Federal Deposit Insurance Corporation Chairman Martin Gruenberg revealed on Monday that the firm guaranteed as much as $13.3 billion in uninsured deposits for the 10 largest account holders at the defunct Silicon Valley Bank.
The implosion of Silicon Valley Bank, where the vast majority of account balances exceeded the $250,000 threshold backed by the FDIC, prompted the government-backed company to secure all accounts in order to prevent additional bank runs. Silicon Valley Bank had been forced to sell a long-term bond portfolio at a substantial loss to cover deposit requests.
Gruenberg testified before the Senate Banking Committee that some $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 collapsed shortly after Silicon Valley Bank as large depositors withdrew their balances. The Deposit Insurance Fund is filled with fees on banks rather than taxpayer dollars.
Gruenberg also revealed that $13.3 billion of the $18 billion allocated to protect Silicon Valley Bank, or nearly 74% of the funds used to assist the customers, were used to back deposits for a mere 10 accounts. “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.”
A number of large companies kept sizable amounts of their cash assets with Silicon Valley Bank: Roku, which manufactures digital media hardware, maintained a balance of $487 million, while BlockFi, a bankrupt cryptocurrency lender, had $227 million in funds, and SunRun, a residential solar company, had $80 million in deposits, according to a report from Reuters.
Gruenberg added that the financial system “remains sound” despite the volatility of the past several weeks but noted that some banks are witnessing 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.”
Funds have indeed been flowing toward larger financial institutions amid uncertainty about the status of some medium-sized banks, prompting concerns about increased consolidation in the banking sector. Treasury Secretary Janet Yellen vowed in remarks to the American Bankers Association last week that moves similar to the one which protected Silicon Valley Bank customers “could be warranted if smaller institutions suffer deposit runs that pose the risk of contagion.” Investors saw her comments as an implicit guarantee of all deposits, but the official later told the Senate Appropriations Committee that she has “not considered or discussed anything” related to “blanket insurance or guarantees of all deposits.”
The bond portfolio sold by Silicon Valley Bank had declined substantially in value amid Federal Reserve actions to hike interest rates. Assets in the banking system are now $2 trillion lower than their book value as a result of the rollback in monetary stimulus, which had been previously maintained to stimulate the economy during the lockdown-induced recession, according to a study from analysts at the National Bureau of Economic Research.