FDIC Seizure of Foreign Deposits at SVB Opens Pandora’s Box at JPMorgan Chase and Citi – Which Hold a Combined $1 Trillion in Foreign Deposits with No FDIC Insurance

Gunnar Larson g at xny.io
Tue May 16 07:10:25 PDT 2023


https://wallstreetonparade.com/2023/05/fdic-seizure-of-foreign-deposits-at-svb-opens-pandoras-box-at-jpmorgan-chase-and-citi-which-hold-a-combined-1-trillion-in-foreign-deposits-with-no-fdic-insurance/


By Pam Martens and Russ Martens: May 15, 2023 ~

Federal Reserve Building, Washington, D.C.If you have been following the
banking crisis, you have likely read at least a dozen times that on March
12 federal banking regulators, with the consent of the U.S. Treasury
Secretary Janet Yellen, invoked the “systemic risk exception” in order to
protect both insured and uninsured depositors at the two banks that failed
in March – Silicon Valley Bank and Signature Bank.

That’s why there were gasps of shock on Saturday evening at around 5:30
p.m. when the Wall Street Journal (paywall) published the stunning news
that depositors in the Cayman Islands’ branch of Silicon Valley Bank had
their deposits seized by the Federal Deposit Insurance Corporation (FDIC),
which they are unlikely to ever see again.

As Wall Street On Parade has previously reported, under statute, the FDIC
cannot insure deposits held on foreign soil by U.S. banks. What it can do,
however, is to sell those deposits to the bank that acquires the collapsed
bank. In the case of Silicon Valley Bank, the acquiring bank was First
Citizens Bancshares which, apparently, declined to purchase the foreign
deposits in the secrecy jurisdiction of the Cayman Islands, a jurisdiction
most notable recently for the largest share of customers engaged with Sam
Bankman-Fried’s crypto house of frauds.

The Journal reported that as of December 31, 2022, Silicon Valley Bank held
$13.9 billion in foreign deposits with an unknown amount remaining as of
the date of its failure and FDIC receivership on March 10. The Journal also
reported that “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.”

Adding to what is certain to be political fallout, the depositors left out
in the cold in the Cayman Islands branch included “investment firms in
China and other parts of Asia.” Those depositors can’t be too happy to see
their deposits seized while everyone else gets protected, whether they had
deposit insurance or not.

What the Wall Street Journal has actually done with this report is to open
a Pandora’s box regarding the vast sums of foreign deposits held in foreign
branches of JPMorgan Chase and Citigroup’s Citibank – none of which are
covered by FDIC insurance. It further raises the question as to why the
banking regulators of these two Wall Street mega banks have allowed this
dangerous situation to occur.

According to the year-end call report filed by Citibank, it held a stunning
$622.6 billion of deposits in foreign offices. (See page 34 of call
report.) According to the year-end call report filed by JPMorgan Chase Bank
N.A., it held $426 billion in deposits in foreign offices. (See page 34 of
the linked report.) Together, these two banks held just over $1 trillion in
deposits on foreign soil – which had no U.S. deposit insurance backing.

As for whether the foreign jurisdiction’s deposit insurance scheme would
apply to the foreign branch deposits of U.S. banks, the FDIC offers this
two-sentence explanation in a recent report: “Deposits in foreign offices
of U.S. banks are not insured by the FDIC. Some jurisdictions may provide
some deposit insurance coverage of these deposits; the amounts of coverage,
if any, vary by jurisdiction.”

In most cases, foreign countries’ deposit insurance schemes offer far lower
deposit protection than the $250,000 per depositor, per bank, offered in
the U.S.

JPMorgan Chase and Citibank also have exposure to uninsured domestic
deposits – that is, deposits exceeding $250,000 per depositor in their bank
branches on U.S. soil. At year end, JPMorgan Chase held $1.058 trillion in
uninsured deposits in domestic branches while Citibank held $598.2 billion
in uninsured deposits in domestic branches. Combining domestic and foreign
uninsured deposits versus the $1.4 trillion Citibank held in total deposits
at year end, means that 87 percent of Citibank’s deposit base lacked FDIC
insurance protection. That is very close to the 90 percent of uninsured
deposits held by Signature Bank when it blew up on March 12 and went into
FDIC receivership.

Given Citibank’s history of teetering on the brink and being rescued by
exorbitant sums from its financial “supervisors” during and after the
financial crash of 2008, it is nothing short of an outrage to U.S.
taxpayers that its banking regulators today have allowed 87 percent of its
deposits to lack FDIC insurance protection. From December 2007 through mid
2010, Citigroup/Citibank received the following bailouts: the U.S. Treasury
injected $45 billion of capital; there was a government guarantee of over
$300 billion on certain of its assets; the FDIC provided a guarantee of
$5.75 billion on its senior unsecured debt and $26 billion on its
commercial paper and interbank deposits; and secret revolving loans from
the Federal Reserve sluiced a cumulative $2.5 trillion in below-market-rate
loans to Citigroup according to the eventual audit performed by the
Government Accountability Office.

The FDIC’s recent report on the banking failures of Silicon Valley Bank and
Signature Bank and the options for Congress to consider in reforming the
federal deposit insurance program, concedes that uninsured deposits play a
pivotal role in bank runs and the ensuing failure of banks, writing as
follows:

“Abstracting from the specifics of the events of March 2023, several
developments suggest that the banking system has evolved in ways that could
increase its exposure to deposit runs. These developments include the
amplification of concerns through social media and the speed of some
depositor responses, the interaction of failure-resolution events and
depositor behavior, and the increased volume and proportion of uninsured
deposits in the banking system.

“The risk of depositor runs is inherent in banking, where long-term assets
are funded by short-term deposit liabilities. The FDIC was established
largely in response to the widespread bank runs of the 1930s. Depositors
who are unprotected by deposit insurance may consider moving their funds if
they are concerned about the liquidity or solvency of their bank. If
uninsured depositors believe that other depositors share their concerns and
that a run on the bank and potential failure is imminent, then they may act
quickly to withdraw their funds. Synchronous deposit withdrawals may then
force the liquidation of assets and cause the failure of the bank. A bank
failure caused by a run can be a self-fulfilling prophecy.”

Editor’s Note: The third paragraph of this article has been corrected to
show that the Cayman Islands represented the largest share of customers for
Sam Bankman-Fried’s crypto house of frauds, not its home base, which was in
the Bahamas.
-------------- next part --------------
A non-text attachment was scrubbed...
Name: not available
Type: text/html
Size: 8175 bytes
Desc: not available
URL: <https://lists.cpunks.org/pipermail/cypherpunks/attachments/20230516/012c8819/attachment.txt>


More information about the cypherpunks mailing list