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FDIC, Regulations  and SVB & Signature Bank

FDIC, Regulations and SVB & Signature Bank

March 15, 2023

When events like the runs on and pending failure of Silicon Valley Bank (SVB) and Signature Bank happen, it's natural to wonder how a bank safeguards your funds. Fortunately, the Federal Deposit Insurance Corporation (FDIC) insurance was designed for this very reason: to help protect your funds once deposited. 

The FDIC is an independent government agency that protects bank depositors from the loss of otherwise uninsured deposits at an FDIC-insured bank. Issues deposit insurance that protects bank customers if an FDIC-insured institution fails. In other words, FDIC insures your money at the bank.

If a bank fails, the FDIC provides depositors with an insurance payout of up to $250,000 per depositor, per institution, and per ownership category or account. For example, if you have a joint account, a business account, a personal checking account, a savings account and bonds in your safe deposit box, the FDIC will cover you up to $250,000 for each account or combination of identical accounts (2 joint husband and wife checking accounts equal one type) if your bank is FDIC-insured.  If so, you don't need to apply for FDIC insurance because coverage is automatic. Your safe deposit box is not covered by FDIC.

With SVB and Signature Bank, banking regulators took the extraordinary step of designating both banks as "systemic risks to the financial system," giving them flexibility to backstop the uninsured deposits -- those beyond the $250,000. Regulators hoped that by protecting these deposits, they would bolster confidence in the banking system.

We expect the government’s quick actions will boost trust in the banking system, yet these events may have an impact on longer-term economic growth and banking institutions.

As I mentioned in an earlier missive, I have a problem with this 'end run' around the regulations. Money at these banks got special treatment that creates a precedent for future bailouts. The next and next bank collapses will expect the same generous governmental largesse despite similar mismanagement of their investments. True, shareholders may lose, but customers -- well aware of the regulated limitations -- must also bear a burden. This is a clear Moral Hazard. Like it or not, rules have, or should have, consequences.

If nothing else, we can expect premiums for FDIC insurance will increase for ALL banks as a result of this debacle. Guess who bears the brunt of this extra expense.

I’m keeping a sharp eye on this situation and plan to provide you with additional updates as the situation evolves.