Some Silicon Valley Bank customers are selling their deposits at big discounts to raise cash quickly, reports say

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Some Silicon Valley Bank customers are selling their deposits at big discounts in an attempt to raise cash quickly, reports say.

The bank’s collapse Friday froze billions of dollars of customer deposits when it was taken over by the Federal Deposit Insurance Corporation (FDIC).

Only the first $250,000 of deposits are insured, but many accounts are likely to hold far higher sums. The remainder is at risk if SVB doesn’t find a new buyer or is denied a bailout.

In the meantime, some startups that banked with SVB are trying to sell their deposits at a discount.

According to Cherokee Acquisition, a claims trading platform in bankruptcy cases, some clients are being offered between 55 cents and 65 cents in the dollar for their uninsured deposits, the Financial Times reported. Another source told the newspaper that some other customers were being offered between 70 and 75 cents on the dollar for theirs.

“I’ve had a few companies sell 90 cents on the dollar to make sure they make payroll. All of these companies have the SVB effect,” a VC investor told the FT.

Startups choosing to sell their deposits at a discount appears to be a potential long-term sacrifice to meet short-term funding needs. Hundreds of founders have been left wondering how they will pay staff in the wake of SVB’s collapse with funds frozen in the failed bank.

The FT reported that startup founders were being cold-emailed with discounted offers on their deposits within 24 hours of SVB’s collapse as uncertainty intensified.

The Information reported that at least one Wall Street firm was contacting SVB clients, offering to buy their deposits at 70 cents on the dollar, citing unnamed sources.

A buyer for SVB or a bailout could save customers’ deposits, but the window for a resolution is narrowing, with resumption of business Monday regarded as a vital deadline. 

However, ratings agency Moody’s suggested not all uninsured deposits were likely to be returned. It estimated a recovery rate of between 80 and 90 cents in the dollar, equivalent to billions of dollars in losses for customers.

If the bank fails to find a resolution by early next week, it seems likely that interest in selling deposits at a discount will intensify.

However, Sheila Bair, who ran the FDIC during the financial crisis in 2008, told the Financial Times that uninsured depositors should hold their nerve: “I think it’d be premature for an uninsured to be selling at a steep discount.”