After the 2008 financial crisis, the DIF was in the red by $21 billion in 2009 when it had to lend funds to depositors from more than 100 bankrupt financial institutions, ultimately requiring a $128 billion cash injection.
The financial damage the DIF will suffer as a result of the collapse of SVB and Signature depends on finding buyers for the failed banks’ assets and the sale price, which is not yet known, McBride said.
“Because it’s not about non-performing loans, but rather high-quality assets that are currently selling for less than face value, the damage to the DIF can be minimized,” McBride said.
In the case of SVB, many of the deposits that exceeded the $250,000 insurance guarantee were corporate payrolls, and companies often have other ways of managing payrolls, including special accounts or mechanisms with additional protection, said J. Michael Collins, professor of public affairs and human ecology and expert in consumer and personal finance.
Republican Senator Marco Rubio of Florida predicted Thursday on CBS Mornings that “potentially every American with a bank account will have to pay higher bank fees.” Rubio said banks would be able to charge a fee that could potentially be levied on bank customers for paying their insurance guarantee.
“So you have people who aren’t related to this bank who have small deposits and could potentially pay higher fees because of a bank’s mismanagement,” Rubio said.
What will happen to the $250,000 cap and the deposit insurance fund in the future?
Rep. Blaine Luetkemeyer, a Republican, member of the House Financial Services Committee and a former banker, told Politico the federal government should temporarily insure every bank deposit in the country to boost confidence in the US financial system.
But Lütkemeyer is in the minority, at least for the time being.
Goldman Sachs said Wednesday that “at this point in time, we do not expect Congress to act on deposit insurance.”
“While some lawmakers from both parties have raised the possibility of insuring all deposits or raising the cap, other lawmakers from both parties have opposed it,” Goldman Sachs said about regulatory changes would significantly delay approval.”
What to do if you have more than $250,000 in cash
So how can people and businesses with more than $250,000 in cash try to protect their investments?
Since individuals are insured for up to $250,000 per person, a total of $500,000 in deposits would be covered by the FDIC for a couple. Depositors can also open accounts with multiple institutions and still be insured for $250,000 per person per bank, Collins said.
There are also brokerage accounts that would be covered by the Securities Investors Protection Corporation, Collins said. And although somewhat controversial, there are also custody accounts that use a certificate of deposit registration service that can cover very large deposits.
“Using a combination of these can allow someone to hold very large aggregate demand deposits if they choose,” said Collins, who says it’s always wise to speak with a financial advisor, especially for those with hundreds of thousands of dollars in liquid assets savings.
Consumer confidence in the banking sector remains shaky and is likely to remain so for some time. But McBride said the key point customers should be aware of is that “your money is safe – and it’s available”.
— Alain Sherter contributed to this report