The Pain of Silicon Valley Bank’s Collapse Is Being Felt by These Depositors

The California-based bank’s American depositors were protected when the Federal Deposit Insurance Corp. took control of SVB on March 10 and guaranteed all of their funds. SVB’s U.S. branches, as well as its loans and deposits, were acquired by First Citizens Bancshares in late March.

It has been a vastly different story for customers of SVB’s Cayman Islands branch, which was left out of the First Citizens deal and placed under FDIC receivership. The branch in the offshore tax haven was set up to primarily support the bank’s activities in Asia, according to SVB. Its depositors, which include multiple Chinese investment firms, haven’t been able to access their funds—and have been in limbo since SVB’s collapse.

On March 31, the FDIC notified SVB’s Cayman Islands depositors that they wouldn’t be covered by its deposit insurance, and that they would be treated as “general unsecured creditors,” according to documents reviewed by the Journal as well as interviews with employees of multiple firms.

SVB’s last annual report said the bank had $13.9 billion in foreign deposits at the end of 2022 that weren’t subject to any U.S. federal or state deposit insurance regime. Besides the Cayman Islands, SVB had a bank subsidiary in the U.K. and branches in Germany and Canada. The German and Canadian branches didn’t take deposits, they only made loans. Its U.K. bank—which has been taken over by HSBC—had the equivalent of about $8.5 billion in deposits on March 10 of this year.

Neither the bank nor regulators have disclosed how much in deposits the Cayman Islands branch had at the time of SVB’s failure.

The FDIC’s notice surprised customers who had thought an earlier statement from U.S. regulators that said all SVB depositors would be made whole also applied to them. The Cayman Islands Monetary Authority, which supervises the offshore branch, echoed that sentiment in a public statement in mid-March and said it was in talks with U.S. regulators “to discuss a way forward.” At the end of the month, it said it was “continuing to engage with the FDIC and other stakeholders regarding the receivership process and impact on SVB’s Cayman Islands branch.” It hasn’t provided an update since.

A representative from the Cayman Islands Monetary Authority said the regulator is still assessing the situation.

“When the FDIC announced they would insure unsecured deposits, it seemed that they would include all deposits, including ours,” said a spokesperson for Phoenix Property Investors, a Hong Kong-based private-equity firm that had funds in SVB’s Cayman Islands branch.

The firm took the notices to mean that “it was only a matter of time before we would be able to access our balances,” the spokesperson added. “We feel misled and are now doing what we can to recover our deposits.”

Employees of other investment firms in Hong Kong and mainland China that had deposits at SVB’s Cayman Islands branch said that in the days following the bank’s failure, they received notices reassuring customers that they would have full access to their money, and that transactions were being processed.

Instead, their bank statements at the end of the month showed their balances were at zero, and that their funds had been transferred to “SVB Receiver,” according to people at multiple firms.

U.S. authorities invoked what is known as a systemic risk exception in the case of SVB’s collapse, which enabled the FDIC to protect depositor funds beyond its limit of $250,000 per bank account.

In response to questions from The Wall Street Journal, a FDIC spokesperson said only domestic deposits are covered, as stated in the Federal Deposit Insurance Act.

“Funds held at foreign branches are not subject to deposit insurance protections,” the spokesperson said, adding that the bank’s creditors can file claims on what they are owed.

SVB, which was a popular bank with U.S. tech startups and venture-capital funds, had for years also pitched its financial services to overseas startups and investment firms in China and other parts of Asia. Many of them had U.S. bank accounts with SVB in addition to accounts in the Cayman Islands. Most overseas customers of the bank conducted their transactions online.

“In fairness, it has always been true that foreign deposits are not covered by U.S. insurance,” said Christopher Curtis, a retired U.S. financial-regulatory attorney who worked at the FDIC in the early 1990s.

The FDIC has estimated that SVB’s failure will cost its deposit insurance fund about $20 billion. The assets under receivership include $90 billion in securities, it said in March.

“Uninsured depositors would only be paid to the extent that there are assets available in the receivership estate to pay claims at that level,” said William Stern, an attorney at Goodwin Procter, a global law firm. “As the FDIC liquidates assets, there may not be sufficient assets available to satisfy 100% of those claims,” he added.

The challenge for SVB’s foreign depositors, however, is that they also don’t rank ahead of bondholders and other creditors in a liquidation scenario.

“They could end up with a very diminished recovery, or nothing,” said Mr. Curtis, the retired attorney.

—Serena Ng contributed to this article.

Write to Frances Yoon at [email protected]