US Fed steps in to save Silicon Valley Bank deposits – and prevent further withdrawal runs

The US Treasury Department has intervened to guarantee deposits following the collapse of Silicon Valley Bank (SVB) and halt broader bank run jitters.

Secretary of the Treasury Janet Yellen, Federal Reserve Board chair Jerome Powell, and Federal Deposit Insurance Corporation (FDIC) chair Martin Gruenberg released a joint statement on Sunday night, US time, amid concerns of contagion spreading on Monday, creating an emergency program to protect all deposits at both California-based SVB and New York’s Signature Bank.

The intervention extends the existing FDIC scheme, which guarantees the first US$250,000 of deposits. But the problem for startups and investors is that many had millions or tens of millions of dollars deposited with SVB.

More than 90% of the funds deposited with the 40-year-old bank came from the startup ecosystem. The bank provided banking to around half of all US VC-backed startups, but imploded last week as customers tried to withdraw around US$40 billion in funds – nearly a quarter of the capital in the bank – before state regulators stepped in on Friday to take control. The FDIC is now the receiver of Silicon Valley Bank.

Concerns that startup founders would be unable to pay staff led to concerns of a dinosaurs-level extinction fears over the weekend amid pleas for the US government to intervene.

ASX-listed tech companies exposed to the SVB collapse fell in early trade on Monday morning before the US Fed announcement.

The Federal Reserve intervention also included the crypto-focused Signature Bank, which New York state regulators took control of on Sunday citing concerns about its viability.

The 25-year Californian bank Silvergate, which has also been crypto-focused in recent years, collapsed last week, but it not part of this bail out.

“Today we are taking decisive actions to protect the US economy by strengthening public confidence in our banking system,” Yellen, Powell and Gruenberg said in their join statement.

“This step will ensure that the US banking system continues to perform its vital roles of protecting deposits and providing access to credit to households and businesses in a manner that promotes strong and sustainable economic growth.”

Depositors will have access to all of their money from Monday, March 13.

“No losses associated with the resolution of Silicon Valley Bank will be borne by the taxpayer,” they said.

At my direction, @SecYellen and my National Economic Council Director worked with banking regulators to address problems at Silicon Valley Bank and Signature Bank.

I’m pleased they reached a solution that protects workers, small businesses, taxpayers, and our financial system. https://t.co/CxcdvLVP6l

— President Biden (@POTUS) March 13, 2023

At its peak, SVB had nearly US$200 million in deposits, but as interest rates rose, those funds began to flow out of the bank, with around $25 billion being withdrawn in 2022, and that figure being exceeded in the opening weeks of 2023, as concerns about the liquidity of the bank grew.

The rush to withdraw funds became a stampede by Thursday after Bloomberg reported that high profile investor Peter Thiel’s Founders Fund pulled all of its cash from SVB, with several other VC funds Coatue Management, Union Square Ventures and Founder Collective, also telling founders to pull their cash from SVB.

The Federal Reserve deal to protect SVB deposits also extends to New York’s Signature Bank, which was closed by regulators on Sunday. Shareholders and some unsecured debtholders, including bond holders, are not covered by the announcement and senior management at both banks have 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,” the joint statement said.

“Today’s actions demonstrate our commitment to take the necessary steps to ensure that depositors’ savings remain safe.”

The Federal Reserve will also make available additional funding available to eligible depository institutions to help assure banks can meet any withdrawal demands from depositors.

Multiple Australian startups had funds deposited with SVB, and after an anxious weekend, not have their capital secured.