Silicon Valley Bank FDIC Receivership: Key Considerations for Customers and Borrowers
On March 10, 2023, the Federal Deposit Insurance Corporation (the “FDIC”) announced that it had been appointed the receiver of Silicon Valley Bank (“SVB”) following the closure of SVB by California Department of Financial Protection and Innovation (the “CDFPI”) and commencement of a receivership over SVB. Immediately, all of the assets, liabilities, and powers of SVB were transferred to the receivership; the management, officers, and employees of SVB have no continuing authority in those roles over any of those assets, liabilities, or powers. The FDIC also created the Deposit Insurance National Bank of Santa Clara (“Santa Clara”) and transferred all of SVB’s deposits to Santa Clara to the extent (but only to the extent) that such deposits were insured by FDIC. The FDIC’s webpage regarding the SVB receivership provides information and resources for depositors and borrowers and is available here.
Below are key considerations for depositors in and borrowers of SVB. As these are high-level considerations and do not contain legal advice, specific circumstances and alternatives should be examined with counsel before taking action. Non-depositors and suppliers to or other claimants against SVB may face additional or different situations.
Key Principles of FDIC Receiverships and Insurance
The FDIC has the power to serve as receiver of an FDIC insured depository institution (an “IDI”), such as SVB, either by appointing itself as receiver or (more commonly) by accepting its appointment as receiver by a federal or state bank supervisory authority, such as CDFPI. FDIC receiverships are governed by the Federal Deposit Insurance Act (and the FDIC’s regulations under that act). Most of the operative statutory provisions for receiverships can be found in 12 U.S.C. §§ 1821 and 1823. As receiver, the FDIC has extraordinary powers and broad discretion under federal law to operate, liquidate, sell, merge, or otherwise resolve failed IDIs. Federal law contains few timelines on the FDIC’s monetization of IDI assets or reconciliation of claims against the receivership estate of the IDI, leaving the administration of the receivership process largely subject to the FDIC’s reasonable exercise of discretion. FDIC receiverships have historically lasted anywhere from several months to more than ten years.
Importantly, when an IDI is owned by a holding company (as has been SVB), the holding company itself is not within the scope of the receivership and its assets are not generally with the IDI receivership estate. Consequently, any subsidiaries of the bank holding company that are not themselves subsidiaries of the IDI are not within the receivership. Commonly, bank holding companies have subsidiaries that are engaged in securities activities for the account of the holding company and the IDI and conduct securities activities for the persons and entities that have dealings with the subsidiary. Frequently, securities customers who consider themselves to be customers or clients of an IDI are in fact not clients or customers of the IDI but of a sibling subsidiary of the holding company that is not within the receivership of an IDI. The holding company of SVB is SVB Financial Group, which has a securities subsidiary, SVB Securities. The activities of those entities are not currently within the authority of the FDIC or Santa Clara. Frequently after the commencement of an IDI receivership the holding company’s and its subsidiaries’ businesses undergo dramatic changes and limitations and it is not uncommon for insolvency proceedings to be opened for some or all of the bank holding company group outside the IDI receivership.
One of the hallmarks of FDIC insurance central to IDI receiverships is that bank deposits are insured by the FDIC only up to a certain amount. For typical deposit accounts, the FDIC insured amount is $250,000 (an impracticably low number for many modern businesses), with any deposit amount in excess of that threshold being uninsured and constituting an unsecured claim against the relevant IDI. It is often understood, however, that if deposits in deposit accounts were invested in securities outside of deposit accounts (in programs such as money market, repo or repurchase agreement sweep accounts), the amount invested as of the relevant time of the receivership are not within the scope of the deposit account and are not bank deposits, so are not generally considered to be within the $250,000 limit.
Of particular note, multiple deposit accounts held by the same person or entity at the same IDI are aggregated for purposes of calculating the $250,000 deposit insurance limit. In other words, a bank deposit customer cannot “increase” its FDIC deposit insurance threshold at a single IDI simply by dividing its total deposit balances into multiple deposit accounts, or in different branches of an IDI. Deposits in accounts in different, highly restricted, “ownership categories,” or modes, however, may entitle a depositor to more than $250,000 in aggregate deposit insurance. In many cases those separate categories are available only to natural persons rather than entities. Moreover, certain categories of accounts, such as retirement and trust accounts, may be treated differently. The FDIC’s comprehensive guides on deposit insurance by ownership category are available here.
Persons holding uninsured portions of deposits in an FDIC receivership typically receive a “receivership certificate” in the amount of such uninsured deposit. As receiver, the FDIC liquidates or monetizes the assets of the IDI to, among other things, maximize distributions on account of parties’ receivership certificates and other claims against the receivership estate. Information regarding the FDIC’s historical payment percentages on account of receivership certificates can be found here. In the absence of communications from the FDIC in a particular receivership, it is generally not possible to estimate what the recoveries on receivership certificates will be or when the FDIC will make cash distributions.
In SVB’s case, the FDIC has announced that FDIC-insured deposit amounts will be available in the morning on Monday, March 13, 2023 at Santa Clara. Banking services such as checks, ATM, online banking, and debit cards will resume at Santa Clara (though only on a limited basis) no later than that date, and SVB’s official checks will continue to clear up to FDIC insurance limits. Certain accounts, such as “sweep account” arrangements that involve sweeps of excess cash from SVB to a third-party financial institution, may be treated differently than regular deposit accounts, and holders of such accounts should review their account documentation.
The FDIC further announced that “[t]he FDIC will pay uninsured depositors an advance dividend within the next week. Uninsured depositors will receive a receivership certificate for the remaining amount of their uninsured funds. As the FDIC sells the assets of Silicon Valley Bank, future dividend payments may be made to uninsured depositors.” Other than the advance dividend and claims filing information, the FDIC has not announced any specific process with respect to uninsured deposits at this time. We expect that the FDIC will provide more guidance this week. Depositors should understand that the timing and amount of future payments is uncertain, and there is risk that their deposits greater than $250,000 will not be repaid in full.
Over the course of the receivership the FDIC (and Santa Clara) will focus on provisions of the receivership laws that permit the receivership or Santa Clara to operate without regard to oral and certain other written undertakings by SVB.
Loans, Contracts, and Other Rights
The FDIC as receiver has certain unusual rights that resemble the rights of a trustee in bankruptcy. One major right is the ability to “repudiate” contracts, including SVB’s loan agreements with borrowers. (See 12 U.S.C. § 1821(e).) “Repudiation” is similar to the concept of “rejection” of an executory contract or unexpired lease under section 365 of the United States Bankruptcy Code, under which debtors are excused from future performance under burdensome contracts and counterparties to such contracts are left with only a claim against the debtor’s estate. In SVB’s case, lines of credit with undrawn commitments are not functioning as usual. The FDIC has advised borrowers—particularly those with lines of credit, trade receivables facilities, construction loans, and other loans with unfunded commitments—that it is not required to make further advances under SVB’s loans but will consider doing so on a case-by-case basis. The FDIC’s repudiation of a contract must occur “within a reasonable period” of time and be based on the FDIC’s determinations “in the [FDIC’s] discretion” that (i) its performance under the contract is “burdensome” and that (ii) repudiation of the contract “will promote the orderly administration of the [failed bank’s] affairs.” (12 U.S.C. § 1821(e).) As a result, the timing and likelihood of repudiation of any particular contract by the FDIC are uncertain.
Importantly, the federal laws relevant to IDI receiverships do not generally excuse a failed bank’s counterparties and borrowers from continuing to perform under non-repudiated agreements with the failed bank. As a result, the FDIC has announced that SVB’s borrowers should continue to repay their loans. Yet borrowers that are also depositors in a failed IDI may, under certain circumstances, have setoff rights up to the lesser of (i) the amount they had on deposit with the IDI prior to receivership and (ii) the amount owed to the IDI under their loan agreement. The FDIC’s website mentions that borrowers might elect to exercise setoff rights with respect to amounts due on non-delinquent loans, though without a detailed discussion. As with any exercise of setoff rights, however, borrowers should be sure to (i) review their loan agreements to determine whether their state-law setoff rights have been contractually modified or waived and (ii) determine whether there is “mutuality” between the proper legal entities: i.e., the corporate borrower is the same legal entity as the depositor, and the lender is the IDI itself. Setoff involving affiliates or third parties—sometimes called “triangular setoff”—may be prohibited.
In some lending situations, the governing documents for a loan contain “defaulting lender” provisions that significantly impact the operation of multiple lender-syndicated or “club” loan facilities and the occurrence of a receivership concerning one of the lenders in the group.
IDI receiverships, like bankruptcy cases, involve specialized and general non-bank (or non-debtor) provisions governing financial contracts, including many of the contracts that create financial hedges. Parties to certain financial derivatives contracts, including swaps, repurchase agreements, securities contracts, commodities contracts, and forward contracts (i.e. “qualified financial contracts”) should promptly evaluate the interplay between the terms of their contracts and the special provisions regarding such contracts in 12 U.S.C. § 1821. Although the rights of counterparties to these contracts resemble the rights that would apply in a bankruptcy case, there are material differences in timing for and delays in the exercise of those rights in the case of an IDI receivership.
Given the risk and potential delay associated with having maintained deposits at SVB above the FDIC insurance threshold, as well as the risk that the FDIC may not timely fund—or fund at all—borrowing requests, depositors and borrowers of SVB may find themselves suddenly having to navigate unforeseeable liquidity constraints. Those parties may have a range of considerations to assess, such as the following:
Utilizing insured deposits. As noted above, insured deposits will be available at Santa Clara on Monday, March 13, 2023. Santa Clara will reopen SVB’s former main office and 17 branches, and the FDIC has promised that insured depositors will have access to their insured deposits “no later than Monday morning, March 13, 2023.”
Opening new lines of credit and accounts at other banks. SVB is closed and will no longer provide depository, cash management, payroll, or other banking services (though Santa Clara will provide limited banking services). Depositors and borrowers should take steps quickly to establish new banking relationships at other institutions and should consider whether to use a range of banks to avoid concentration at any particular bank and cash management arrangements other than standard deposit accounts to diversify their holdings.
Creating cash management forecasts and evaluating other potential sources of cash. As it is impossible to predict the timing and amounts of payments on account of uninsured deposits, depositors left with substantial receivership certificates may face repayment risk and timing risk. They should forecast their liquidity needs over at least the coming 13 weeks, along with any more substantial payments due in the longer-term, to determine how much time they have to find replacement liquidity and to obtain such liquidity on the best terms available. It may be necessary for companies to seek emergency bridge funding from their current investors or outside sources. We are aware that capital providers, including direct lending sources, are currently looking for opportunities to deploy capital by providing rescue or bridge financing. Some capital providers have also expressed an interest in purchasing receivership certificates at a discount, thus providing immediate liquidity to depositors (presumably at a significant discount rate). The company will need to evaluate the effect of such financing on the company’s capitalization and consider subordination and intercreditor issues if the company has other outstanding loans or lines of credit. Management should have discussions with the board, investors and other funding sources with respect to timing and terms of, and approvals required for, potential funding.
Protecting employees. As every management team knows, employees are critical service providers and a source of value for a company, and the timely and full payment of wages and benefits is critical to any organization. Employee wages and benefits are also protected by state and federal laws, and failure to timely pay such obligations may in some instances give rise to director and officer liability. The payment of employee wages and benefits requires special care and should be an extremely high priority in a liquidity-constrained scenario. Companies should communicate with employees about their plans to fulfill payroll obligations. In light of recent reductions in force at many companies, substantial severance payments may also be due in the near or medium term that companies should include in their liquidity planning. Companies should also review their insurance policies with respect to employment and director and officer insurance, as well as their indemnification of directors and officers.
Evaluating SVB loan documents. Companies that have borrowed money from SVB are considering whether they can exercise rights to offset loan amounts due against uninsured deposits. While the FDIC’s website recognized its ability to offset deposits (including insured amounts) against delinquent loans and even a borrower’s ability to offset performing loan obligations against uninsured deposits (with certain limitations), modern loan agreements often limit borrowers’ setoff rights while expanding lenders’ setoff rights. Borrowers should review their loan documents to determine whether and how they may affect otherwise-applicable setoff rights. In evaluating whether a replacement lender is needed or desired, borrowers should consider whether, in the event SVB’s assets are acquired by another financial institution, that new institution gives them a better chance of retaining similar terms and conditions in their facility than a replacement lender.
Demonstrate emergency circumstances in making borrowing requests of the FDIC. Although it has the ability to repudiate contracts, including loan agreements, the FDIC has announced that it will consider funding borrowing requests on a case-by-case basis and may also enter into discussions with borrowers to modify the terms of loan agreements. The FDIC has also stated that “[i]n very limited circumstances, the FDIC will consider emergency funding needs required to ensure the short term viability of a borrower, to protect or enhance collateral value, or for public safety.” The FDIC may require substantially more documentation to support a borrowing request than SVB would otherwise have required (especially for emergency funding requests); borrowers should be prepared to provide such documentation on a timely basis.
Reviewing treasury management plans, automatic or recurring deposit instructions to account payors, making of electronic payments by customers. Since some accounts may be continuing accounts with continuing activity, automatic payments by account payments are likely to remain in effect, but some disruption can be expected because of the change in the identity of the depository from SVB to Santa Clara. Some companies will find these changes unremarkable but for some, these may be material changes, causing a reconsideration of those automated operations. It is likely that account deposit sweeps into repos or other investments will be affected, and for many, “peg” amounts will need to be adjusted since the amount expected to be available on March 13, 2023, would not exceed $250,000.
Securities and derivatives activities and investments. As noted, many securities relationships apparently with a bank operate outside the scope of the bank itself—sometimes with non-bank subsidiaries of the bank’s holding company. Many companies and individual customers will want to examine the extent to which the receivership of SVB has impacted the securities (and hedging) activities that had been in place prior to March 10, 2023.
Corporate governance. Directors of companies with material exposure to the SVB collapse should obtain frequent updates from management. In responding to corporate challenges such as a need for rescue or bridge financing, boards should maintain appropriate governance practices, be kept up to date and engage in oversight of management and the process, and document their actions and processes contemporaneously and in writing.
D&O insurance and indemnification/advancement. Many companies rely on a combination of directors' and officers' insurance plus company obligations of indemnification and advancement of litigation expenses. While company funds may be illiquid, directors and officers should review their insurance policies to confirm whether expense advancement is available in the event of fiduciary duty or other claims for which the company would otherwise be required to advance expenses or provide indemnity.
Public company reporting. Public companies should consult counsel to determine whether SVB's failure triggers any reporting obligation under the Securities and Exchange Act, in particular due to any material changes in liquidity and capital resources and related risks to the company. Whether and to what extent disclosure may be required by a public company will depend on the facts and circumstances for the particular company. Companies should also consult counsel when considering whether to make voluntary disclosures in response to inquiries from stakeholders.
If You Are Severely Impacted
Companies finding themselves severely (even if temporarily) impacted by the receivership of SVB should immediately discuss their situation with trusted advisors, as time is of the essence in managing through crisis situations. In the event of a liquidity shortfall, it is important to maintain proper corporate governance and the continued exercise of directors’ and officers’ duties as they apply in distress situations.
With our deep bench of cross-disciplinary expertise, including in venture capital, finance, technology, private equity, and restructuring/special situations, Baker Botts is prepared to assist our clients in navigating the challenges precipitated by SVB’s closure. Do not hesitate to reach out to your Baker Botts relationship partner or any of the Baker Botts partners listed below, as we are happy to discuss these issues in more detail.
At approximately 6:15pm ET on March 12, the Treasury, Federal Reserve, and FDIC released a joint statement saying that all deposits that had been held by Silicon Valley Bank (“SVB”) at the time of its receivership will be fully available in the morning on Monday, March 13, 2023 at the Deposit Insurance National Bank of Santa Clara. As the statement notes, shareholders and holders of unsecured claims will not be similarly protected. The statement can be found here.
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