FAQs Regarding the Failures of Silicon Valley Bank and Signature Bank
On Sunday, March 12th, the Treasury Department, the FDIC, and the Board of Governors of the Federal Reserve System (Fed) (the Agencies) announced that the New York Department of Financial Services had appointed the FDIC as receiver for Signature Bank, which was closed on March 11th. Subsequently, the FDIC announced that it had transferred substantially all of the assets and all of the deposits of Signature Bank to the newly created Signature Bridge Bank, N.A. Early on March 13th, the FDIC announced a similar transfer of assets and deposits to Silicon Valley Bank, N.A., another newly-formed bridge bank. The Agencies also announced that they were invoking the Systemic Risk Exception to the Federal Deposit Insurance Act (FDI Act) to permit the FDIC to take action to fully protect all depositors of both banks, regardless of their deposit insurance coverage. Finally, the Fed announced the creation of a new Bank Term Funding Program (BTFP) that is designed to help assure that open banks have the capacity to meet the needs of their depositors.
On Monday, March 13th, the UK Government announced that Silicon Valley Bank UK (SVBUK) has been sold to HSBC in an arrangement that will preserve all customer deposits and enable its banking business to continue as a going concern. As a result of the sale, the UK Government will no longer apply to Court to place SVBUK into a Bank Insolvency Procedure as had previously been announced on Friday, March 10th.
These are fluid and quickly evolving events. Below are general insights on issues that have arisen to date in both the US and the UK - please continue to check this page for updates. Please feel free to reach out to your Dechert team or the contacts listed here.
Each situation should be evaluated based on its unique facts and circumstances. The below is not intended to be, and should not be construed as, legal advice.
The Treasury Department, the FDIC, and the Board of Governors of the Federal Reserve System (“Federal Reserve”) invoked the Systemic Risk Exception to the Federal Deposit Insurance Act to permit the FDIC to act to fully protect all depositors of both banks, regardless of their deposit insurance coverage.
Silicon Valley Bank
On Friday, March 10th, the California Department of Financial Protection and Innovation closed Silicon Valley Bank (“SVB”) and appointed the Federal Deposit Insurance Corporation (“FDIC”) as receiver. The FDIC created a new bank, called the Deposit Insurance National Bank of Santa Clara (“DINB”), and transferred all insured deposits to the DINB. Uninsured deposits and the assets of SVB remained with the FDIC as receiver. The purpose of the DINB was to ensure that customers had access to their insured deposits starting on Monday, March 13th.
On Monday, March 13th, the FDIC transferred all deposits—both insured and uninsured—and substantially all the assets, including all Qualified Financial Contracts, of the former Silicon Valley Bank to Silicon Valley Bank, N.A. (“SVB N.A.” or the “bridge bank”), a newly created, full-service FDIC-operated bridge bank. Depositors had full access to their money, including the ability to withdraw funds, as of Monday morning. We understand that SVB N.A. has generally been fulfilling its obligations, and loan customers to the former SVB are expected to continue making loan payments to SVB N.A.
Tim Mayopoulos, former president and CEO of the Federal National Mortgage Association who most recently served as president of Blend Labs, Inc, has been appointed CEO of Silicon Valley Bank, N.A. Senior management of SVB has been removed.
On Sunday, March 12th, the New York State Department of Financial Services closed Signature Bank and appointed the FDIC as receiver. Subsequently, the FDIC transferred all deposits—both insured and uninsured—and substantially all assets, including all Qualified Financial Contracts, of the former Signature Bank to Signature Bridge Bank, N.A. (also, a “bridge bank”), a newly created, full-service FDIC-operated bridge bank. Depositors had full access to their money, including the ability to withdraw funds, as of Monday morning. We understand that Signature Bridge Bank, N.A. has generally been fulfilling its obligations, and loan customers to the former Signature Bank are expected to continue making loan payments to Signature Bridge Bank N.A.
Greg D. Carmichael, who recently served as president and CEO of Fifth Third Bancorp, has been appointed CEO of Signature Bridge Bank N.A. Senior management of Signature Bank has been removed.
The situation continues to develop quickly, but it is expected that the bridge banks will operate in the same manner as their respective predecessor banks. The FDIC has stated that all depositors of SVB and Signature Bank will be made whole.
A bridge bank is established to provide the time needed to arrange a more permanent sale of the bank’s assets to another bank. This process generally requires 16 to 24 weeks to prepare for the sale, though the timing in this process thus far has been significantly accelerated. The FDIC will complete a resolution timetable and strategy.
In addition, the Federal Reserve will be operating a new Bank Term Funding Program, which will offer loans with maturities of up to a year to banks, savings associations, credit unions and other eligible depository institutions. Such loans will allow banks access to funds to cover outflows without needing to solidify losses on securities which have depreciated due to high interest rates or needing to sell high-quality securities in times of stress. The Federal Reserve will also offer the same collateral terms for loans drawn from the Fed’s discount window.
As of Monday, March 13th, all depositors of SVB and Signature Bank now have access to all of their deposits—both insured and uninsured—via SVB N.A or Signature Bridge Bank N.A., respectively.
As of Monday, March 13th, all depositors of SVB and Signature Bank now have access to all of their deposits—both insured and uninsured—via SVB N.A. or Signature Bridge Bank N.A., respectively.
Shares of money market funds (and other securities) held by a bank as a securities intermediary or custodian for a customer generally should not be part of a receivership estate. Although there may be a delay in a customer’s access to these assets after a bank’s failure, including time for third-party funds or custodians to verify the holdings of the individual customer, the customer’s ownership interest in the securities will not be affected by the bank’s failure if the transactions and accounts have been properly established and documented. To the extent that funds were swept to an unaffiliated money market fund or deposit at another institution, rather than remaining at the failed bank, these funds should be viewed as the customer’s assets with the failed bank acting as the customer’s agent. Typically, however, cash held by a bank custodian is treated as any other deposit and is only insured up to $250,000. As of March 13th, depositors have full access to these deposits via SVB N.A or Signature Bridge Bank N.A., respectively. Going forward, customers may wish to review their custody agreements with SVB and Signature Bank, if any, to determine whether any cash held was segregated and treated as remote from the receivership estate.
The FDIC issued a press release yesterday (March 13) morning, announcing that it has transferred all the QFCs of SVB to a newly created bridge bank, Silicon Valley Bank, N.A.
The FDIC also issued a press release in the afternoon of March 13, announcing that it has transferred all QFCs of Signature Bank to a newly created bridge bank, Signature Bridge Bank, N.A.
Counterparties to the SVB QFCs or the Signature Bank QFCs, as applicable, now face the relevant bridge bank which is a solvent and fully-operational financial institution that is not subject to receivership. Accordingly, counterparties may not exercise their rights to suspend, condition or extinguish their payment obligation solely because of the receivership of the failed bank, and may also not terminate, liquidate, or net their QFCs solely by reason of the receivership of the failed bank.
Yes, if you have outstanding loan payments that were due to SVB or Signature Bank, then you should continue to make payments in the same manner to the applicable bridge bank under the same terms of the contract with the former bank. Essentially, now that all deposits will be available, all previous payment obligations to the former bank are now expected to continue as normal to the applicable bridge bank.
As of March 13th, depositors will have full access to both insured and uninsured deposits.
Although the Treasury Department, the FDIC, and the Board of Governors of the Federal Reserve System invoked the Systemic Risk Exception to the Federal Deposit Insurance Act to permit the FDIC to take action to fully protect all depositors of SVB and Signature Bank, regardless of their deposit insurance coverage, we are still receiving questions on receivership generally in the event of any future bank failures and the potential for other claims against the assets still remaining in the receiverships for SVB and Signature Bank. For ongoing planning and compliance, we have included general answers to such questions below.
Each depositor is entitled to up to $250,000 in deposit insurance per insured bank. Separate coverage is provided for funds held in different ownership categories. All deposits in each ownership category are aggregated for insurance purposes. The FDIC recognizes 14 different ownership categories, including single accounts, joint accounts, certain trust accounts, and certain retirement accounts. Accounts of different types within the same ownership category will be aggregated. For example, all of a customer’s CDs and demand deposits in a single capacity will be aggregated; CDs are not treated separately from demand deposits.
If an institution holds deposits in a commingled account for the benefit of its customers, and the account is titled as such, pass-through insurance should be available such that each customer is entitled to the full amount of coverage. Other accounts at the same bank of the same ownership type by the customer would be aggregated, however, to determine the total available coverage. Sufficient records will need to be maintained by the agent institution to identify each customer and their ownership interests in the account.
The FDIC has indicated that it has transferred “substantially” all of the assets of SVB and Signature Bank to the respective bridge banks, but some assets remain in the respective receiverships. The FDIC has indicated that creditors may make a claim against the remaining assets. As with FDIC receiverships generally, initially, secured creditors of SVB or Signature Bank will recover amounts up to their valid security interest to the extent assets are available. Any excess amounts above the value of the security interest will be an unsecured claim subject to the priority of claims below, which gives preference to uninsured depositors:
- Administrative expenses of the receiver
- Deposit liability
- Any other general or senior liability (which is not a liability described below)
- Any obligation subordinated to depositors or general creditors (which is not a liability described below)
- Equity shareholders (including the holding company)
Generally, when a depositor’s deposit exceeds the FDIC’s insurance limit, depositors may wish to set-off the uninsured funds against their debts. Subject to applicable state law, a depositor may deduct the amounts it owes to the bank based on the amounts it has deposited at the institution. In general, the requirements for a right to set-off are:
(1) the existence of a valid debtor-creditor relationship;
(2) the mutuality of the obligations; and
(3) the debt is mature and not contingent.
These requirements can be straightforward:
- A deposit of cash into a bank account creates a debtor-creditor relationship where the bank becomes the debtor and the depositor becomes the creditor.
- Mutuality means that both parties must act in the same capacity, i.e. as unsecured creditors. Unsecured debt cannot be offset when the other party is acting in a fiduciary capacity.
- Finally, the debt owed by the depositor must have become due and may not be contingent upon the occurrence of a future event.
From a failed bank’s perspective, federal statute provides that a failed institution in receivership may exercise set-off rights against insured deposits. The FDIC may decline to make insurance payments to depositors until the debts owed to the institution have been paid. The following conditions must be met in order for a bank to exercise a right of set-off:
(1) the deposited funds must be the property of the depositor;
(2) the funds must be deposited without restriction;
(3) the depositor’s debt must be matured; and
(4) the obligations must be mutual.
These requirements are largely the same as those that apply to rights of set-off for depositors.
When the FDIC is appointed as receiver of a bank, it steps into the shoes of the bank and assumes all its obligations. The collateral value of the deposit account would be affected if the account value were above $250,000, as the funds in the deposit account will be affected in the same manner as every other deposit account of the bank. Therefore, the secured party will be secured by depositor’s rights to the insured $250,000 and by the depositor’s right to any distribution on account of the uninsured amount. Determining who is the owner of the account to which the FDIC deposit insurance limits should be attributed will depend on the account documentation and other facts and circumstances.
Going forward, depositors should consider seeking to structure their deposit account and custodial account arrangements in such a way as to minimize their uninsured exposure. Two common methods for doing this are utilizing insured deposit account sweep programs and cash sweep services using money market mutual funds. Negotiating one or both of these types of services into their deposit account and custodial account arrangements will reduce the depositor’s exposure to insolvency of the depository institution.
Undoubtedly, cyber criminals are out in full force with phishing links and other scams trying to capitalize on the disruption and panic that many companies are experiencing around the Silicon Valley Bank receivership and related events. It is important to remind employees to respond with the utmost caution to any inquiries or offers that are purportedly from other financial institutions or entities offering to help. Threat actors may provide bogus wiring instructions, offer a malicious link to click on for more information, send targeted emails purporting to be from actual financial personnel or senior executives at the company, to name just a few, so this is the time to use caution before clicking or responding. Of course, be sure to use an “out of band” method to verify the identity of the person making the offer (i.e. call a number you obtain from a public source, not the number on the email) or to verify wiring instructions. Never accept a change in wiring instructions via email and, if you are transferring a large amount of funds, it is best to send a small test wire first and then call to be sure it went through to the real recipient before wiring a larger amount.
On Monday, March 13th, the UK Government announced that Silicon Valley Bank UK (“SVBUK”) has been sold to HSBC in an arrangement that will preserve all customer deposits and enable its banking business to continue as a going concern. As a result of the sale, the UK Government will no longer apply to Court to place SVBUK into a Bank Insolvency Procedure as had previously been announced on Friday, March 10th.
The transfer to HSBC was implemented by way of a share sale, most likely meaning that all of SVBUK’s assets and liabilities will remain with SVBUK, and which now form a part of HSBC. The assets and liabilities of SVBUK’s parent companies (based in the US) have not been included as part of the transaction.
SVBUK will be fully integrated into HSBC’s ringfenced UK business and, as a result, all of SVBUK’s customer deposits will be fully recoverable. Bank accounts are expected to be accessible once the operational handover has completed.
As a result of the sale, the Financial Services Compensation Scheme (“FSCS”) will not be required to compensate eligible depositors, which would have been the case following an insolvency of SVBUK.
In the US, the Federal Reserve is also seeking to fully protect deposits through its Bank Term Funding Program.
As the transfer to HSBC was facilitated by way of a share sale, SVBUK’s contractual arrangements (including any credit facilities, derivative/repo contracts, sweeps or other arrangements) shall continue to operate in the usual way, although we would encourage all parties to review the terms of their documentation and seek specific legal advice.
SVBUK is a separate legal entity to Silicon Valley Bank in the US, and the sale of SVBUK to HSBC is separate to the ongoing US situation, which has no bearing on SVBUK.
While the news of the transfer provides a degree of certainty for SVBUK’s customers in the meantime, this remains a developing situation.