On March 10, the California Department of Financial Protection & Innovation closed down Silicon Valley Bank, leaving many depositors in a state of uncertainty. This was followed up on Sunday with New York regulators closing Signature Bank. The FDIC was named as the Receiver for both banks, but what does this mean for business owners?
The Federal Deposit Insurance Corporation (FDIC) is an independent agency created by Congress to maintain stability and public confidence in the nation’s financial system. On March 12, the FDIC announced it will secure all deposits for any person or business who banked with either Silicon Valley Bank or Signature Bank.
In the aftermath, business owners across the United States are curious: Will banks be more hesitant to take on risks and what sort of challenges does this face for small business owners looking to obtain financing? We break down the answers to these important questions below.
How did this happen?
Silicon Valley Bank (SVB) was the bank that startups would turn to when they needed funding to get their businesses off the ground. Following $42 billion in deposit withdrawals and an inability to raise sufficient capital, the bank was placed under receivership of the FDIC.
The news of SVB’s failure spread quickly, and many account holders were left in a state of uncertainty. Fortunately, the FDIC confirmed their deposits would be assumed by another healthy bank or that the FDIC would pay them up to the insured limit.
In the end, the rise and fall of Silicon Valley Bank serves as a reminder that even the most trusted institutions can fail. It is important to be cautious and to understand the risks involved with where you store your money.
How to get your deposits from closed banks
Right after the bank closures, the FDIC transferred all deposits and all assets of the former SVB and Signature Bank to newly created, full-service FDIC-operated ‘bridge banks’ in an action designed to protect all depositors of both banks. The bridge banks, Silicon Valley Bridge Bank N.A., and Signature Bridge Bank N.A. were responsible for storing all customer deposits until the sale of the failed banks.
On March 19, the FDIC announced Signature Bank was acquired by New York Community Bancorp Inc. (NYCB), which will continue to operate Signature under a new name, Flagstar Bank. All Signature customers automatically became customers of Flagstar Bank and can access their deposits in the same manner as before, through in-person or online banking.
On March 26, First Citizens Bank acquired all deposits and loans of SVB. While the bank works on converting all internal systems, customers can still access their deposits as usual through SVB N.A. If you’re an SVB customer, there is no action required on your part. You will receive a notice from First Citizens Bank once all systems are in place.
About the bridge bank structure
A bridge bank is a chartered national bank that operates under a board appointed by the FDIC. It assumes the deposits and certain other liabilities and purchases certain assets of a failed bank. The bridge bank structure is designed to “bridge” the gap between the failure of a bank and the time when the FDIC can stabilize the institution and implement an orderly resolution. Generally speaking, bridge banks can operate up to two or three years after the bank’s failure.
The money that will be used to make the accounts whole will come from the Deposit Insurance Fund (DIF). Any losses incurred from protecting uninsured depositors, will be recovered by a “special assessment” on banks that fund the DIF.
Next steps you should take if you banked with SVB or Signature Bank
There are four steps every SVB or Signature Bank account holder should take in the aftermath of the banks closing:
Determine whether you should continue banking with the acquiring banks: As the deposits and loans of both failed have been acquired by new banks, It is important you determine whether it is beneficial for you to continue banking as usual with the acquiring banks or transfer over your funds to a new bank. Some things to consider are bank fees, future access to funding, APY etc. If you’re happy with the current benefits offered by Flagstar bank or First Citizens bank it might make sense to stick with them.
Open a new account with a new bank: If you decide to switch over to a new bank, look for institutions that are FDIC insured. Just as they protected account holders with these collapses, they would help in the future. Generally speaking, diversifying your assets across multiple banks is your best bet to keeping your cash secure. See our suggested accounts here.
Transfer funds to your new bank: Consult with a bank teller for the best way to get this done. They may suggest a preauthorized check or wire transfer. With the funds officially protected with the opening of the bridge bank, you won’t need to rush this. Note there is a fee for wire transfers at both SVB and Signature.
Review your scheduled payments: Any automatic payments from your SVB or Signature bank will need to be moved to your new account. This could be for scheduled payments like rent, payroll, and utilities.
Does this news point to a recession?
Small business owners are feeling anxious about the possibility of an economic recession and the potential for further bank failures like SVB and Signature bank. The FDIC’s role as Receiver and the creation of the bridge banks provides a safety net for insured investors, but what about small business owners who rely on banks for funding and financial stability?
The impact of economic recession on small businesses
When the economy takes a downturn, small businesses are often hit the hardest. These businesses typically have fewer resources to weather the storm and may struggle to stay afloat. In a recession, consumers tend to cut back on non-essential spending, which can lead to a decrease in revenue for small businesses.
Additionally, banks may become more cautious about lending. Having just seen two banks fail, they will be more risk averse which can make it difficult for small businesses—especially newer ones—to secure funding.
Small business owners are still feeling the effects of the COVID-19 pandemic, which has caused many businesses to shut down or reduce operations. The possibility of an economic recession only adds to their concerns. Many small business owners are worried about the future of their businesses and the impact that a recession could have on their employees and their communities.
The importance of diversifying funding and banking sources
Small business owners can take steps to protect their businesses in the event of an economic recession or bank failure. One of the most important steps is to diversify funding sources.
Relying on a single bank for funding can be risky, especially if that bank is struggling or fails. Small business owners should consider working with multiple banks or other funding sources, such as investors or crowdfunding platforms. Consider using a mix of banks including long-tenured institutions like Chase, Bank of America, or Wells Fargo that have a track record of protecting their money.
Diversifying funding sources can also help small business owners secure better terms and rates on loans. It also means more insurance coverage since the FDIC insures $250,000 per depositor, per bank. If you have amounts over $250,000, putting them into multiple accounts means each account is insured up to $250,000. Furthermore, when a business has multiple sources of funding, banks and investors may compete for their business, which can lead to better deals for the business owner.
The role of government assistance programs
In times of economic uncertainty, government assistance programs can be a lifeline for small businesses. The Small Business Administration (SBA) offers a variety of loan programs to help small businesses access funding. These programs can be especially important for businesses that may not qualify for traditional bank loans.
The SBA also offers counseling and training programs to help small business owners navigate challenging times. These programs can help business owners develop contingency plans and identify new opportunities for growth.
While a recession seems likely in 2023, there are steps small business owners can take to protect their businesses, such as diversifying funding sources and taking advantage of government assistance programs. Small business owners should endeavor to stay informed and prepared so that they can weather any economic storm that comes their way.
Bank failure questions, answered
Am I guaranteed to get my money from these banks?
Yes, the FDIC confirmed accounts at SVB and Signature Bank will be made whole and customers will have access to their funds through the bridge banks. This applies to customers with insured and uninsured deposits.
How do I get my money from SVB or Signature Bank?
You can access your funds through your institution’s bridge banks: Silicon Valley Bridge Bank N.A., and Signature Bridge Bank N.A. Depositors and borrowers automatically became customers of their associated bridge bank and have access to their funds through ATMs, debit cards, online banking, and writing checks in the same manner as before.
How should I transfer my money out of SVB or Signature Bank?
Currently, all your deposits are being stored in “bridge banks” that are operating just like the closed banks. Consult with a bank teller for the best way to get this done. They may suggest a preauthorized check or wire transfer. With the funds officially protected by the bridge bank, you won’t need to rush this.
How will I get my tax documents from the bank now that it’s closed?
The bridge bank is responsible for filing your 1099 forms. If you have a mortgage with the bank, FDIC or the servicer of your loan will be responsible for your 1098 form reporting. In sum, you will still receive the appropriate tax forms.
Do I continue to make loan payments with the failed bank?
Yes, you are required to still make your loan payments as stated in the loan agreement. The payments should continue to be sent to the same address with checks made payable to SVB or Signature Bank.
Do my auto payments for bills still work?
Yes, it will continue to work normally. You will continue to have the same account and routing numbers up until you are notified by the bridge bank.
Will I still be able to use and pay off my SVB or SB credit card?
Yes, it was announced that they will continue fully honoring existing credit facilities.
Who is the FDIC?
The Federal Deposit Insurance Corporation (FDIC) is an independent agency created by Congress to maintain stability and public confidence in the nation’s financial system. FDIC insures deposits, examines and supervises financial institutions for consumer protection, manages receiverships, and many more.
What is the FDIC’s role in bank failures?
The FDIC can have two possible roles: insurers of the bank’s deposit or receiver of the failed bank. As insurers, the FDIC provides depositors with insurance up to the insurance limit for the customers’ deposit. As a receiver, which the FDIC has been named for SVB and SB, they take on the responsibility of selling or collecting the bank’s assets and paying off its debts.
What is a bridge bank?
A bridge bank is a chartered national bank that operates under a board appointed by the FDIC. It assumes the deposits and certain other liabilities and purchases certain assets of a failed bank. This structure is designed to “bridge” the gap between the failure of a bank and the time when the FDIC can stabilize the institution and implement an orderly resolution. Generally, bridge banks can operate for up to two or three years after the bank’s failure.
Are more banks likely to fail?
There is no definite answer, but several industry experts have stated there’s a chance more banks will fail despite government intervention.
How can I best protect my money?
One of the most important steps is to diversify funding and banking sources. Small business owners should consider working with multiple banks or other funding sources. Consider using a mix of banks including long-tenured institutions like Chase, Bank of America, or Wells Fargo. Here are our bank recommendations for small businesses.
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