Uninsured Silicon Valley Bank depositors seek fire sale of assets

US customers of Silicon Valley Bank not covered by a government-backed insurance scheme have rushed to sell their deposits to pay salaries and other operating expenses after the lender was shut down by regulators.

SVB will reopen Monday for insured depositors under the newly formed Deposit Insurance National Bank of Santa Clara, but it is not yet clear if or when customers with more than $250,000 in their accounts will be able to access all their money.

Some try to sell at steep discounts to raise money. On Friday, uninsured SVB deposits were quoted at a price between 55 and 65 cents on the dollar, according to Cherokee Acquisition, a trading platform for claims in bankruptcy cases. Other deposits were offered for between 70 and 75 cents on the dollar, according to a person familiar with the situation.

Start-up entrepreneurs have resorted to selling uninsured deposits as they have to pay employees as early as next week. “I̵[ads1]7;ve had a few companies sell [for] 90 cents on the dollar to make sure they get paid. All these companies have the SVB effect, said a venture capital investor.

Less than 24 hours after the bank’s collapse, the founders received cold emails from investors offering to buy up their deposits, according to messages seen by the Financial Times.

Fulcrum Capital, an Austin-based special situations fund, contacted startups on Saturday and offered to pay an unspecified percentage of their total deposits with SVB and to “take the duration/recovery risk. We can fund within a week (48 hours good)”, it wrote.

Jefferies is one of the financial groups that expressed an interest in buying some of the deposits.

“At the request of many of our VC clients, Jefferies is working to help their portfolio companies find innovative ways to meet critical requirements such as short-term payroll obligations by helping them monetize or fund their deposits as the receivership process progresses,” said .

According to an industry source, when the bank reopens under FDIC control, standard banking services will be available, including checking and bank services.

Any sale of SVB to another bank can also free up customer deposits.

Sheila Bair, who led the FDIC during the 2008 financial crisis, urged uninsured depositors not to “sell outright.”

“The recoveries could be substantial, although not quite sufficient to pay the uninsured. So I think it would be premature for an uninsured to sell at a steep discount,” Blair said.

SVB had already had a bank run on Thursday, when depositors began withdrawals that eventually totaled $42 billion, nearly a quarter of the $173.1 billion in deposits SVB had at the end of 2022.

The vast majority of SVB deposits are uninsured, partly because the customer base is dominated by large deposit customers such as venture capital companies and the start-up companies they supported. At the end of last year, nearly 96 percent were not covered by FDIC insurance that guarantees deposits up to $250,000. At Bank of America, this figure was around 38 per cent.

Regulators typically view uninsured depositors as “smart” and more likely to withdraw quickly at the first sign of stress compared to capital-insured customers, who are seen as more “sticky”.

The Treasury Department, the Federal Reserve and other regulators are closely monitoring the fallout from SVB and any signs of spillover to the broader banking sector.

In a semi-annual report published this month, the US central bank reported that large banks “continue to have ample liquidity to meet severe deposit outflows”. Chairman Jay Powell echoed this view in congressional testimony this week, saying “American banks are heavily capitalized”.

The Federal Reserve declined to comment, while SVB referred a request for comment to the FDIC.

On Monday, SVB customers with FDIC-insured accounts will be able to access their funds. The priority for the FDIC over the weekend has been to ensure that those funds will be available, as promised on Friday, according to a person familiar with the matter.

FDIC officials have reviewed the bank’s records with SVB staff, reviewed the bank’s daily operations to prioritize and be prepared for any looming deadlines and make the necessary legal filings.

For uninsured deposits, the FDIC has said it will pay them an “advance dividend” within the week that will be a percentage of their deposits. By comparison, uninsured customers at IndyMac Bank, the California-based bank that failed during the 2008 financial crisis, received an initial dividend worth 50 percent of deposits and paid out more funds at a later date.

On a hastily arranged conference call for clients Friday night, lawyers at Cooley, a Silicon Valley firm, said sorting out deposit recoveries typically took the FDIC six to 12 months. But given SVB’s complexity, this resolution could take longer, lawyers warned. They speculated that the FDIC seizing SVB in the middle of Friday, rather than at the traditional end of the day, may have mitigated the damage to uninsured account holders.

The firm also noted that in addition to traditional savings and checking deposits, SVB provided other types of accounts, including money market funds, custody arrangements and repos.

One complication has been the FDIC’s decision to place the insured deposits with the Deposit Insurance National Bank of Santa Clara while leaving the uninsured deposits in receivership. This can complicate a sale given that buyers, especially during the 2008 period, will typically seek to buy all of a failed bank’s deposits.

The freeze at SVB has rippled through the tech startup community with several companies scrambling to ensure they can meet payroll next week. Groups have sought advances from venture capital backers, applied for bridging loans and even borrowed on credit cards to meet immediate liquidity needs, according to multiple sources.

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