This past weekend saw the sudden closure of two banking institutions, resulting in the largest institutional failure since the financial crisis of 2008.
As many are aware, on Friday, March 10, 2023, Silicon Valley Bank ("SVB") was closed by the California Department of Financial Protection and Innovation. Then, on Sunday, March 12, Signature Bank ("Signature") was closed by the New York State Department of Financial Services.
When a financial institution closes, it is typically placed into receivership with the Federal Deposit Insurance Corporation ("FDIC") as receiver. This was no different with the closures of SVB and Signature. The banks are currently in receivership, with the FDIC serving as the appointed receiver.
So what do the SVB and Signature closures and receiverships mean for the banks and their depositors, lenders and borrowers? Below is a summary of the details, which continue to evolve. Please monitor the FDIC's website, including the following pages, for updates:
- FDIC Failed Bank Information for Silicon Valley Bank, Santa Clara, CA - https://www.fdic.gov/resources/resolutions/bank-failures/failed-bank-list/silicon-valley.html
- FDIC Failed Bank Information for Signature Bank, New York, NY - https://www.fdic.gov/resources/resolutions/bank-failures/failed-bank-list/signature-ny.html
A. What is the current status of SVB and Signature?
On Monday, March 13, the FDIC, in its capacity as receiver, transferred all of SVB's deposits, both insured and uninsured, as well as substantially all assets of SVB to newly formed Silicon Valley Bank, N.A., a full-service "bridge bank" that the FDIC will operate while it markets the institution to potential bidders. Similarly, on March 13, the FDIC transferred all of Signature's deposits, both insured and uninsured, as well as substantially all assets of Signature to Signature Bridge Bank, N.A., a newly formed full-service "bridge bank" that will be operated by the FDIC.
These bridge banks are chartered national banks operated by FDIC-appointed boards.1 They are designed to "bridge" the gap between the closure of a bank and when the FDIC is able to "stabilize the institution and implement an orderly resolution."2
B. How does the SVB and Signature closure and receivership impact depositors?
Depositors of SVB and Signature have automatically become customers of each FDIC created bridge bank.
Typically, deposit accounts at insured banks, such as SVB and Signature, are insured by the FDIC up to $250,000 per depositor, per insured bank, for each account ownership category. However, on March 12, the Department of the Treasury, Federal, Reserve, and FDIC released a joint statement (the "Joint Statement") announcing that all depositors will be made whole, effectively waiving the $250,000 ceiling on federal deposit insurance for both SVB and Signature depositors.3 As a result, all depositors are expected to be made whole, regardless of the amount held in their respective accounts. Beginning Monday, March 13, 2023, all customers regained access to their funds.
The FDIC has communicated that it will continue to provide regular updates regarding both SVB4 and Signature5on each institution's respective page on the FDIC's website. Depositors should monitor the FDIC's website for additional updates.
C. How does the SVB and Signature closure and receivership impact their non-depositor creditors?
The FDIC has stated that the transfer of assets of SVB and Signature to the bridge banks was meant to protect all depositors and to preserve the value of the assets and operations that could lead to improved recoveries for creditors and the Deposit Insurance Fund, which is making all depositors whole.6
The FDIC has designated that allowed claims will be paid, after administrative expenses, in the following order of priority: (1) depositors, (2) general unsecured creditors, (3) subordinated debt, and (4) stockholders.7Pursuant to the Joint Statement, shareholders and certain unsecured debt holders will not be protected.
The FDIC has communicated that companies that provided a service or product, leased space, furniture or equipment to SVB prior to its March 10 closure and have not been paid, may submit a claim against SVB to the Receiver. Similarly, companies that provided a service or product, leased space, furniture or equipment to Signature prior to its March 12 closure and have not been paid, may submit a claim against Signature to the Receiver.
Creditors will need to monitor the FDIC's notices and website for claims submission deadlines.
D. How does the SVB and Signature closure and receivership impact their borrowers?
As part of the receivership, all loans issued by SVB or Signature appear to have been transferred to the new bridge banks.
The FDIC has issued guidance that borrowers with loans that originated with either SVB or Signature should continue paying such loans in the normal course as they become due, unless and until directed otherwise.8 Within a few days, borrowers should be notified where to send future payments.9 Moving forward, the bridge banks may sell the loans (as negotiable instruments) to a successor entity to administer and service the loan.
As receiver, the FDIC also analyzes loans that require special attention, such as unfunded and partially funded lines of credit, and any construction and development loans that SVB or Signature extended. Generally, the receiver will cease lending operations, unless there is a compelling reason to do so, such as preservation or enhancement of collateral to ensure maximum recovery to the receivership.10 A letter of credit is typically treated as an agreement that may be repudiated by the FDIC, if burdensome, within a reasonable amount of time after appointment of a receiver. The FDIC may consider new funding, however, only in very limited circumstances, to ensure short-term viability of a borrower, to protect or enhance collateral value, or for public safety purposes.11
The FDIC has advised borrowers to contact the respective bridge bank if they have questions regarding their accounts.
E. How does the SVB and Signature closure and receivership impact non-depositor or non-borrower contractual counterparties?
As receiver, the FDIC has the authority to repudiate contracts for services that are no longer needed.12 Federal law will prohibit a counterparty to an agreement with either the former SVB or Signature from exercising contractual provisions allowing it to terminate the agreement without the consent of the receiver during the 90-day period beginning on the date of the appointment of the receiver.13
All contract counterparties should continue to monitor the FDIC's website for updates about SVB and Signature.
F. What's next?
It is impossible to know for certain. Based on prior instances of bank closures, the banks may be sold to another entity or multiple other entities. In fact, over the weekend, SVB's UK subsidiary--SVB UK--was sold to a subsidiary of one of Europe's largest banks, HSBC UK Bank Plc, in a deal that the British Treasury and Bank of England facilitated to avoid opening a bank insolvency procedure.14 At this point, there are no reports of a potential purchaser of the former SVB or Signature.
While the receivership is in place, the FDIC will administer the assets of the bridge banks by paying out claims in order of priority on a dividend basis as assets become available. The timing of that is uncertain and will be dictated in large part by the recoverable assets of each of the banks, although as already noted, the depositors will all be made whole.
In response to concerns over further turmoil in the small and regional banking market, on March 12, the Federal Reserve Board published a press release15announcing that it will make available additional funding to eligible depository institutions to ensure banks can meet the needs of all depositors going forward.
G. Beware of scams
In addition to the foregoing, individuals and entities should be aware of phishing scams that seek to gather information from those dealing with the fallout from these bank closures. The FDIC has indicated that it will not send unsolicited email notifications to claim/unlock/suspend an account.16 That being said, the FDIC does encourage correspondence through the FDIC Claims Portal, which is a secure web portal that can be found at https://resolutions.fdic.gov/claimsportal/s/.
Please contact one of the lawyers in Shipman's Workout, Restructure and Bankruptcy practice group and Finance practice group, if you have questions about this ever-changing legal landscape.
12. 12 U.S.C. § 1821(e)(1)
13. 12 U.S.C. § 1821(e)(13)
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.