Failure of Silicon Valley Bank & the Importance of Collateralizing Public Deposits
In May 2023, the California Department of Financial Protection and Innovation (DFPI) released its Review of DFPI’s Oversight and Regulation of Silicon Valley Bank (SVB), which summarizes the circumstances that led to SVB becoming insolvent after an unprecedented run on SVB’s deposits. Within the span of eight hours on March 9, 2023, SVB received deposit withdrawal requests of approximately $42 billion, representing nearly 25 percent of SVB’s total deposits. While many factors made SVB susceptible to a bank run, key findings identified in the report indicate that rising interest rates led to SVB’s startup deposits decreasing and its investments losing value, both of which contributed to SVB’s liquidity challenges. Additionally, SVB’s high level of uninsured deposits contributed to the run on the bank.
Some regional banks remain under pressure due to unrealized losses on long-term investments, while banks face market pressure to increase the rates they pay depositors to compete with other financial institutions. As a result, the same economic headwinds that contributed to the failure of SVB and Signature Bank remain. To help mitigate economic headwinds facing depository institutions, the Federal Reserve created the Bank Term Funding Program (BTFP) to provide an additional source of liquidity to help assure that banks have the ability to meet the needs of all their depositors, eliminating an institution’s need to quickly sell those securities in times of stress.
Deposits above the FDIC’s threshold of $250,000 are not insured if a financial institution becomes insolvent. However, California Government Code Section 53652 requires financial institutions in California to pledge a pool of securities as collateral against all public deposits held on behalf of a local agency, which, if rigorously adhered to by the financial institution, protects public deposits in excess of FDIC insured amounts.
The State of California’s Department of Business Oversight administers the Local Agency Security Program (“LASP”), the collateral program for local agencies within the state. Financial institutions that accept public deposits are required to report to the LASP on a weekly basis and to maintain the collateralization thresholds pursuant to State law. California public agencies and their audit firms may choose to confirm directly with the California Department of Business Oversight whether a specific financial institution has complied with the collateralization and reporting requirements.
DFPI’s report on Silicon Valley Bank can be found here.
Additional information on the Local Agency Security Program can be found here.
Jason Al-Imam is the Finance Director and City Treasurer for the City of Newport Beach. He has 20 years of municipal finance experience working in both the private and public sectors. Prior to joining the City of Newport Beach, Jason served in financial management positions for four full-service cities in Southern California. He currently serves on the Board of Directors for CSMFO and previously served as the Chair of the Professional Standards Committee.
