FDIC Insurance: What to Know Following Silicon Valley Bank Closure

March 13, 2023

Federal regulators took over Silicon Valley Bank after shutting it down on Friday – two days after SVB’s announcement that it had lost almost $2 billion in Treasury bonds. The bank, which caters to many of the world’s most powerful tech investors, is the largest to fail since the 2008 financial crisis. SVB was closed by California banking regulators and put into receivership under the Federal Deposit Insurance Corp. (FDIC), effectively giving the FDIC control of the bank.

On Sunday, regulators also shut down New-York based Signature Bank, another institution threatening to collapse.

The fallout is causing tremendous concern and questions regarding protection for bank deposits. Here is what you should know regarding FDIC insurance, custodial vs. general accounts and other guidance.

FDIC Insured Deposits

The FDIC covers up to $250,000 per depositor, per bank, with the insurance amount based on legal ownership name. A married couple with a business, for example, may have up to $250,000 insured in an account under “Spouse A,” up to $250,000 insured in an account in the name of “Spouse B” and up to $250,000 insured in a business account. Those with more than $250,000 in deposits are advised to open accounts at other banks to boost their FDIC coverage.

To confirm whether you are insured at your banking institution and calculate your insurance coverage, check the FDIC’s Electronic Deposit Insurance Estimator.

Depositors who had assets with SVB or Signature Bank will have access to their insured deposits, according to the FDIC. Depositors should work with other banks to expedite a new account opening to quickly transfer the insured assets out of the receivership account.

FDIC Insurance: What’s Covered (and What’s Not)

According to the FDIC, here is what is covered and what is not when it comes to FDIC insurance:

What the FDIC Covers

  • Checking accounts
  • Negotiable Order of Withdrawal (NOW) accounts
  • Savings accounts
  • Money market deposit accounts (MMDA)
  • Time deposits such as certificates of deposit (CDs)
  • Cashier’s checks, money orders and other official items issued by a bank

What the FDIC Does Not Cover

  • Stock investments
  • Bond investments
  • Mutual funds
  • Crypto Assets
  • Life insurance policies
  • Annuities
  • Municipal securities
  • Safe deposit boxes or their contents
  • S. Treasury bills, bonds or notes*

*These investments are backed by the full faith and credit of the U.S. government.

Uninsured Deposits

In a press release, the FDIC states, “The FDIC will pay uninsured depositors an advance dividend within the next week. Uninsured depositors will receive a receivership certificate for the remaining amount of their uninsured funds. As the FDIC sells the assets of Silicon Valley Bank, future dividend payments may be made to uninsured depositors.”

Sweep Accounts

A sweep account is a banking or investment account that automatically transfers funds between two accounts to maintain a predetermined balance or maximize interest earnings. Typically, a sweep account is linked to a primary account, such as a checking account, and a secondary account, such as a savings account, money market account or investment account. The primary account is used for daily transactions, while the secondary account is used to earn interest on any excess funds.

When the primary account balance exceeds a pre-determined threshold or falls below a pre-determined minimum balance, funds are automatically transferred to or from the secondary account to maintain the desired balance. This process is known as “sweeping” funds between the two accounts.

Sweep accounts are often used by individuals or businesses to manage their cash flow more efficiently and earn additional interest income on idle funds. They are also commonly used by brokerage firms to manage their clients’ cash balances and ensure compliance with regulations.

Many companies have “sweep” accounts with SVB where SVB applies excess company cash to purchase shares in certain securities through a third-party custodian. Because these accounts are held by a third-party custodian, the accounts are not on SVB’s balance sheet. While SVB is the administrator of these accounts, sweep accounts do not constitute a deposit account and thus are not subject to SVB’s liquidity risk. However, access to these funds may take time and the FDIC has not yet stated a plan to access sweep account funds.

Custodial vs. General Accounts

A custodial account holds customers’ securities for safekeeping. Securities may hold stocks, bonds or other assets in electronic or physical form on behalf of their customers. The custodian banks can manage financial accounts, handle settlements and handle compliance and tax issues. Similar to sweep accounts, because the custodied assets are not on the bank books, they are not subject to SVB or other bank failure risks.

Custodians tend to be large and reputable banks because they are responsible for the safety of assets and securities.

On the other hand, a general account is an account that is owned and managed by an individual or entity for their own use. These accounts are not designed for the purpose of managing funds for others but rather for general financial transactions such as depositing or withdrawing money, paying bills and managing expenses.

Mutual Fund Custodians

Mutual fund custodians are third-party institutions that protect securities invested in mutual funds. Mutual fund custodians maintain control over the fund’s assets. Should a fund’s management declare bankruptcy, the mutual fund custodian will return the investments to the shareholders.

Suggestion of Where to Place Assets

Assets held in money market accounts at brokerage firms owned by a bank are not on the bank’s books and not at risk during a bank collapse. Assets held in money market accounts at the bank are on the bank’s books if held in a deposit account and are subject to risk during a bank collapse.

Wiring Confirmation

Many SVB customers attempted to initiate wires from their SVB accounts which were in process when the bank was closed. Wiring status should be confirmed with the account holder Monday, March 13, 2023.

Incoming Payments and Autopay

If possible and permissible, payments and autopay directed to SVB accounts should be redirected to new bank accounts with new instructions.

Priority of Payments and Timing

First, insured depositors are paid; next, uninsured depositors are paid. Third, if funds are available, payments are made first to general creditors and then to stockholder.

Be Alert for Scams

The FDIC warned SVB customers to be on alert for potential scams and to not disclose account numbers and confidential information to sources they do not know.

KJK will continue to monitor developments related to the SVB bank closure. In the meantime, if you have questions or concerns about the potential implications for your assets or want to learn more about how to maximize protections for your deposits, contact Estate Planning Partner Susan Friedman (SLF@kjk.com; 216-736-7272) or a member of our Banking & Finance team.