The FDIC is paying Silicon Valley Bank customers an anticipated dividend this week, but the amount is unknown.
Silicon Valley Bank’s collapse has left its clients in a bind as they cannot access their money.
None of the clients know how much of the money that was deposited at the California bank will be returned to them after the FDIC, a regulatory agency, shut it down on March 10.
DON’T MISS: SVB CEO sold $3.6 million worth of shares before bank collapse
The FDIC said it would “pay uninsured depositors an anticipated dividend within the next week” on March 10.
“Uninsured depositors will receive a certificate of receivership for the remaining amount of their uninsured funds,” the agency said. “As the FDIC sells Silicon Valley Bank’s assets, future dividend payments may be made to uninsured depositors.”
Since the FDIC only insures deposits up to $250,000, anyone with an account balance that exceeds the amount is eagerly awaiting the outcome of the FDIC’s early dividend decision.
This is the “advance dividend.” These are the two words that everyone is looking at and trying to understand.
An FDIC spokesperson on March 11 told TheStreet: “It’s a partial payment of your uninsured deposits.”
He declined to comment further on the process of how the FDIC decides whether an account holder receives 75% or even just 25% of the value of their cash.
SVB collapsed after the bank tried to raise additional capital to bolster its liquidity. When it failed to raise $2.25 billion after losing $1.8 billion in losses on the sale of long-term US government bonds, shares of its parent company, SVB Financial Group, fell more than 60%.
Some customers managed to transfer their money from SVB to another bank on March 9, but tens of thousands of people were not so lucky.
Joseph Taggart, president of LandVest, a Boston-based real estate and forestry management company, told TheStreet that he was able to transfer some of SVB’s company cash into one of his existing bank accounts on March 9. But the company did not transfer all of its cash to another bank because they were scheduled to do payroll on March 10.
“There were a lot of accounts that we had to keep active because we’re doing business all the time for vendors or payroll,” he said. “We had to sit down and cross our fingers and see if that transaction would go through.”
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Examiners valuing SVB assets
SVB has $151 billion in uninsured deposits as of December 31, 2022, according to its Federal Financial Institutions Examination Council (FFEIC) “call report”. The bank had $209 billion in total assets and $175.4 billion in total deposits as of December 31.
The good news is that customers with deposits that were not insured will receive a payment that the FDIC calls a dividend, Todd Baker, senior fellow at the Richman Center for Business, Law and Public Policy at Columbia University in New York and general manager of Broadmoor Consulting, he told TheStreet.
“Yes, there will be a ‘dividend’ payment (which is actually a return of the principal of the uninsured deposit) next week as soon as the remaining book of securities is sold,” he said.
When the FDIC closes a bank, the regulator sells its investments, such as stocks and bonds, and other assets to provide money for the bank’s customers.
But clients are likely to receive only a percentage of their funds, and the process could take several months or longer, creating difficulties for clients who need to pay bills and employee salaries.
Baker estimates that clients will only receive “about a third of their uninsured balances, based on the likely liquidation price of the security portfolio and a rough estimate of post-foreclosure deposit balances.”
The banking regulator is working to “get price quotes and make deals right now,” he said. “Those proceeds will get a haircut of some sort to reflect ongoing liabilities and receivership operating costs and then be distributed. After that, future payments will depend on ongoing asset sales.”
The dividend paid by the FDIC to clients could take “months for the rest of the asset sales, with the last bits trickling down for a longer duration,” Baker said.
The FDIC insures money deposited in checking and savings accounts, CDs, and money market deposit accounts.
The agency states that the amount of money clients receive depends on “the category of property.” This usually means the way in which you hold your funds. Some examples of FDIC property categories include individual accounts, certain retirement accounts, employee benefit plan accounts, joint accounts, trust accounts, business accounts, and government accounts.”
The money will be returned to customers once a bank’s assets and investments are sold, but the FDIC said it does not pay “dividends up front when the value of the failed institution’s assets cannot be reasonably determined at closing. Federal law applicable to all depository institutions provides that a trustee’s maximum liability to a claimant is an amount equal to what the claimant would have received if the institution’s assets had been liquidated.”
Previous bank failures already had buyers
During previous bank failures, the FDIC would close the banks on Friday with a buyer ready to step in. Clients often received “55 to 65 cents on the dollar,” Lucilio (Louie) Coutous, former president and CEO of American Plus Bank in Arcadia. , California, who was a senior bank examiner at the FDIC for 16 years, told TheStreet.
SVB clients could receive “in this case, if they sell the securities and there are no more losses, they could get 70 cents on the dollar,” he said.
The best outcome for customers is if the FDIC can find someone to buy the entire bank.
Coutous, who also served as chief risk officer at Vineyard Bank in California, said his clients received 60 cents on the dollar initially and another 10 cents on the dollar after their assets were sold, followed by another 10 cents.
Eventually, some customers received 85 to 90 cents for every dollar deposited at the bank.
“They spent years at Vineyard Bank and clients received money in batches,” he said.
The SVB bankruptcy is “unusual” because in previous bank failures, the FDIC would spend months working with the financial institution to determine the value of its loans and begin selling its assets.
“Banks used to take months to fail and the FDIC knew that way in advance and would look at the loans and try to price them,” Coutous said.
Although loans are difficult to value, there are virtual data rooms that speed up the process. Bank inspectors “will spend most of their time looking at loan files and looking at credit quality, often debating what the quality of the loan is,” she said.
Customers shouldn’t panic because “not having insurance doesn’t mean being lost,” Coutous said. “If the bank’s money is invested in assets that are illiquid, it will take time to convert it into cash.”
The problem is “uncertainty about when and the ultimate level of value those assets get: will they take six months and 90 cents or two years and get 80 cents? That’s a legitimate question.”
In the past, the FDIC “had a pretty good idea of what they would get for the loans and could put forward 60 to 80 cents on the dollar,” he said.
In the case of the SVB failure, “we don’t know if they had time to do this,” Coutous said.
The market for SVB’s assets could be tighter with fewer bidders, meaning sales would take longer to close, he said.
Since SVB dealt with the technology and venture capital industry, its lending was also niche.
“How many people will bid on the loans?” Coutous said.
