More than 85% of Silicon Valley bank deposits were not insured

More than 85% of Silicon Valley bank deposits were not insured. Here's what that means for customers

Silicon Valley Bank is aptly named: it owns the funds of hundreds of US tech companies and has been a key player in the valley's economy. But on Friday, it became the second-largest bank failure in US history after a rapid influx of deposits. The Federal Deposit Insurance Corporation (FDIC) took about $175 billion in customer accounts and is now tasked with returning the money to the bank's customers.

But more than 85% of the bank's deposits were uninsured, according to estimates in a recent regulatory filing. This is because the FDIC deposit insurance is for everyday bank customers and has a maximum limit of $250,000. Many Silicon Valley startups had millions, or even hundreds of millions, in the bank - money they used to run their companies and pay employees. No one is sure how much of that cash is left.

The tech sector was already going through a tough macroeconomic climate, with many layoffs and a precipitous collapse in stock prices. The failure of the Silicon Valley bank is likely to exacerbate these problems - and could threaten the economy in general. "It's like a Lehman Brothers moment for Silicon Valley," says a Silicon Valley startup founder whose company has millions of dollars in SVB. "It feels like something that should never have happened because it's such a trustworthy entity." The person spoke anonymously because he is concerned about losing clients due to their SVB connections.

Bad bets

SVB was founded in 1983 and is headquartered in Santa Clara, located in the middle of Silicon Valley. The bank was the 16th largest in the country and has long prided itself on its close relationship with tech entrepreneurs, describing itself as "the financial partner to the innovation economy." The bank claimed at the end of 2022 that "nearly half" of all US-backed startups had used its services.

But on Wednesday, SVB announced that it was facing a liquidity squeeze, holding an emergency fundraiser and selling US government bonds at a loss to shore up its position. This announcement caused widespread panic across the valley, as many companies scrambled to withdraw their funds before it was too late.

As fears spread, investors pulled out of bank stocks more broadly, with the four largest US banks losing about $52 billion in market value on Thursday.

Several tech leaders have urged companies doing business with SVB not to panic or withdraw their funds. But the stakes for these startups were too high, and a self-fulfilling bank run followed. SVB's stock price fell 60% on Thursday, and trading was halted on Friday morning. By midday, the FDIC had taken control of the bank. The only bank failure larger than this in American history was Washington Mutual, which had nearly $300 billion in customer deposits before the 2008 financial crisis.

By their very nature, most banks use customer deposits to make loans and then make money off the spread, allowing them to earn income and their customers to earn interest. But financial institutions are currently facing a changing economic climate, as the free money era of ultra-low interest rates is over as the Federal Reserve tries to rein in inflation by making it more expensive to borrow.

Some of the seemingly smart investments banks made two years ago have since faltered, says John Rizzo, senior vice president of public affairs at D.C.-based firm Clyde Group. That was a big part of SVB's problem: the $91 billion worth of Treasury notes (usually a safe investment) the bank bought with customer deposits lost about $15 billion in value due to higher interest rates.

(Rizzo also pointed to the difficulties of cryptocurrency-focused Bank Silvergate, which announced it would close operations this week.) "When interest rates go up, and money is tighter, you tend to see who made bad bets," he says. "You can see the bubble bursting in some of these risk assets, and over the last couple of weeks, we've been spotting financial institutions that have been overexposed to it."

chase insurance

The failure of SBV has immediate ripple effects in Silicon Valley. The founder mentioned above of the startup said he got into banking with SVB right when founding his company several years ago "because it seemed like the de-facto standard."

They said, "It's been around for 40 years." "It was a trusted entity, and everyone seemed to hoard money."

The founder's company kept all its assets, worth millions of dollars, in SVB. When the panic started on Wednesday, the founder considered withdrawing their money but said setting up a new bank account would have taken several days.

The FDIC said customers would get full access to their insured deposits of up to $250,000 next Monday. The founder says the $250,000 is "a small change" compared to what most tech companies have stashed away in the SBV. They estimate that "hundreds if not thousands of companies" have millions of dollars in the bank.

"FDIC insurance is designed to give everyday depositors confidence that they can get their money back right away," says Rizzo. "But as we discovered, this creates a big problem if you're way over the bottom line."

The founder says his company is in a better position than others: since the company is generating revenue and their team is only about 30 people, they can provide payroll for the next few months to sell that, but they needed to be sure. "We don't know if we must lay off or furlough employees. We don't know if we will get more money than the amount insured," they said.

And many Silicon Valley startups don't generate revenue at all, instead relying on fundraising rounds from venture capital firms. "Suppose you are a top-tier startup that has dealt with an SVB bank, raised $100m, burned $1m a month, and has no revenue," says the founder. "You are deprived."

The general sentiment they've heard from other tech entrepreneurs, the founder says, is that "people are hoping someone, whether it's the government or a bigger bank, will bail out the rest of their depositors." Some longtime financial experts, including former Treasury Secretary Larry Summers, have begun calling on the government to ensure depositors are kept full, even if their accounts exceed $250,000.

The SVB failure sent tremors throughout the banking system. Institutions of similar size, including First Republic Bank, Signature Bank, and PacWest Bancorp, suffered double-digit declines in shares.

The founder says the SVB failure could fundamentally change how money flows in Silicon Valley, and people may become more reluctant to trust smaller organizations. They say: "People will be more careful, and that's bad." "Maybe more money will be pooled into the hands of the biggest players."