More than 85% of SVB’s Deposits Were Not Insured. Here’s What That Means for Customers

Silicon Valley Bank was aptly named: It held the funds of hundreds of U.S. tech companies and was a crucial player in the valley’s economy. But on Friday, it became the second largest bank failure in U.S. history after a rapid run on its deposits. Some $175 billion in customer accounts were taken over by the Federal Deposit Insurance Corporation (FDIC), which is now tasked with returning 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. That’s because FDIC deposit insurance is meant for everyday bank customers and maxes out at $250,000. Many Silicon Valley startups had millions, or even hundreds of millions of dollars deposited at the bank—money they used to run their companies and pay employees. Right now, nobody’s sure how much of that cash is left.

The tech sector was already wading through a harsh macroeconomic climate, with layoffs abounding and stock prices sinking precipitously. Silicon Valley Bank’s downfall is likely to exacerbate those problems—and could threaten the wider economy. “It’s like a Lehman Brothers moment for Silicon Valley,” says one Silicon Valley startup founder whose company has millions of dollars tied up in SVB. “It feels like something that never should have happened, because it’s such a trustworthy entity.” The person spoke on the condition of anonymity because they are worried about losing customers over their ties to SVB.

Bad bets

SVB was founded in 1983 and is headquartered in Santa Clara, which sits right in the middle of Silicon Valley. The bank was the 16th-largest in the country, and has long prided itself in its close relationship with tech entrepreneurs, calling itself the “financial partner of the innovation economy.” The bank claimed at the end of 2022 that “nearly half” of all U.S. venture-backed startups used its services.

But Wednesday, SVB announced that it faced a liquidity squeeze, and that it was holding an emergency fundraiser and selling off U.S. government bonds at a loss to shore up its position. This announcement caused widespread panic across the Valley, with many companies scrambling to withdraw their money before it was too late.

As fears spread, investors pulled out of bank stocks on a larger scale, with the four largest U.S. banks losing some $52 billion in market value on Thursday.

Many tech leaders urged companies that banked with SVB not to panic or withdraw their money. But the risk for these startups was too high, and a self-fulfilling bank run ensued. SVB’s stock price fell by 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 one in American history was Washington Mutual, which had roughly $300 billion in customer deposits before the 2008 financial crisis.

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

Some savvy-seeming investments that banks made two years ago have since turned sour, says John Rizzo, senior vice president, public affairs at the D.C.-based firm Clyde Group. This was a big part of SVB’s problem: $91 billion worth of Treasuries (a usually safe investment) that the bank bought with customers’ deposits, had lost some $15 billion in value due to interest rate hikes.

(Rizzo also pointed to the struggles of the crypto-focused Silvergate Bank, which announced that it would shut down operations this week.) “When interest rates rise and the money is tighter, you tend to find out who’s made bad bets,” he says. “You can see the bubble bursting in some of these risk assets, and over the last couple weeks, we’ve been finding out which financial institutions were overexposed to them.”

Chasing Insurance

SBV’s failure is having immediate ripple effects in Silicon Valley. The aforementioned startup founder said that they began banking with SVB right at their company’s founding several years ago, “because it seemed like the de facto standard.”

“It’s been around for 40 years,” they said. “It was a really well-trusted entity that everyone seemed to store money on.”

The founder’s company held all of its assets, which were worth millions of dollars, in SVB. When the panic began on Wednesday, the founder began to mull over pulling their money out, but said that the process of creating a brand-new business bank account would have taken several days.

The FDIC said that customers will have full access to their insured deposits up to $250,000 this coming Monday. But $250,000 is “chump change” compared to what most tech companies stashed in SBV, the founder says. They estimate that “hundreds if not thousands of companies” have millions of dollars tied up with the bank.

“The FDIC insurance is designed to give the everyday depositor confidence that in a run, they can get their money back,” Rizzo says. “But as we’re finding out, that creates a significant problem if you’re well over the threshold.”

The founder says that their company is in a better position than many others: because the company generates revenue and their team is only about 30 people, they will be able to make payroll for the next few months. After that, they’re not so sure. “We don’t know if we’re going to have to lay off or furlough employees. We don’t know if we’re ever going to get the money beyond the insured amount,” they said.

And many start-ups in Silicon Valley don’t generate revenue at all, instead relying on fundraising rounds from venture-capital firms. “Let’s say you’re a high flying startup who banked with SVB, raised $100 million, burns a million dollars a month, and has no revenue,” the founder says. “You’re actually f—ed.”

The founder says a common sentiment they’ve heard from other tech entrepreneurs is that “people are hoping for someone, whether it be the government or a bigger bank, will bail out the rest of the depositors.” Some financial veterans, including former Treasury Secretary Larry Summers, have begun calling on the government to ensure that depositors are made whole, even if their accounts exceed $250,000.

SVB’s failure sent tremors across the banking system. Similarly-sized institutions, including First Republic Bank, Signature Bank, and PacWest Bancorp, all suffered double-digit stock dips.

The founder says that SVB’s failure could fundamentally change the way money flows in Silicon Valley, with people perhaps becoming more hesitant to trust smaller institutions. “People will be much more cautious, and that’s a bad thing,” they say. “It may be that more money gets aggregated into the hands of the biggest players.”