On March 10, the California Department of Financial Protection and Innovation closed Silicon Valley Bank and appointed the Federal Deposit Insurance Corporation (FDIC) as its receiver. Silicon Valley Bank had 17 branches in California and Massachusetts. The FDIC transferred all deposits and assets of the former bank to a newly created, full-service FDIC-operated bridge bank in an action designed to protect depositors. In its press release, the FDIC stated that depositors would have full access to their money beginning Monday morning when Silicon Valley Bridge Bank, N.A. would open and resume normal banking hours and activities. In the past, the FDIC only provided up to $250,000 per insured depositor, per institution, and per ownership category. However, in an unprecedented move, the FDIC announced it would make all depositors whole — both insured and uninsured — no matter the size of their deposits.
The FDIC was also appointed receiver of Signature Bank, which was closed on March 12, 2023, by the New York Department of Financial Services. Signature Bank had 40 branches across New York, California, Connecticut, North Carolina, and Nevada. As receiver, the FDIC transferred all the deposits and assets of Signature Bank to Signature Bridge Bank, N.A., a full-service bank operated by the FDIC as it markets the institution to potential bidders. In its related press release, the FDIC again stated that “all depositors of the institution will be made whole.” The FDIC also noted that any losses to the FDIC’s Deposit Insurance Fund (DIF) to support uninsured depositors “will be recovered by a special assessment on banks, as required by law.”
Typically, the FDIC’s power to guarantee deposits is limited by the least cost resolution rule. Under this rule, the FDIC is required to pursue all possible resolution methods for a failed institution and the FDIC must choose the method that entails the least cost to the DIF, even if doing so inflicts losses on a failed bank’s uninsured depositors, creditors, and shareholders. The only exception to the least cost resolution rule is the systemic risk exception. Under the systemic risk exception, the FDIC may pursue a resolution method other than the one having the least cost to the DIF if the Secretary of the Treasury, the FDIC board, and the Federal Reserve Board, in consultation with the President, determine that a particular institution’s failure would post a systemic risk to the banking industry.
Secretary of the Treasury Janet Yellen, Federal Reserve Board Chair Jerome Powell, and FDIC Chairman Martin Gruenberg, released a joint statement on March 12 stating that after receiving a recommendation from the boards of the FDIC and the Federal Reserve, and consulting with President Biden, Secretary Yellen approved the actions which enabled the FDIC to complete its resolution of Silicon Valley Bank in a manner that fully protected all depositors. The joint statement also announced that a similar systemic risk exception was approved for Signature Bank.
Finally, to address any liquidity pressures that may arise moving forward, the Federal Reserve announced that it will make available additional funding to eligible depository institutions to help assure banks can meet the needs of all their depositors. The related press release stated that the “additional funding will be made available through the creation of a new Bank Term Funding Program (BTFP), offering loans of up to one year in length to banks, savings associations, credit unions, and other eligible depository institutions pledging U.S. Treasuries, agency debt and mortgage-backed securities, and other qualifying assets as collateral.” The Fed further stated that these assets will be valued “at par” (i.e., at face value) and that the “BTFP will be an additional source of liquidity against high-quality securities, eliminating an institution’s need to quickly sell those securities in times of stress.”