On Friday, March 10, 2023, the Federal Deposit Insurance Corporation (“FDIC”) was appointed the receiver for Silicon Valley Bank (“SVB”). The FDIC created the Deposit Insurance National Bank of Santa Clara (“DINB”) and immediately transferred to the DINB all insured deposits of SVB. This action is unprecedented in terms of size and complexity, and is likely to raise novel receivership questions for the FDIC and other stakeholders.
The situation remains fluid, and the following Q&A reflects our understanding as of Saturday, March 11.
What deposit insurance recovery does the FDIC provide to deposit customers of SVB?
Covered deposits (e.g., funds in checking accounts, savings accounts and money market accounts; certificates of deposit (“CDs”)) are insured up to $250,000 per depositor for each “ownership category”.
Ownership categories include single accounts owned by an individual, joint accounts owned by two or more individuals, corporation/partnership/LLC accounts, and others for certain retirement, trust, employee benefit plan and government accounts.
Coverage is determined based on the deposit accounts owned by a business entity within a given ownership category. For example, if an entity has multiple checking accounts, savings accounts and/or CDs at SVB, and they do not fall under another ownership category (e.g., trust or employee benefit plan accounts), the deposits in such accounts would be combined and covered up to $250,000 in total.
In certain cases, an account that is established by a third party for the benefit of several owners may benefit from “pass-through” coverage such that each owner’s funds are insured up to the $250,000 coverage limit.
Under the FDIC’s customary approach for bank receiverships, depositors are not required to file claims with the FDIC for deposits within the coverage limits. Instead, the FDIC can be expected in this case to use SVB’s books and records to make determinations as to deposit insurance coverage.
Are non-U.S. deposit customers of SVB eligible for deposit insurance recovery from the FDIC?
FDIC deposit insurance is not limited to U.S. citizens and residents. The FDIC’s deposit insurance regulations provide that any person or entity that maintains deposits in an insured depository institution (such as SVB) is generally entitled to FDIC deposit insurance coverage, subject to the limitations discussed above.
However, in the case of deposits that are maintained at, and carried on the books and records of, a non-U.S. branch of an insured depository institution, the FDIC regulations make clear that such deposits are not eligible for FDIC deposit insurance coverage, even if the deposit agreement or other governing document provides that the deposit would be dually payable (i.e., payable at both the non-U.S. branch and at an office of the institution in the U.S.). If the foreign branch deposits are dually payable, such deposits would have the same preference in a bank liquidation over claims of general unsecured creditors as applies to domestic U.S. uninsured deposits, per the depositor preference provisions of the Federal Deposit Insurance Act.
When will the FDIC make insured deposits available to eligible customers of SVB?
We currently understand that insured deposits will be made available for withdrawal by customers at the open of normal business hours on Monday, March 13 through the usual means of withdrawal (i.e., online banking).
We expect depositors will be able to close accounts at SVB without having to visit a branch, such as by directing a wire transfer of the available balance to an account at another institution.
Do cash deposit customers of SVB have any recourse with respect to deposits in excess of the FDIC deposit insurance coverage limit?
As described above, the FDIC insures covered deposits up to $250,000 per depositor for each “ownership category”. Amounts in excess of this cap are uninsured.
We currently expect that each depositor with uninsured deposits will receive:
(i) an advance dividend for uninsured deposits sometime next week, in an amount to be determined by the FDIC (based on the FDIC’s determination of how much cash will be available from the sale of SVB’s assets after providing for the coverage of insured deposits and the anticipated expenses that will be incurred by the FDIC in order to liquidate SVB’s assets); and
(ii) a “receivership certificate” entitling the holder to the remaining amount of their uninsured funds, to be satisfied from (and to the extent of) proceeds from the liquidation of SVB’s assets in the form of additional dividends.
We further expect that depositors will not have to file claims with the FDIC for advance dividends, but depositors should monitor the FDIC website for any specific instructions or information.
As the FDIC sells the assets of SVB, additional dividend payments will be made to holders of these receivership certificates. This sale process could take a year or more, depending on liquidity of the assets. We expect the receivership certificates to be freely transferrable or assignable instruments, such that holders may sell them or pledge them as collateral for debt. It is yet to be seen whether a market for such receivership certificates will emerge.
How does the receivership affect the terms of Certificates of Deposit issued by SVB?
We expect that CDs issued by SVB will have ceased to accrue and pay interest as of the bank’s closure on March 10, 2023. We also expect that the FDIC will waive any early withdrawal penalties that might have applied under the terms of the CDs.
What happens to securities accounts for which SVB was serving as custodian, trustee or other fiduciary?
The assets in these accounts remain the property of the customer, and may be transferred to another bank upon request. Given the high volume of requests, delays can be expected.
Additionally, in order to make a full recovery, the customer ordinarily would have to establish the existence of a custodial or fiduciary relationship with the bank with respect to the assets held in the securities account, which would depend on the provisions of the governing agreement for or relating to the account. A customary form of custodial or fiduciary account agreement for a bank in the U.S., which would identify the particular customer as the party on whose behalf the account was being established and to whom the securities in the account were being credited, would satisfy that requirement.
FDIC precedents in this area also provide that the customer must be able to trace the account assets into the hands of the FDIC as the bank’s receiver. That requirement would be satisfied as long as SVB continued to hold the assets separate and apart from its general assets at the time that the bank was closed. Trust departments of banks in the U.S. are regularly examined by their federal and state bank regulatory authorities for compliance with legal and requirements and risk management practices and procedures for trust and custodial operations, including asset segregation and the maintenance of appropriate books and records, and the likelihood of commingling of assets at a bank custodian or fiduciary is generally low.
Note that this commentary relates only to securities accounts that may be held with SVB, and not accounts held with SVB Securities LLC, a broker-dealer affiliate of SVB that is not subject to the receivership.
White & Case means the international legal practice comprising White & Case LLP, a New York State registered limited liability partnership, White & Case LLP, a limited liability partnership incorporated under English law and all other affiliated partnerships, companies and entities.
This article is prepared for the general information of interested persons. It is not, and does not attempt to be, comprehensive in nature. Due to the general nature of its content, it should not be regarded as legal advice.
© 2023 White & Case LLP