How does the banking crisis in the United States affect the EB-5 Program?
The failure of Silicon Valley Bank and Signature Bank shocked the banking industry and left many investors unsure about the safety of their funds. The Federal Deposit Insurance Corporation took control of the two banks earlier this month when depositors withdrew money from the two lenders.
Concerned that bank failures would undermine customer confidence in the banks, the federal government protected all deposits at the two banks, including those over the $250,000 FDIC insured limit.
Regulators can protect deposits above the $250,000 amount if they determine that bank failures pose a systemic risk, as they did with SBV and Signature.
“In the short term, there’s not much banks can do to change the safety of their depositors’ money,” says William T. Chittenden, Ph.D., associate professor, Texas State University McCoy College of Business Administration . . “What I’ve seen so far is banks reporting that their percentage of uninsured deposits is much, much lower, in the 35-40% range, compared to Signature and SVB, both of which are well above 90%.” .
Many EB-5 investors, in particular, remain concerned about the safety of their escrow funds. Much of an EB-5 investor’s $800,000 is left uninsured in an escrow account.
“Since the funds are in escrow, EB-5 investors don’t have much say in where the funds are kept, as this is typically determined by the EB-5 Regional Center,” Chittenden says. “My advice would be to make sure that the EB-5 Regional Center uses a bank that is part of the IntraFi network. This allows the bank to “exchange” deposits with other banks so that all deposits are insured.”
For example, Pennsylvania-based Customers Bank offers coverage for accounts over $250,000 through its Insured Cash Sweep (ICS) program, which is comprised of FDIC-insured institutions across the country.
The funds are distributed among several different banks so that each amount is insured and depositors maintain access through a single account. By distributing the funds through a network of FDIC-insured banks, investors face less risk, experts say.
“The only other real alternative is to ensure that the EB-5 Regional Center does banking with one of the four largest banks in the US, those that have trillions, not billions, of dollars in assets,” Chittenden says. . “These banks are considered too big to fail and the government would definitely consider these banks to be ‘systemic risk’ and therefore eligible for 100% deposit coverage, as in the case of Signature and SVB.”
Consequences of SVB and Signature in the EB-5 industry
The collapse of tech-focused startup SVB followed by Signature Bank created the worst banking shock since the 2008 global financial crisis. Clients pulled out nearly $100 billion in deposits, according to reports.
The FDIC said that First Citizens BancShares Inc would acquire all of SVB’s deposits and loans from the regulator. Signature Bank announced on March 20, 2023 that Flagstar Bank, NA, the wholly owned subsidiary of New York Community Bancorp Inc., Hicksville, New York, has acquired $12.9 billion of the bank’s loans and taken $38.4 billion in deposits. Flagstar also acquired all of its 40 branches, which now operate under the Flagstar name.
According to a joint statement by Thomas R. Cangemi, President and CEO of New York Community Bancorp Inc., and Eric R. Howell, Flagstar Bank, the association was named one of “like-minded and customer-focused institutions.”
“This transaction provides significant diversification and strength needed in today’s banking system, while furthering NYCB and Flagstar’s strategic plan to transition to a commercial bank model,” the statement read.
The partnership described itself as “a commercial banking powerhouse” that will make Flagstar one of the largest commercial banks in the US, “with a fortress-like balance sheet, strong liquidity and excellent credit quality metrics.” assets”.
In their statement, they assured that clients will continue to be served by their Private Clients Group and “they anticipate a return to normality in a short time.”
EB-5 Congressional and Industry Bank Hearings
Tuesday marked the first day of hearings on bank failures and the role of federal regulators before bankruptcy and after closings. The Federal Reserve’s top banking regulator, Michael Barr, told Congress on Tuesday that SVB’s failure was a “textbook case of mismanagement.”
He said the bank failures raised “questions about evolving risks and what more can and should be done” by regulators and said he is considering strengthening banking regulations.
Like other top regulators, Barr assured the public of the safety of banks, calling the banking system “robust and resilient, with strong capital and liquidity” and that they are “committed to ensuring that all deposits are safe.”
On Wednesday, top officials from the Treasury Department, the Federal Reserve and the FDIC were questioned on Capitol Hill about the causes of the collapses of SVB and Signature banks.
Republican lawmakers on Wednesday blamed top banking regulators for being too slow to react as SVB headed toward bankruptcy and debated whether tougher regulations would have had any impact. Democrats are pushing new legislation that seeks to tighten banking regulations.
Both sides want the agencies to take more responsibility and learn from the mistakes that led to the failures. Barr is leading an internal review of the agency’s oversight and ways it could have done better and how its own regulatory structure might have played a role.
Officials who testified at the hearing suggested they are considering raising the $250,000 limit to insure deposits, but that congressional action is needed.