SVB Collapse | What is FDIC? How does it work?

Silicon Valley Bank

Last week, the collapse of Silicon Valley Bank in the US triggered panic selling in the global financial markets, fearing contagion in the banking system.

Yet, a crisis was averted with the intervention of the authorities. The Federal Deposit Insurance Corporation (FDIC) took control of SVB’s assets and appointed Tim Mayopoulos, a former CEO of Fannie Mae, to lead the bank.

Here's an explainer on how the FDIC functions:

What is the FDIC?

The FDIC is an independent agency created by the US Congress in 1933 to maintain stability and public confidence in the nation's financial system. It protects bank depositors against the loss of their insured deposits in the event that an FDIC-insured bank or savings association fails.

FDIC insurance is backed by the full faith and credit of the US government.

What is deposit insurance?

Deposit insurance protects bank customers if an FDIC-insured depository institution fails. Bank customers don’t need to purchase deposit insurance – it is automatic for any deposit account opened at an FDIC-insured bank.

Deposits are insured up to at least $250,000 per depositor, per FDIC-insured bank, per ownership category.

How does FDIC operate during bank failures?

The FDIC acts in two capacities following a bank failure: As the “insurer” of the bank’s deposits, the FDIC pays deposit insurance to the depositors up to the insurance limit. As the “receiver” of the failed bank, the FDIC assumes the task of collecting and selling the assets of the failed bank and settling its debt, including claims for deposits exceeding the insured limit.

Historically, the FDIC pays insurance within a few days of a bank closing, usually the next business day, by either providing each depositor with a new account at another insured bank in an amount equal to the insured balance of their account at the failed bank or issuing a cheque to each depositor for the insured balance of their account at the failed bank.

In other words, the FDIC insures deposits; examines and supervises financial institutions for safety, soundness, and consumer protection; makes large and complex financial institutions resolvable; and manages receiverships.

What was the SVB crisis?

Silicon Valley Bank, a subsidiary of the SVB Financial Group, collapsed as its finances turned weak. The lender said it had sold bonds at a loss and would sell $2.25 billion in new shares to plug the gap in its finances, triggering a run on the bank.

The bank had about $209 billion in total assets and $175.4 billion in total deposits as of December 31, before being gripped by the crisis.

SVB was the 16th-largest bank in the US, with 17 branches in California and Massachusetts.

What happened subsequently?

The California Department of Financial Protection and Innovation closed SVB on March 12 and appointed the FDIC as receiver. The FDIC created the Deposit Insurance National Bank of Santa Clara and, as receiver, immediately transferred to it all the insured deposits of SVB.

The seizure of SVB's assets marks the biggest bank failure since Washington Mutual during the height of the 2008 financial crisis.

What is the next step for SVB?

The FDIC will have to find a buyer for SVB through an auction. Apollo Global Management, Blackstone, and KKR & Co. have expressed interest in a book of loans held by SVB, Bloomberg reported, citing people familiar with the matter.

What happens if your bank goes bankrupt in India?

Just as the FDIC does in the US, the Reserve Bank of India’s subsidiary, Deposit Insurance and Credit Guarantee Corporation (DICGC) manages a deposit insurance programme that covers deposits in the case of bank failures.

What kind of deposits come under DICGC?

The DICGC insures all deposits such as savings, fixed, current, and recurring deposits.

What is the deposit ceiling for DICGC in India?

This maximum insured amount is Rs 5 lakh per bank account, including principal and interest.

Deposits kept in different branches of a bank are aggregated for the purpose of insurance cover and a maximum amount of Rs 5 lakh is paid.

If deposits are with more than one bank, the insurance coverage limit is applied separately to the deposits in each bank.