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03.11.2023 | Legal Advisory

This is an update, as of 5:00 pm EDT on March 15, 2023, to the client advisory that Nutter first posted on Saturday, March 11, 2023.  There have been two important developments relating to SVB.

• On Sunday, March 12, Treasury, the Fed and FDIC announced that the FDIC will cover all SVB deposits, including those in excess of $250,000, and depositors will have access to all of their money starting Monday, March 13.
• On Monday, March 13, before the opening of business, the FDIC transferred to a newly chartered, “full service” national bank – Silicon Valley Bridge Bank, N.A. (the “Bridge Bank”) – all deposits—both insured and uninsured—and substantially all of SVB’s assets.  All SVB loan positions, including as lender, issuing bank, administrative agent, were transferred to the Bridge Bank, and all commitments to advance funds under existing credit agreements will be honored in accordance with and pursuant to their terms in effect as of the time SVB was placed into receivership.

These developments are discussed in more detail below.

There continues to be great uncertainty about how the FDIC will ultimately complete SVB’s liquidation.  Comments from the Bridge Bank’s CEO on Tuesday, March 14, emphasizing that the Bridge Bank is “open for business” and “making new loans and fully honoring existing credit facilities” and encouraging former SVB customers to leave deposits with the Bridge Bank and to transfer back deposits that left over the last several days, suggest that the FDIC hopes to sell the SVB franchise to a healthy bank.  (According to reporting by the Wall Street Journal late on March 13, the FDIC is planning to conduct a new auction for the SVB franchise.) Time will tell whether former SVB customers have any interest in patiently waiting for that possible outcome.

For ease of reference, this advisory update refers only to the failure of SVB and the establishment of the Bridge Bank for SVB’s deposits and assets.  The FDIC has structured a similar arrangement for Signature Bank, which was placed into receivership on March 12.  Here is a link to the Transfer Agreement for Signature Bank.

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What happened to SVB, and what has the U.S. Government done to protect depositors?

On Friday, March 10, 2023, before 9:00 a.m., Pacific Time, SVB’s chartering authority, the California Department of Financial Protection and Innovation (DFPI), announced that the DFPI had taken control of SVB and appointed the Federal Deposit Insurance Corporation (FDIC) as SVB’s receiver.  This is commonly known as a “bank failure.”  SVB’s collapse was the second-largest bank failure in U.S. history behind that of Washington Mutual in 2008.

On the evening of Sunday, March 12, the U.S. Department of the Treasury, Federal Reserve and FDIC released a Joint Statement indicating that the Federal government will provide full protection for all deposits with SVB, including those in excess of the $250,000 FDIC deposit insurance limit (described in more detail below).  

Later on March 12, the FDIC announced that it had transferred all the deposits and substantially all of the assets of SVB to Silicon Valley Bank, N.A., a full-service national bank that will be operated by the FDIC until the time when the FDIC can stabilize the bank and implement an orderly resolution. Starting Monday, March 13, 2023, former SVB depositors were able to continue using their SVB personal checks, ATM/debit cards and SVB online banking and bill services, and automatic payments from former SVB depositors’ accounts continue to be processed.  All obligations of the Bridge Bank are backed by the FDIC and the full faith and credit of the U.S. government.

Why did SVB fail, and how did it happen so quickly?

The immediate cause of SVB’s failure was a lack of liquidity, or in layman’s terms a “bank run.”  According to the DFPI, SVB customers withdrew $42 billion of deposits on March 9, 2023, leaving SVB with a negative cash balance of $958 million at the end of the day and forcing DFPI’s hand. It has been reported that Signature suffered a similar run on deposits and suffered a liquidity crisis late last week.

The pace at which investors and depositors lost confidence in SVB was unprecedented.  On March 8, 2023, after the close of trading on Nasdaq, SVB Financial Group (Nasdaq: SIVB), the publicly traded entity that was then SVB’s parent company, made a filing with the SEC disclosing that SVB sold $21 billion of available for sale (AFS) securities, constituting substantially all of its AFS securities, and realized an estimated after-tax loss of $1.8 billion.  (By comparison, SIVB’s total 2022 net income was $1.5 billion.)  SIVB also announced at the same time its plans to raise $2.25 billion of equity capital.  The next day, March 9, SIVB’s stock declined precipitously in heavy trading, losing 63% of its value.  By the time the DFPI closed SVB and appointed the FDIC as receiver, SIVB had not completed its sale of equity.

Of course, bank runs are not a new phenomenon, but a combination of factors arguably unique to SVB created the conditions for a perfect firestorm. According to reporting in the Wall Street Journal, Eric Rosengren, who served as president of the Federal Reserve Bank of Boston from 2007 to 2021, observed that SVB’s business was heavily weighted toward venture capital firms and the start-up companies in which they invest, known as “portfolio companies,” and venture-capital firms don’t want their deposits or those of their portfolio companies to be at risk.  Rosengren argues that SVB should have anticipated that if venture-capital portfolio companies started pulling out funds, they would do so en masse.  Depositor anxiety ignited by the stock market sell off was exacerbated by social media comments about prominent venture capital firms urging their portfolio companies to withdraw their deposits.

However, unlike the bank runs of the early 20^th century, which, akin to the run seen on Bailey Bros. Building & Loan in the iconic film It’s A Wonderful Life, required depositors to physically “run” to their respective banking institutions to get in line to withdraw funds in person before the bank ran out of cash, SVB’s failure was fueled in part by technology that allowed a staggering outflow of funds with very few customers setting foot in a branch office of SVB.  Financial institutions have increasingly introduced mobile banking tools and other forms of technology to their platforms in recent years in order to make banking experiences faster and more user-friendly, and consequently, customers can make deposits, withdraw cash and transfer funds to separate accounts using technology at their fingertips within a matter of minutes, or even seconds.  The combination of convenient online banking and frenzy of worrisome news, coupled with the SVB’s business concentration with venture capital firms and their portfolio companies, resulted in SVB’s failure in a single day.

What is the FDIC’s role as receiver?

When a bank fails, a receivership is established at the moment the bank is closed.  Similar to bankruptcy proceedings for non-bank companies, a receivership is the legal process whereby the FDIC assumes responsibility for recovering the maximum amount possible from the disposition of the failed bank’s assets and the pursuit of claims, and then distributing funds collected from the sale of assets and the disposition of claims to the depositors and other creditors of the failed bank according to priorities set by law.  The receivership does not end until all the bank’s assets are sold and all claims against the bank are addressed.

The FDIC’s statutory authority gives it great discretion to design a plan of liquidation for a failed bank, which in SVB’s case involved the establishment of the “full service” Bridge Bank.

Is the Bridge Bank functionally equivalent to SVB prospectively?

Yes, prospectively (i.e., after the appointment of the FDIC as receiver), the Bridge Bank will be functionally equivalent to SVB from the perspective of customers, vendors and counterparties that were not affiliates of SVB prior to its closure.  (See below for a discussion of how to submit claims against SVB not relating to deposits or ongoing business arrangements.)

Under the terms of a formal transfer agreement (Transfer Agreement) between the FDIC, as receiver of SVB, and the newly formed Bridge Bank, the Bridge Bank assumed all of SVB’s deposit liabilities and essentially all of its loans and other assets.  Notably, the receiver retained every loan or extension of credit to, or other agreement with or for the benefit of any officer, director, or person acting as an agent of SVB or its subsidiaries

A March 14, 2023 letter from the FDIC, known as a Financial Institution Letter (FIL-10-2023) contains a succinct summary of the Bridge Bank’s relationship with vendors and other counterparties:

• The Bridge Bank is performing under all failed bank contracts (and expects all counterparties to similarly fulfill their contractual obligations).
• All vendors providing services to SVB should continue to provide such services to the Bridge Bank.
• All authorized signers, account details, Tax Identification Number, wire/ACH instructions, and pre–Receivership processes remain in effect, and can and should be utilized to provide such services, until such time as the Bridge Bank provides notice to the contrary.
• Vendors and counterparties should be aware that the FDIC as receiver is authorized to enforce such contracts (12 USC 1821(e)(13)) and to transfer the contract notwithstanding any apparent limits on transfer in the contract (12 USC 1821(d)(2)). This includes all qualified financial contracts, and property securing or other credit enhancement for such qualified financial contracts, formerly held by SVB. All qualified financial contracts of SVB—such as derivatives, swaps, securities lending, repurchase agreements and other short-term funding contracts—have been transferred to the Bridge Bank.
• Vendors and counterparties with contracts with the Bridge Bank are legally obligated to continue to perform under the contract, and the Bridge Bank is obligated to and has the full ability to make timely payments to vendors and counterparties and otherwise perform its obligations under the contract. (Failure to meet these obligations may result in legal action by the U.S. government.)

What about wire transfers initiated on March 9 or March 10 and not completed?

According to the Bridge Bank, all wire payments entered on March 9 or 10 that have not already processed have since been cancelled.

If customers wish to consummate those transactions, the customers must reinitiate them.

What about investments or other assets acquired through SVB?

The following types of assets are not deposits, are not covered by FDIC insurance, and remain the property of SVB’s customer:

• Stock investments;
• Bond investments;
• Mutual funds (note that this is an investment in shares of a money market mutual fund (MMF), which is different than a money market rate deposit account);
• Life insurance policies;
• Annuities;
• Municipal securities; and
• The contents of safe deposit boxes.

Is it still possible that the SVB franchise can be sold to another banking company or a new investor group?

Yes, although it would be slightly different from a conventional bank acquisition, and the shareholders of SIVB may not receive any benefit.

One of the important lessons learned by the FDIC from the bank and thrift crises of the late 1980s and early 1990s is the benefit of a resolution strategy that centers on selling assets back into the marketplace promptly, either at the time of failure or shortly thereafter.

When possible, the FDIC will attempt to find an acquirer for some or all of a failed bank’s assets or liabilities (including deposits) or both.  The preferred and most common method – known as a Purchase and Assumption (or P&A) Transaction – involves a healthy bank assuming the insured deposits of the failed bank.  Insured depositors of the failed bank immediately become depositors of the assuming bank and have access to their insured funds. The assuming bank may also purchase loans and other assets of the failed bank.  Sometimes the P&A transaction will involve a loss sharing agreement between the FDIC and the healthy bank acquirer.

When there is no open bank acquirer for the deposits, or if all the bids are more costly for the FDIC than a payout, the FDIC will implement a payout strategy (also called a liquidation); in a payout, the FDIC will pay the depositors directly by check up to the insured balance in each account.  Such payments usually begin within a few days after the bank closing.  The FDIC then seeks to recoup those insurance payments with the funds the FDIC receives from asset sales over time.

How are FDIC coverage limits applied?

The standard insurance amount is $250,000 per depositor, per insured bank, for each account ownership category.

As noted above, however, Treasury, the Fed and FDIC announced on Sunday, March 12, that the FDIC will cover all deposits with SVB (and Signature), including those in excess of $250,000.

The FDIC provides separate coverage for deposits held in different account ownership categories.  Depositors may qualify for coverage over $250,000 if they have funds in different ownership categories and all FDIC requirements are met.

All deposits that an accountholder has in the same ownership category at the same bank are added together and insured up to the standard insurance amount.

Below are certain ownership categories provided by the FDIC:

• Single accounts owned by one person ($250,000 per owner);
• Joint accounts owned by two or more persons ($250,000 per owner);
• Certain retirement accounts, including IRAs ($250,000 per owner);
• Revocable trust accounts (generally $250,000 per owner per unique beneficiary, but, if there are more than five different beneficiaries, special rules apply);
• Corporation, partnership and unincorporated association accounts ($250,000 per corporation, partnership or unincorporated association);
• Irrevocable trust accounts ($250,000 for the noncontingent interest of each unique beneficiary); and
• Employee benefit plan accounts ($250,000 for the noncontingent interest of each plan participant).

Are multi-tiered fiduciary relationships insured?

In the case of deposit accounts where there are multiple levels of fiduciary relationships (as described above), there are two ways to obtain insurance coverage for the interests of the true beneficial owners of a deposit account.

One method is to expressly indicate, in the deposit account records of the bank, the existence of each and every level of fiduciary relationship; and disclose, at each level, the name(s) and interest(s) of the person(s) on whose behalf the party at that level is acting.

An alternative method is to expressly indicate, in the deposit account records of the bank, that there are multiple levels of fiduciary relationships; disclose the existence of additional levels of fiduciary relationships in records, maintained in good faith and in the regular course of business, by parties at subsequent levels; and disclose, at each of the levels, the name(s) and interest(s) of the person(s) on whose behalf the party at that level is acting.

No person or entity in the chain of parties will be permitted to claim that they are acting in a fiduciary capacity for others unless the possible existence of such a relationship is revealed at some previous level in the chain.

Special rules apply to certificates of deposit (and certain other negotiable instruments) and to deposit obligations of the failed bank for payment of items forwarded for collection by another bank acting as agent.

What about account holders which are themselves pooled investment vehicles?

The FDIC deposit insurance regulations permit the FDIC to pay the participants in many pooled investment vehicles provided that the books and records of the failed bank indicate that the account is held by the investment vehicle on behalf of its participants.  In general, “corporate” accounts are insured up to $250,000 and, in general, “any trust or other business arrangement” which is registered with the SEC or that would be required to register with the SEC but for certain sections of the Investment Company Act of 1940 (including Section 3(c)(1), which exempts from registration pooled investment vehicles with not more than 100 investors), is deemed to be a corporation for purposes of determining deposit insurance coverage. 

However, an exception provides that a deposit account of such a trust or business arrangement, including a limited partnership, will not be deemed to be the deposit of a corporation if the funds in the account can be traced to one or more specific investors or participants (based on the failed bank’s books and records including, presumably, its “know your customer,” or KYC, review) and the existence of the nature of the beneficial interest of the participants is disclosed in accordance with the requirements of the FDIC’s rules for fiduciary accounts.  If the FDIC concurs that these conditions are satisfied, each participant’s pro rata share of funds will be insured up to $250,000 as a deposit account of the participant with the true beneficial interest in the funds.

Even if my contract has been assigned to the Bridge Bank – or if it is ultimately assigned to a healthy bank in a P&A Transaction – might it still be repudiated?

Yes. 

The Bridge Bank has the option for 120 days to assume or reject each “Optional Contract” from the Receiver.  Optional Contracts generally are defined as “Optional Contracts” means “Service Contracts,” “Leases,” and “Data Equipment Leases” (each as defined in the Transfer Agreement). If the Bridge Bank enters into a transaction with a healthy bank, the acquiror will likely have a similar option.  If the Bridge Bank or a healthy bank rejects an Optional Contract, the FDIC will likely exercise its statutory right to repudiate the Optional Contract.

Further, if you were a vendor to SVB, the Transfer Agreement provides that any liabilities that are not expressly assumed by the Bridge Bank will remain with the failed bank; vendor agreements or obligations of SVB to vendors are not included in the definition of “Assumed Liabilities.”

By statute, when the FDIC is acting as receiver for a failed bank, the FDIC has the power to repudiate (i.e., terminate) any lease or contract (i) to which the failed bank was a party; (ii) the performance of which the FDIC deems, in its sole discretion, to be burdensome; and (iii) the repudiation of which the FDIC determines, in its sole discretion, will promote the orderly administration of the failed bank’s affairs.

If the FDIC repudiates a lease or other agreement formerly held by SVB, the counterparty to that lease or agreement would have the right to file a claim for actual direct compensatory damages. Parties filing claims for damages will be treated as “general unsecured creditors” in the levels of payment priority outlined above.

What if SVB owes you money (other than a deposit), how do you file a claim?

Creditors must submit claims in writing, together with proof of the claim.

To access the FDIC Claims Portal online (go to FDIC.gov and type in “Claims Portal” in the search box). To file a claim via mail, please send it to the following address:

FDIC as Receiver for Silicon Valley Bank
600 N. Pearl Street, Suite 700
Dallas, Texas 75201
Attention: Claims Agent

What if I have more questions about SVB or the Bridge Bank?

Please contact the FDIC Call Center or the Silicon Valley Bridge Bank, N.A. call center at the numbers provided below.

FDIC Call Center: 1-866-799-0959
Hours of Operation (Eastern Time Zone):
     Thereafter: 9:00 AM – 5:00 PM

Silicon Valley Bridge Bank, N.A. Call Center: 1-800-774-7390
Hours of Operation (Pacific Time Zone):
     Monday through Friday: 5:00 AM – 5:30 PM

This advisory was prepared by Nutter’s Banking and Financial Services group. For more information, please contact any member of the Banking group or your Nutter attorney at 617.439.2000.

This advisory is for information purposes only and should not be construed as legal advice on any specific facts or circumstances. Under the rules of the Supreme Judicial Court of Massachusetts, this material may be considered as advertising.