By Anayat Durrani
The failure of Silicon Valley Bank and Signature Bank was a shock to the banking industry and left many investors unsure of the safety of their funds. The Federal Deposit Insurance Corporation took control of the two banks earlier this month as depositors pulled money from the two lenders. Concerned that the bank failures would lose customer trust in banks, the federal government protected all deposits at the two banks, including those over the FDIC’s insured $250,000 limit.
Regulators can protect deposits over the $250,000 amount if they determine that the banks’ failures pose a systemic risk, as they did with SBV and Signature.
“In the short-term, there isn’t a lot that banks can do to change the safety of their depositor’s money,” says William T. Chittenden, Ph.D., associate professor, McCoy College of Business Administration at Texas State University. “What I have seen so far are banks pointing out that their percentage of uninsured deposits is much, much lower, 35% – 40% range, as compared to Signature and SVB—both well over 90%.”
Many EB-5 investors, in particular, have remained concerned about the safety of their funds in escrow. Much of an EB-5 investor’s $800,000 is left uninsured in an escrow account.
“Since the funds are in escrow, the EB-5 investors do not have much say in where the funds are kept as this is typically determined by the EB-5 Regional Center,” says Chittenden. “My advice would be to ensure that the EB-5 Regional Center uses a bank that is part of the IntraFi network. This allows the bank to “swap” deposits with other banks so that all deposits are insured.”
For example, Pennsylvania-based Customers Bank offers coverage for accounts with more than $250,000 through its Insured Cash Sweep (ICS) program, which is made up of FDIC-insured institutions nationwide. Funds are distributed among several different banks so that each amount is insured and depositors retain access through a single account. By spreading funds across a network of FDIC-insured banks, investors face less risk, say experts.
“The only other real alternative is to ensure that the EB-5 Regional Center banks with one of the four largest banks in U.S.—those that have trillions, not billons, of dollars in assets,” says Chittenden. “These banks are considered too big to fail and the government would definitely consider these banks to have “systemic risk” and therefore be eligible for 100% deposit coverage, just like in the case with Signature and SVB.”
SVB and Signature aftermath in the EB-5 industry
The collapse of tech start-up focused SVB followed by Signature Bank created the worst banking shock since the 2008 global financial crisis. Customers took out nearly $100 billion in deposits, according to reports.
The FDIC said First Citizens BancShares Inc would acquire all of SVB’s deposits and loans from the regulator. Signature Bank announced on March 20, 2023, Flagstar Bank, N.A., the wholly owned subsidiary of New York Community Bancorp Inc., Hicksville, New York, acquired $12.9 billion of the bank’s loans and took on $38.4 billion in deposits. Flagstar also acquired all of their 40 branches, now operated under the Flagstar name.
Per a joint statement by Thomas R. Cangemi, President & Chief Executive Officer, New York Community Bancorp Inc. and Eric R. Howell, Flagstar Bank, the partnership was called one of “like-minded, client-forward institutions.”
“This transaction provides significant diversification and strength needed in today’s banking system while further advancing NYCB and Flagstar’s strategic plan to transition to a commercial bank model,” the statement said.
The partnership was described as “a commercial bank powerhouse” that will make Flagstar one of the biggest commercial banks in the U.S., “with a fortress-like balance sheet, strong liquidity, and excellent asset quality metrics.”
In their statement, they assured that clients will continue to be serviced by their Private Client Group and “anticipate getting back to business as usual in short order.”
Congress bank hearings and the EB-5 industry
Tuesday marked the first day of hearings regarding the bank failures and the role of federal regulators preceding the failure and after the shutdowns. The Federal Reserve’s top banking regulator, Michael Barr told Congress on Tuesday that SVB’s failure was a “textbook case of mismanagement.” He said the bank failures raised “questions about evolving risks and what more can and should be done” by regulators and said he is considering making banking regulations stronger.
Like other top regulators, Barr assured the public of the safety of banks calling the banking system “sound and resilient, with strong capital and liquidity” and that they are “committed to ensuring that all deposits are safe.”
On Wednesday top officials from the Treasury Department, the Federal Reserve and FDIC were grilled on Capitol Hill about what caused the collapses of SVB and Signature banks.
Republican lawmakers blamed top bank regulators Wednesday for being too slow to react as SVB headed toward failure and debated whether stricter regulations would have made any impact. Democrats are pushing new legislation that seeks to tighten banking regulations.
Both parties want the agencies to take more responsibility and learn from the mistakes that led up to the failures. Barr is leading an internal review of the agency’s oversight and ways they could have done better and how their own regulatory structure could have played a role.
Officials testifying at the hearing suggested that they are considering increasing the $250,000 cap on insuring deposits, but that congressional action is needed.
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