Update: Top Depositor Questions on the Silicon Valley Bank Receivership

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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 SVB's receiver.

The closing of SVB and the appointment of the FDIC as receiver are unprecedented in terms of size and complexity for a bank failure in the United States in recent years, and are 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 9:00 am EDT on Tuesday, March 14.

What does the March 12, 2023 Federal Bank Regulatory Agencies' Joint Statement on deposit withdrawals mean for customers of SVB?

On Sunday, March 12, 2023, the Treasury Department, the Federal Reserve Board, and the FDIC released a Joint Statement in which they announced approval of actions enabling the FDIC to complete its resolution of SVB "in a manner that fully protects all depositors."

The following are key points made in the Joint Statement.

  • All depositors with SVB, whether covered in full by FDIC deposit insurance or uninsured, were to have full access to all of their money starting Monday, March 13.
  • Shareholders of the SVB holding company (SVB Financial Group) and "certain unsecured debtholders" of SVB will not be protected.
  • Until further details are announced by the FDIC, it is not possible to determine which particular types of unsecured debtholders and other creditors and counterparties of SVB will have some type of protection or relief from the otherwise applicable FDIC procedures under the Federal Deposit Insurance Act ("FDI Act") for receiverships of failed insured banks.

The Joint Statement also noted the closure of Signature Bank by the New York Department of Financial Services and that Signature Bank would have a similar arrangement permitting withdrawals for insured as well as uninsured depositors.

The following are new developments that were announced by the FDIC on Monday, March 13 regarding the SVB receivership.

  • The FDIC has now transferred all deposits – both insured and uninsured – and substantially all assets of SVB to a newly created, full-service FDIC-operated 'bridge bank' – Silicon Valley Bank, N.A. The FDIC confirmed that "All depositors of the institution will be made whole."
  • The FDIC has also transferred all "qualified financial contracts" of SVB, such as swap agreements and repurchase agreements, to the bridge bank.
  • The bridge bank will be operated by the FDIC in normal banking fashion as the FDIC pursues the sale of the institution to potential bidders.
  • Depositors will have full access to their money at the bridge bank during normal banking hours, including through online banking. Depositors and borrowers of the former SVB will automatically become customers of the bridge bank and will have customer service and access to their funds by ATM, debit cards, and writing checks in the same manner as before.
  • SVB's official checks will continue to clear.
  • Loan customers should continue making loan payments as usual.

The FDIC has announced that it is taking the same types of actions with regard to Signature Bank as have been taken with regard to SVB, including the transfer of all the deposits and substantially all of the assets of the former Signature Bank to the newly-created Signature Bridge Bank, N.A. as well as the transfer to the bridge bank of the qualified financial contracts of the former Signature Bank.

The FDIC has posted an updated set of Frequently Asked Questions for customers of SVB (the "SVB FAQs"), which are available on the section of the FDIC's website for the SVB receivership (link).

A similar set of Frequently Asked Questions for customers of Signature Bank is also available on the FDIC website (link).

What is the new liquidity facility that is being provided to other banks in the United States?

In addition, in the Joint Statement and in a separate statement by the Federal Reserve Board it was announced that:

  • The Federal Reserve Board will "make available additional funding to eligible depository institutions to help assure banks have the ability to meet the needs of all their depositors", in order to ensure that funds will remain available to depositors and will be able to be withdrawn where and when needed under any other distressed bank scenarios that may arise.
  • The additional funding will be made available through the creation of a new Bank Term Funding Program ("BTFP"), offering loans of up to one year in length to banks, savings associations, credit unions, and other eligible depository institutions. Terms and Conditions for the BTFP and Frequently Asked Questions about the BTFP are available on the Federal Reserve Board's website (here and here, respectively).
  • Banking institutions that obtain funding under the BTFP would be required to pledge collateral to the Federal Reserve such as U.S. Treasury securities, U.S. Government Agency debt and mortgage-backed securities, and other qualifying assets.
  • Those assets would be valued at par rather than having to be discounted (in contrast to "Discount Window" credit from the Federal Reserve Banks, which requires pledged collateral to be discounted). This prevents a bank having to liquidate performing assets with below-market interest rates at a loss to cover demand for withdrawals (which, reportedly was part of the cause of SVB's failure).
  • With approval of the Treasury Secretary, Treasury will make available up to $25 billion from the Exchange Stabilization Fund as a backstop for the BTFP if needed.

What other steps is the U.S. Government taking at this time?

Notwithstanding the announcement of these emergency measures, news reports on March 13 indicated that the shares of a number of other bank holding companies were the subject of major sell-offs and dramatic declines in trading prices, leading to temporary halts in trading in those companies' shares. It is not possible to know at this time whether the U.S. Government will take further steps to stem what appears to be continuing market turmoil.

Will SVB be sold and if so what does that mean for current depositors and other interested parties?

Typically, under the FDIC's customary procedures for auctions of failed banks in FDIC receivership, the following would occur:

  • Potential acquirers are asked to submit bids on some or all of the failed bank's business that the FDIC has transferred to the bridge bank.
  • Once the FDIC selects a winning bidder, the FDIC arranges a purchase and assumption transaction – typically a "whole bank" acquisition but in some cases a more limited transaction – in which the assets and liabilities of the failed bank that the FDIC that has already transferred to the bridge bank are purchased and assumed by the acquirer.
  • The result of such a purchase and assumption transaction is that the depositors, borrowers and other customers and counterparties of the failed bank have their accounts and other banking relationships transferred to the acquiring institution. Those accounts and relationships continue to operate normally in accordance with the applicable terms and conditions unless and until those terms and conditions are amended by the acquirer or the accounts or other banking relationships are subsequently terminated by the parties.
  • Any loans or other assets or obligations or liabilities of the bridge bank that the acquiring institution chooses not to acquire or assume, such as non-performing assets, would remain with the bridge bank and would have to be liquidated or otherwise resolved by the FDIC separately.
  • The initial auction for SVB by the FDIC that was conducted on March 12 was reported to have concluded without a buyer for SVB (including a rejection by the FDIC of one prospective buyer's offer), but it was reported on March 13 that a second auction is underway.
  • In light of the regulatory agencies' declaration of SVB's failure as a threat to the financial system, it has been reported that the FDIC has additional flexibility to auction SVB, including the ability to offer "loss-sharing agreements" to would-be buyers.
  • As of this writing, the timetable for the second auction is unclear, although the FDIC's announcements of March 13 – i.e., that the FDIC had transferred all deposits and substantially all of the assets of each of SVB and Signature Bank to newly-chartered, FDIC-insured bridge banks that would be operated by the FDIC as it markets those institutions to bidders – confirm that auction processes are underway or planned for both failed banks.
  • Although an acquisition by an acquiring bank of the SVB banking business that had been transferred by the FDIC to the bridge bank would likely be subject to approval by the regulatory authorities for the acquiring bank, it can be expected that such approval will have been granted on an emergency basis by the regulatory authorities involved.

Would non-U.S. deposit customers of SVB be eligible for deposit insurance recovery from the FDIC?

As noted above, the statements from the FDIC indicate that all depositor customers of SVB, regardless of whether their deposit accounts were within the $250,000 maximum limit for FDIC deposit insurance, will be made whole by the FDIC.

The statements did not indicate that non-U.S. depositors of SVB would be treated any differently than domestic U.S. depositors. Moreover, under the FDIC's standard rules, deposit insurance is not limited to U.S. citizens and residents. The FDIC's Deposit Insurance Coverage 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.

However, the following discussion explains how the FDIC's Deposit Insurance Coverage regulations treat deposits that are maintained at, and carried on the books and records of, a non-U.S. branch of an insured depository institution such as SVB.

  • The FDIC regulations make clear that foreign branch deposits are not eligible for FDIC deposit insurance coverage, even if the deposit agreement or other governing document specifically 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 United States).
  • However, if the account agreements or other governing contracts for the foreign branch deposits do in fact provide that the foreign branch deposits are dually payable, such deposits would have the same preference in a bank liquidation by the FDIC over claims of general unsecured creditors of the failed bank as applies to domestic U.S. uninsured deposits, per the depositor preference provisions of the FDI Act.

Available information at this time indicates that the branches or other operations of SVB in London and in Germany did not have authority to accept deposits from the public. However, further information would be required in order to determine whether those branches or operations have issued obligations that, although not representing a customary bank deposit account, might have nonetheless come within the definition of "deposit" in the FDI Act.

We also note that the Bank of England ("BoE") announced on March 13 that Silicon Valley Bank UK Limited ("SVB UK") has been sold to HSBC UK Bank Plc ("HSBC") for £1. The BoE's announcement further stated that "customers of SVB UK will be able to access their deposits and banking services as normal from [March 13, 2023]". With regard to the branch of SVB in Germany, the Federal Financial Supervisory Authority ("BaFin") on March 13 issued a ban on "disposals and payments" by that branch, stating that "the institution is at risk of being unable to meet its obligations towards its creditors." In addition, BaFin has ordered that the branch be closed for business at the current time.

How would the FDIC receivership affect the terms of CDs issued by SVB?

The SVB FAQs state generally that interest on deposits at SVB accrued through close of business on March 12, 2023 will be paid at the same rate as in effect prior to the bank's closing. The SVB FAQs further explain that SVB's rates will be reviewed by Silicon Valley Bank, N.A. (the bridge bank) and that depositors will be notified in writing of any changes.

Additionally, the SVB FAQs clarify that, consistent with standard FDIC procedure for bank receiverships, it has waived any early withdrawal penalty for CDs that had been issued by the former SVB, until such time as the CD holder enters into a new deposit agreement with Silicon Valley Bank, N.A.

The FDIC has also made a similar announcement with regard to Signature Bank.

What would happen to securities accounts for which SVB was serving as custodian, trustee or other fiduciary?

Under the standard rules for bank receiverships, the assets in these accounts remain the property of the customer, and may be transferred by the customer to the customer's account at another bank upon request. Given the high volume of requests, delays could ordinarily be expected.

Neither the Joint Statement nor the FDIC's subsequent announcement regarding SVB specifically addressed these types of accounts at SVB, but it is unlikely that the FDIC would seek to vary its procedures in this regard.

The FDIC's customary approach for resolving the trust and custody operations of a failed bank is to transfer the trust and custody operations to an acquiring institution, either as part of a "whole bank" purchase and assumption transaction or as part of a trust-only transfer, rather than having to make determinations as to ownership rights and claims for each owner of securities or other assets that had been held by the failed bank in a fiduciary or custodial capacity. Under that customary approach, the trust and custody customers would automatically become customers of the acquiring institution and their accounts would continue to operate as they had prior to the bank closing unless and until the account terms were amended or the customer were to close the account.

It is very likely that FDIC will seek to include the trust and custodial operations of SVB in any purchase and assumption transaction that the FDIC is now seeking to arrange in the SVB auction process. There may be circumstances, however, under which the FDIC would seek to liquidate the trust and custody operations rather than transferring those operations and account relationships to an acquiring institution. At present, there is insufficient information to determine what the outcome will be for SVB or for any fiduciary or custody operations that may have been conducted by Signature Bank.

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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.

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