UPDATE (3/12 PM):
U.S. Treasury Uses Systemic Risk Exception to Protect Depositors of Failed Banks and the Federal Reserve Board Establishes New Emergency Facility
Today, following the failure of Silicon Valley Bank (SVB) on March 10, 2023, U.S. Treasury Secretary Janet Yellen approved actions enabling the Federal Deposit Insurance Corporation (FDIC) to complete its resolution of SVB in a manner that ensure that depositors of SVB have access to their insured and uninsured funds starting on Monday, March 13. Secretary Yellen took a similar action to ensure depositors of Signature Bank—which the New York Department of Financial Services took possession of, and appointed the FDIC as receiver of, earlier today— would be made whole. Today's announcement marks the first time since the financial crisis in 2008-2009 that the U.S. financial regulators have utilized the "systemic risk exception" authority under the Federal Deposit Insurance Act (FDIA).
At the same time, the Board of Governors of the Federal Reserve System (Federal Reserve Board) exercised its authority under section 13(3) of the Federal Reserve Act to establish an emergency lending facility to provide liquidity to banks, called the Bank Term Funding Program (BTFP). Eligible borrowers for the BTFP include any U.S. federally-insured depository institution (including a bank, saving association, or credit union) and certain U.S. branches or agencies of a foreign bank.
In its press release the Federal Reserve Board stated that "[t]he capital and liquidity positions of the U.S. banking system are strong and the U.S. financial system is resilient," and that it is "prepared to use its full range of tools to support households and businesses, and will take additional steps as appropriate."
These significant agency actions are intended to reassure the public and strengthen confidence in the U.S. banking system. As the landscape evolves, banks, depositors, borrowers and investors will have questions about the meaning and impact of these measures. MoFo's financial services team is available to help you navigate this evolving landscape and respond to any questions about BTFP or FDIC receivership.
On Friday, March 10, 2023, the California Department of Financial Protection and Innovation closed Silicon Valley Bank (SVB), and the Federal Deposit Insurance Corporation (FDIC) was appointed as receiver.
Following its appointment as receiver, the FDIC created the Deposit Insurance National Bank of Santa Clara (DINB) and immediately transferred all insured deposits of SVB to DINB. The FDIC announced on Friday that all insured depositors will have access to their insured deposits beginning Monday morning, March 13, 2023, when SVB's main office and all branches will re-open. The FDIC stated that it will pay uninsured depositors an "advance dividend" representing a pro rata share of SVB's estimated assets likely within the week. Uninsured depositors also will receive a "receivership certificate" from the FDIC for the remaining amount of their uninsured funds, and such funds may be paid back to depositors as the FDIC sells the assets of SVB. A receivership certificate is not a guarantee of full repayment of the value of the depositor's account.
In this alert, we address key client questions regarding bank failures and the receivership process.
1. What is FDIC Insurance?
FDIC deposit insurance automatically applies to any covered account opened at an FDIC-insured institution. Deposits (including both accrued interest and principal) are insured up to $250,000 per depositor, per FDIC-insured bank, per ownership category. Not all categories of financial products are covered by deposit insurance. Deposit insurance covers only certain deposit products, including checking and savings accounts, money market deposit accounts, and certificates of deposit (CDs). Investment products, including mutual funds, annuities, life insurance policies, stocks, and bonds are not FDIC-insured. Depositors can find the FDIC's list of insured deposit products here.
2. What is the FDIC Receivership Process?
When an insured bank fails, a receivership is immediately established. A receiver is the entity that handles all the affairs of a failed bank. The receivership does not end until all the bank's assets are sold and all claims against the bank are resolved. As receiver for SVB, the FDIC is responsible for attempting to find a buyer for some of all of the bank's assets and liabilities.
3. What is the Hierarchy of Claims?
FDIC receivership is subject to a complicated legal regime under the Federal Deposit Insurance Act and its implementing regulations. Once a bank has been placed into receivership, the following hierarchy generally applies to unsecured claims:
- FDIC Administrative Expenses. This category of claims includes any liability that the FDIC, as receiver, has on the bank, such as loans made to the receivership and the accrued interest on those loans.
- Insured Deposits. As the insurer of the bank's deposits, the FDIC pays insurance to depositors up to the $250,000 insurance limit. Historically, the FDIC pays insurance the next business day following an insured bank's failure. This payment generally occurs when the FDIC either (1) provides each depositor a new account at another insured bank (in this case, DINB) in an amount equal to the insured balance of their account at the failed bank, or (2) issuing a check to each depositor for the insured balance of their account at the failed bank.
- Uninsured Deposits. As receiver of the failed bank, the FDIC is tasked with collecting and selling the assets of the failed bank and settling its debts, including claims for deposits in excess of the insured limit. If a depositor has uninsured funds, they may recover some portion of their uninsured funds from the proceeds of the FDIC's sale of the failed bank's assets. It can take several years to sell off the assets of a failed bank, and there is no guarantee that uninsured depositors will be made whole. As assets are sold, uninsured depositors will receive periodic pro-rata payments on their remaining claims.
- General Creditors and Stockholders. Following payments to uninsured depositors, payments are made to general creditors of the bank and then the bank's stockholders.
4. What Happens to Uninsured Deposits?
Payments of uninsured funds depend on the net recovered proceeds from the FDIC's liquidation of the bank's assets and the payment of bank liabilities according to federal statute. The disbursements of uninsured funds may take place over several years based on the timing of the liquidation of the failed bank assets. A 2014 study of bank failures determined an average receivership of five years and found that claimants such as uninsured depositors, on average, lose approximately 27 percent of their claim. However, these averages may not be good predictors of future outcomes because the resolution process is highly dependent on the facts of each bank failure and varies greatly. For example, when Washington Mutual failed in 2008, its depositors, including uninsured depositors, were made whole when it was purchased by another bank.
5. What if I Had Pending Transactions (e.g., a Wire) at SVB When the Bank Failed?
SVB clients may have submitted requests for wire transfers prior to the bank's failure on Friday. If SVB transmitted the funds to the recipient bank by wire transfer before SVB's failure, then the funds would have left SVB's balance sheet prior to failure. The liquidation provisions of U.S. banking laws generally do not void a settled wire transfer from an insolvent participant. Therefore, wire payments from a sender at SVB would not be affected by the bank's subsequent failure unless a court finds the payment void after the fact as a fraudulent transfer, unlawful preference, or other inequitable conduct. However, if SVB only acknowledged receipt of the client's wire request, but did not wire the money prior to its failure, then the funds may remain on the bank's balance sheet.
6. What If I Had Funds in a Sweep Account?
Sweep programs vary widely, and different programs will have different deposit insurance treatments. For example, in the case of certain deposit sweep program, funds swept out of the failed bank prior to the applicable cut-off time would be treated by the FDIC as having been completed, and these funds would not be part of the FDIC insurance coverage calculation for that depositor. If, however, funds subject to a sweep were either transferred to another account at the bank or otherwise not transferred from the bank before the applicable cut-off time, then the FDIC may treat the funds as having never left the customer's account at SVB for the purpose of calculating FDIC insurance coverage and the amount of uninsured funds.
7. If I Have a Loan From SVB, Should I Continue Making Payments?
If a customer has a loan from SVB that is outstanding, then the FDIC will either sell the loan following the bank's failure or may temporarily retain it. In either event, a borrower remains obligated to make payments on the loan. The FDIC, and the eventual purchaser, will notify all borrowers within a few days following the bank's failure where they should send future payments.
8. What if I Have a Line of Credit from SVB?
As indicated by the FDIC, if you have an undrawn or partially drawn line of credit from SVB, then the FDIC generally will not permit new draws on the line. In addition, the FDIC has broad powers to repudiate lines of credit and other agreements.
9. What Happens if SVB Is Acquired?
If SVB is acquired, the impact on depositors depends on the terms of the purchase and assumption transaction. Often the acquiring bank assumes all the liabilities (including uninsured deposits) and assets of the failed bank. This approach is also the preferred course of action from the FDIC's perspective.
10. I Have Payroll Obligations That I Need to Meet. What Should I Do?
Customers of SVB should make all efforts to pay employee earned wages without delay. Failure to pay wages in a timely manner can be a violation of state and federal law, with consequences potentially including civil and criminal penalties. Customers should consider alternative options in order to meet their payroll obligations.
11. If I Am a Public Company, Do I Have Disclosure Requirements?
As public companies evaluate the impact of SVB's failure on their operations and financial position, they should keep disclosure considerations in mind. Companies that are preparing a periodic report, such as a Form 10-K or Form 10-Q, or engaging in an offering of securities (including sales under existing at the market sales programs) must consider whether any exposure to SVB needs to be described in the report. Particular consideration should be given to liquidity disclosures and whether the company's circumstances represent a material known trend or uncertainty that would require disclosure.
Analysts and investors are endeavoring to identify which companies have significant exposure to SVB. Accordingly, public companies need to be mindful of SEC Regulation FD and its prohibition against selective disclosures of material information to such parties. If a company wishes to engage with investors and analysts on SVB and such information could be material, a prior or simultaneous public disclosure of the information may be required or advisable.
Companies also should consider whether issues associated with SVB may lead to a triggering event for current disclosure on Form 8-K, such as under Item 2.06 Material Impairments. In addition, public companies should consider whether a voluntary Form 8-K under Item 7.01 or 8.01 is in the best interests of the company and its shareholders, such as for Regulation FD purposes as described above or to quell undue speculation. We note that the Form 8-Ks filed thus far largely have been to confirm that the companies have no material exposure to SVB.
Public companies with potentially material exposure to SVB should consider the implications under their insider trading policies, in particular whether certain employees and board members need to be blacked out from trading until appropriate disclosure of information regarding such exposure has been made.
Lastly, because the SVB situation is recent and evolving, public companies need to carefully consider what to say about their exposure, in particular, with respect to conclusions regarding such exposure. Any disclosure must be accurate and complete, and forward-looking information should be supportable and accompanied by appropriate cautionary statements.
Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.
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