The following is a guest post by Konrad Alt and Patrick Haggerty of Klaros.
If you managed an FBO account of any size at Silicon Valley Bank last weekend, you knew three things:
- Using the concept of “pass-through” deposit insurance, the FDIC has long held that customers whose funds are in FBO accounts enjoy deposit insurance protection up to applicable limits so long as the program manager maintains the requisite account records;
- Deposit insurance limits apply to customers whose funds are pooled in FBO accounts just as they do to all depositors. But the FDIC could not possibly have had – because SVB never required you to report – the information necessary to determine the insured proportion of your SVB FBO account balance; and
- If the FDIC, unable to make that calculation, had even preliminarily determined that your FBO account enjoyed only $250,000 in deposit insurance, the remaining balance would have remained frozen, and your business would have been in a world of hurt, at least, come Monday.
We took several calls about this problem. It’s not a small one.
“FBO,” for those unfamiliar with the term, means “for the benefit of.” If you run any kind of business in which you take in funds from large numbers of customers, you likely park those funds at a bank, where they are held on deposit in an omnibus account for the benefit of your customers.
Neobanks, p2p transfer services, prepaid card programs, payroll services, bill payment services, brokerage sweep programs, health benefit account providers, crypto exchanges, stablecoin issuers, and more depend on FBO accounts.
If you faced this problem last weekend, your immediate challenge was that your account at SVB was frozen.
To restore access, you had to provide the FDIC the information it would need to identify the account holders included in your FBO balance, aggregate their balances with other balances the same account holders might have at SVB (either directly or through other FBO accounts), do the math, and determine the amount of each customer’s insured balance.
But getting this data to the FDIC raised another set of questions: how and in what format should you provide it?
No clear answers
These questions proved to have no clear answers.
The FDIC has provided detailed guidelines and a dedicated data submission channel to only one type of FBO account manager: deposit brokers.
To other FBO account managers, at least those who asked, the agency clarified that it did not consider them deposit brokers and that they should wait for additional instruction.
As of Sunday evening, when Washington announced full government coverage of SVB’s uninsured deposits, the agency had offered FBO account managers no direction whatsoever for preparing or submitting the data required to unlock their customer funds.
How the FDIC would have handled the situation had higher authorities did not step in will remain a mystery.
Pretty clearly, however, the pass-through deposit insurance that FBO customers should have enjoyed as a matter of law was not going to be available in any operationally meaningful way come last Monday morning and very likely not for some time after that.
At the very best, businesses dependent on FBO accounts at SVB faced an extremely challenging time.
We believe the experience of this past weekend highlights a type of business continuity risk that managers of FBO accounts everywhere should stop to consider.
History teaches that bank failures will continue to occur occasionally, often with little warning. If your bank fails, the FBO accounts upon which your business depends can be frozen for an indeterminate amount of time. At that moment, the fact that your customers enjoy pass-through deposit insurance doesn’t help much.
Although the FDIC will make your customers whole in the long run, to the extent of their coverage, your business and customers alike could suffer enormous disruption waiting for that process to play out.
Future events could mitigate this risk. Congress could determine to expand the deposit insurance safety net, possibly to all depositors or possibly to some smaller subset, including some or all FBO accounts.
More likely (given the generally bleak outlook for legislation of all sorts), the FDIC will eventually clarify its guidelines and adjust its processes to provide FBO account managers with the clear direction they need when the chips are down.
To say that neither of these events appears imminent feels like an understatement.
Fortunately, for FBO account managers wishing to take the mitigation of this risk into their own hands, some practical steps are available:
- Establish and maintain redundant bank relationships and FBO accounts, structured to enable you to quickly shift essential business activity from one bank to another in case of bank failure or other business discontinuity.
- Maintain FBO account records in a format consistent with the data fields and formatting the FDIC requires for deposit brokers. While agency personnel expressly disclaimed the applicability of those requirements to other non-FBO accounts, the information the FDIC needs from FBO account managers to calculate deposit insurance coverage does not depend on the account managers’ underlying business models. It seems a good bet that whatever guidance the FDIC eventually provides to FBO account managers will look a lot like, and possibly just like, the guidance deposit brokers already have.
- Work with your partner bank or BaaS platform to ensure the bank can receive and process information from your subaccount ledger to support FDIC insurance calculations.
- Large banks with at least 2 million deposit accounts have been required by the FDIC to maintain such systems. Businesses that rely on FBO accounts but do not depend on Durbin-exempt interchange may consider partnering with one of these large banks. Under the rules applicable to them, their systems must be capable of ingesting broker files in a standardized format and making insurance determinations within 24 hours of failure. (SVB, with less than 150,000 deposit accounts, had no such system).