Just before noon on Friday March 10, 2023, Silicon Valley Bank (SVB) was shut down by the California Department of Financial Protection and Innovation and the Federal Deposit Insurance Corporation (FDIC) was named as the receiver. Since that time, SVB customers have scrambled to assess their exposure, understand business risks, and prepare for the possibility of operating their businesses without immediate access to bank accounts and other banking services.
Over the weekend (as of the time of the publishing of this Alert), regulators provided little information about the process for customers to access their funds above the insured deposits, leaving those impacted by the closure of SVB without clear guidance.
While SVB customers wait for additional guidance from the FDIC, there are actionable steps companies can take to prepare for the opening of business on Monday. We have identified a number of immediate issues to consider here, but we encourage you to reach out to your Foley Hoag team to discuss your specific circumstances.
Arrange for Access to Funds
As discussed in our prior alert, the FDIC has indicated that depositors will have access to their insured deposits (generally, a maximum of $250,000 in the aggregate per depositor, per deposit account category) no later than Monday morning, March 13, 2023 and at that time banking activities will resume. The FDIC will pay uninsured depositors an advance dividend sometime this week. Uninsured depositors will receive a receivership certificate for the remaining amount of their uninsured funds. As the FDIC sells the assets of SVB, future dividend payments may be made to uninsured depositors.
Depositors may calculate their insurance coverage using the FDIC's Electronic Deposit Insurance Estimator at https://edie.fdic.gov. If possible, companies should work to establish a bank account at another institution so they will be in a position to immediately transfer insured amounts out of the receiver account. Many banks have put in place expedited account opening procedures.
Many companies have "sweep" accounts with SVB (pursuant to which, broadly, SVB applied excess company cash to purchase shares in certain investment securities through a third-party custodian institution). These accounts are held by a third-party custodian and are not on SVB's balance sheet, however, SVB is the administrator of the accounts. As a result, a company's money invested via these sweep accounts does not constitute an SVB deposit and therefore is not subject to SVB's liquidity risk, but access to these funds may take time and will follow a process (yet to be) laid out by the FDIC.
As of the writing of this Alert, the FDIC has not announced a clear process for the ability of depositors to access funds above insured amounts and has not yet announced a claims process for depositors. The FDIC has posted a Frequently Asked Questions page (https://www.fdic.gov/resources/resolutions/bank-failures/failed-bank-list/silicon-valley-faq.html), and we expect more information on this on Monday, March 13, 2023.There is a claims portal on the FDIC website (https://resolutions.fdic.gov/claimsportal/s/) for creditors seeking payment for goods or services supplied to SVB or changes needed to be made to depositor accounts such as a change of mailing address.
Confirm Wire Processing
Many SVB customers were attempting to initiate wires out of their SVB accounts up until the moment the bank was closed by regulators. A number of those wires were noted as being in process, but not confirmed. If a company attempted to initiate a wire out of SVB any time last week that was not processed, the status of that wire should be confirmed with the intended recipient as soon as possible on the morning of Monday, March 13, 2023.
Incoming Payments and Autopay
To the extent feasible and permissible under existing legal obligations, any incoming payments or direct deposits that would normally be directed to SVB accounts should be redirected to new bank accounts. If a company had arranged autopay services, those autopay instructions should be turned off and new payment arrangements should be made.
Funding Near Term Obligations
In the event a company's payroll account is held at SVB, the company's ability to make timely payroll may be impaired. Many state and local labor laws and regulations impose strict standards on payment of payroll and may require consideration of furloughs or reductions to avoid violations of unpaid wages, minimum wage and other applicable laws.
In addition to payroll, companies should consider critical vendor payments, payments to service providers, insurance premiums, loan obligations or other obligations that need to be paid on a timely basis to ensure business continuity. It may be necessary to consider whether payment extensions or short term or bridge funding will be required to fund the gap until a company has access to funds. If payments cannot be made on existing contractual obligations, companies should carefully review existing agreements and discuss the default provisions with counsel.
Prepare for Non-Payment or Non-Performance from SVB Account Holders
If a company's customer normally pays from an SVB account, companies should expect delayed payments from those customers and should engage with those payors to make plans for future payment. Fund managers making capital calls should prepare for potential defaults by limited partners. Companies should assess the impact of failing to receive payments and should review default provisions with counsel. Similarly, companies that rely on services to be performed by customers with SVB accounts may inquire if the obligations will be satisfied timely and review their counterparty rights and remedies.
Customers with Credit Facilities
SVB customers with credit facilities in place, whether or not SVB is a lender, should review existing financing documents in order to determine compliance with covenants as plans are made for continuing the operation of the business. The FDIC has advised that borrowers with loans from SVB should continue to make scheduled payments to SVB until the borrower receives notice of alternative payment instructions. You can expect that the FDIC will sell your loan and notify you of where to make future payments. Companies with an upcoming payment due to SVB should consult with their counsel at Foley Hoag for specific analysis of what is required under the company's applicable financing documents. Borrowers with non-delinquent loans may be entitled to set off the loan against their deposits to maximize the return value of uninsured amounts. Please reach out to your contact at Foley Hoag for specific analysis of the applicable documents on a case-by-case basis.
Priority of Payments and Timing
After insured depositors are paid, uninsured depositors are paid next, and if funds are available, then payments are made to general creditors and then stockholders. Payments of uninsured funds only, called dividends, depend on the net recovered proceeds from the liquidation of SVB's assets and the payment of bank liabilities according to federal statute. The payment of dividends on account of uninsured deposits may take place over several years based on the timing of the liquidation of SVB's assets.
Be on Alert for Scams
The FDIC has warned that SVB customers should be on alert for potential scams and be careful not to disclose account numbers and other confidential information to unknown sources.
WEBINAR - What's Next?
In rapid response to the Silicon Valley Bank situation, we hosted an SVB flash briefing webinar to share the information we learned and gathered since the onset. Hear from our cross-discipline team of lawyers on potential next steps and resources we have to guide you through this rapidly evolving situation.
- FDIC guidance
- Actionable steps companies can take now
- Preparing for non-payment from SVB account holders
- Access to capital alternatives
- Labor and employment law considerations
View recording here.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.