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FDIC steps into the US Banking Sector as contagion fears unsettle markets: US crreates "systemic risk exception."

Nigel Morris-Cotterill

"Senior management has also been removed."

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Let's quickly summarise what the Federal Deposit Indemnity Scheme covers: in relation to regulated banks only -

Current accounts
Negotiable Order of Withdrawal (NOW) accounts
Savings accounts
Money Market Deposit Accounts (MMDAs)
Time deposits such as certificates of deposit (CDs)
Cashier's cheques, money orders and other official items issued by a bank
and nothing else.

Cover is up to USD250,000 per depositor, per insured bank, for each account ownership category. The FDIC provides separate cover for deposits held in different account ownership categories. Depositors may qualify for cover over USD250,000 if they have funds in different ownership categories and all FDIC requirements are met. All deposits that an account holder has in the same ownership category at the same bank are added together and insured up to the standard insurance amount.

But for the avoidance of doubt, it says that amongst things it does not cover are:

Stock investments
Bond investments
Mutual funds
Crypto Assets
Life insurance policies
Municipal securities
Safe deposit boxes or their contents
U.S. Treasury bills, bonds or notes because these investments are backed by the full faith and credit of the U.S. government.

On Friday, FDIC was appointed the receiver for Silicon Valley Bank after announcing that it was to intervene in the bank.

The scale of concern was demonstrated by the fact that the FDIC, which historically closes banks on Fridays, acted yesterday to close Signature Bank and to create "Signature Bridge Bank, N.A." in its stead. The FDIC said "To protect depositors, the FDIC transferred all the deposits and substantially all of the assets of Signature Bank to Signature Bridge Bank, N.A., a full-service bank that will be operated by the FDIC as it markets the institution to potential bidders."

Over the weekend, The US Government scrambled and announced a "systemic risk exception" which is is clouded in fussy language. Here's what it means:

The bank's assets exceed its deposits but not its total liabilities.

Depositors will be regarded as first in line for repayment and on the information currently available, they will all receive 100% payout. Secretary of the Treasury Janet L. Yellen, Federal Reserve Board Chair Jerome H. Powell, and FDIC Chairman Martin J. Gruenberg released a statement saying "No losses associated with the resolution of Silicon Valley Bank will be borne by the taxpayer. "

That might not be entirely true because on the wording of the statement, it appears as if the depositors come first, even above the Revenue. This is a massive step forward because uninsured losses have hitherto been regarded as unsecured. What is now needed is for the same dream-team to get a change in the law to provide that all deposits are held in trust and therefore outside the creditors' regime.

The statement says "Shareholders and certain unsecured debt holders will not be protected."

Standard and Poors Global Market Intelligence has produced a table which we can't show you because it's their copyright. It's a table that shows what percentage of bank deposits in the USA are held in accounts with less than USD250,000 in them. Northwest Bancshares is top of the list with almost two thirds of its accounts falling within the FDIC limit. Silicon Valley group was at 2.7% and it's not the worst. That's BoNY-M.

But only a couple of places above it is Signature Bank. The FDIC is somewhat disingenuous when it says that Signature Bank "was closed today by its state chartering authority." That's technically true but in reality it can't happen without FDIC's say-so because it's needed to provide the infrastructure to protect customers. Signature was charted in New York and a similar approach has been adopted. Signature Bank had a similar profile of customer to that of Silicon Valley and fears grew after it appeared that a run was developing. But that wasn't Signature's basic business: it had a long history (well, twenty-odd years) in property financing but it recently moved heavily into attracting crypto-currency deposits.

According to the New York Times it had a nice line in financing taxi drivers' licences. Also, the bank was popular with law firms who used its escrow services in, in particular, property transactions. The company had 40 offices with its main office in New York where a quarter of a million dollars will barely buy a packet of crisps. FDIC will need to move fast if it's to avoid chaos in the property transfer market.