The California Department of Financial Protection & Innovation on March 10 declared Silicon Valley Bank insolvent and appointed the FDIC as receiver. To help with the resolution of SVB, the FDIC created the Deposit Insurance National Bank of Santa Clara, which will essentially serve as a bridge bank to facilitate access to SVB deposits insured by the FDIC. Having a large insured depository institution fail without warning is a significant event that has already caused ripples across the financial industry, although many see the risk of serious contagion in the financial sector as relatively low. In this LawFlash, our lawyers break down some high-level questions that many are asking in this quickly evolving situation.
CAN I ACCESS MY FUNDS THAT WERE IN SVB?
The Federal Deposit Insurance Corporation (FDIC) was appointed receiver of Silicon Valley Bank (SVB) and, in that capacity, announced here that all insured deposits—up to $250,000 in each insurable right and capacity—will be fully available the morning of Monday, March 13. Any holders of uninsured deposits of SVB (i.e., deposits over the FDIC-insured amount) will receive an “advance dividend” sometime during the week of March 13, which will be a portion of the amount of uninsured deposits they have at SVB. The exact timing or amount of that dividend is currently unclear, but we have heard (perhaps optimistically) that the FDIC has already begun selling SVB loans and other assets (which we understand include a significant portion of US Treasurys and similar highly liquid assets), and that should hopefully be positive for the amount of next week’s dividend.
For any deposit amounts not paid next week, the FDIC has stated the deposit holders will receive a receivership certificate that effectively gives them a claim against SVB for the remaining amount. The amount and timing for any disbursement of funds under the receivership certificate will depend on the timing of the liquidation of SVB’s assets. Completing disbursements could take weeks, months, or—for full and/or final payment on claims (which of course may not be 100% of the uninsured deposit amounts)—potentially years.
We encourage clients with SVB accounts in excess of the FDIC insured limit to contact the FDIC toll-free number at +1.866.799.0959, or as otherwise indicated here.
WHO WILL GET PAID FIRST?
The Federal Deposit Insurance Act requires that insured deposits be paid "as soon as possible", and also specifies the order in which claims will be paid under the receivership as follows:
- Secured claims
- Administrative expenses of the FDIC as receiver
- Insured deposits (the standard insurance amount is $250,000 per depositor, for each account ownership category)
- Uninsured deposits
- General/senior liabilities
- Subordinated debt and similar liabilities
- Shareholders of SVB and its parent, SVB Financial
SVB has been cited as having relied more heavily on large—and therefore uninsured—deposits than have other banks. This means that the amount of funds allocated for satisfying insured deposit claims in the tier immediately above uninsured deposits should be much smaller than at most banks with more traditional deposit bases. Assuming that the amount of secured claims and administrative expenses will also be relatively modest, this should mean that more funds will be available to satisfy the claims of uninsured depositors. Recoveries for uninsured depositors and creditors junior to them are not guaranteed by the FDIC and will more heavily depend on proceeds available from liquidation of SVB’s assets.
For now, the FDIC has advised that insured depositors should have access to their accounts and insured funds on Monday, March 13, 2023. The FDIC has also announced it will pay uninsured depositors an advance dividend the week of March 13 and will issue receivership certificates for remaining amounts. Depositors will not have to file a claim for their advanced dividend. It is not known what percentage of uninsured deposits will be paid through next week’s advance; the closure order reports that at the close of business on March 9, 2023, due to a “run on the bank,” SVB had a negative cash balance of $958 million. Subsequent dividends are likely, although the amounts and timing of such distributions will be determined by the FDIC in its discretion.
WHAT SHOULD COMPANIES DO ABOUT PAYROLL?
Payroll laws are state specific for employers’ requirements to pay wages. While new guidance from the FDIC is expected, there are a few overarching principles for employers operating in states that require wages to be paid during specific time periods. A company should create a detailed balance sheet of their payroll requirements and their available funds to identify what type of short-term funds may be needed to cover the shortfall. Consequences of not paying those wages on time include fines, potential treble damages, and in certain situations personal civil and even criminal liability for executives or board members. Companies can also look at furloughs of nonexempt employees to temporarily reduce that shortfall.
DO I NEED TO KEEP PAYING A LOAN FROM SVB?
The FDIC as receiver can be expected to exercise its powers to collect all obligations and money due to SVB, as well as to preserve and conserve the assets and property of SVB to help it pay all valid obligations of SVB in a manner consistent with its role as receiver. While the FDIC has stated that loan customers should continue to make their payments as usual, the FDIC also issued an FAQ on March 11 (since taken down) indicating that it may be possible for a borrower to offset an uninsured deposit against a loan in the same name as the uninsured deposit account. Additionally, because SVB was placed into receivership, for a period of 90 days beginning on March 10, 2023, no person may terminate, accelerate, or declare a default under a contract to which SVB is party without the consent of the FDIC. However, the stay expires at 5:00 pm ET on Monday, March 13, for self-help enforcement of derivatives and other qualified financial contracts.
The FDIC, as receiver, may sell certain performing or non-performing loans of SVB. If the FDIC sells a borrower’s loan, the borrower will be sent notice of the transaction, along with payment instructions; the sale should not affect the terms of the loan. Of note for unfunded or partially funded lines of credit, the FDIC often repudiates funding obligations or otherwise curtails the lending operations of a failed bank, although it may advance funds in limited circumstances such as to protect or enhance collateral or ensure maximum recovery as receiver, and may also provide emergency funding to ensure the short-term viability of a borrower.
WHAT HAPPENS TO FUNDS IN TRANSIT AS PART OF A MONEY MARKET FUND SWEEP?
Unless a wire has already been settled out of the account, it would still be considered a deposit in SVB. Funds that have been swept out of the account and used to purchase money market fund shares will no longer be considered deposits in SVB. Depending on the account documentation and agreements, the money market fund shares are held together with the shares of other SVB clients at the respective money market fund complex in the name of SVB on behalf of its clients. Those shares should not be considered part of the receivership estate, but customers may not have immediate access to them until the FDIC establishes procedures for access.
WHAT ARE MY DISCLOSURE REQUIREMENTS AS A PUBLIC COMPANY?
Public companies should consider whether disclosure is required based on their specific facts and circumstances in coordination with their boards and trusted advisers. Any disclosure relating to the possible impact should be limited to the facts known at the time that the disclosure is made, and companies should exercise caution in drawing any definitive conclusions as to the materiality of impact given the evolving nature of the situation. Careful consideration should also be made to Regulation FD compliance, and any forward-looking statements should be identified as such and accompanied by meaningful cautionary language.
WHAT IF MY COMPANY HAD AN ACCOUNT WITH ONE OF SVB’S AFFILIATED, NON-BANK ASSET MANAGERS OR BROKER-DEALERS?
It appears that SVB’s affiliated, non-bank asset managers and broker-dealers—SVB Asset Management, SVB Wealth LLC, SVB Investment Services, and SVB Securities—should not be directly impacted by the receivership. These affiliated asset managers and broker-dealers appear to have arrangements with non-affiliated custodians to maintain client assets, as applicable. However, it appears that some clients of these affiliated asset managers and broker-dealers may have had the option of having some or all of their cash balances swept to an SVB bank account rather than through a mechanism provided by the non-affiliated custodian. In those instances, cash that was swept to an SVB bank account may only be protected up to the FDIC insurance limit of $250,000 per person, which may be impacted by a client’s other deposit accounts with SVB.
IF SVB IS ACQUIRED, DOES THIS AFFECT ANYTHING?
Based on the initial actions taken by the FDIC, as receiver, any “acquisition” would likely involve the sale of selective assets for the benefit of the receivership estate and would not take the form of a “white knight” assuming all of the bank’s assets and liabilities.
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