Article prepared by and republished courtesy of our colleagues Jeffrey Hare, Margo Tank, Christopher Steelman, David Whitaker, and Adam Dubin; originally published here: https://www.dlapiper.com/en-us/insights/publications/2023/03/takeaways-from-the-silicon-valley-bank-and-signature-bank-receiverships
On Friday, March 10, 2023, Silicon Valley Bank (SVB) was closed by its chartering regulator, the California Department of Financial Protection and Innovation, and the Federal Deposit Insurance Corporation (FDIC) was appointed as receiver which is typical for a bank receivership. The FDIC formed Deposit Insurance National Bank of Santa Clara (DINB) (chartered by the Office of the Comptroller of the Currency) and immediately transferred to DINB all insured deposits of SVB. No loans or other products were transferred to DINB nor were uninsured deposits.
Unlike most banks, SVB’s deposit base was heavily weighted toward fund and technology companies and less reliant on retail or consumer deposits. This created a significant portion of uninsured deposits for depositors with more than $250,000 on deposit at SVB at the time of its failure. In fact, reports suggest that roughly 88 percent to 93 percent of SVB’s $173 billion in total deposits was uninsured. While FDIC’s $250,000 deposit insurance coverage applies per depositor, per insured bank, for each account ownership category, major institutional depositors of SVB were anxiously assessing their exposure and recovery options as uninsured depositors, and the timing for access to their funds.
Following a process used in the IndyMac failure in 2008, the FDIC announced a plan to make payments of an advance dividend of uninsured deposits within the week, but the exact timing for availability and amount of funds distributed with the advance were unknown. The potential for “haircuts” on recovery of uninsured deposits existed.
Then, on Sunday, March 12, 2022, Signature Bank (SB) was closed by its chartering regulator, the New York State Department of Financial Services, and the FDIC was appointed as receiver. The deposit base of SB was similarly weighted heavily toward large depositors. It was reported that SB had approximately $89 billion in total deposits with 90 percent above the FDIC’s deposit limits.
At the same time the announcement was made about SB’s failure, a joint statement issued by the Department of Justice, the Federal Reserve, and the FDIC confirmed that both the SVB resolution and the SB resolution would be handled “in a manner that fully protects all depositors. Depositors will have access to all of their money.” However, shareholders and certain unsecured debtholders will not be protected, and any losses to the Deposit Insurance Fund to support uninsured depositors will be recovered by a special assessment on banks, as required by law.
The FDIC then formed “bridge banks” for both failed depository institutions – Silicon Valley Bank, NA for SVB, and Signature Bridge Bank, NA for SB. A bridge bank is an institution formed by federal banking regulators to operate an insolvent bank until a buyer of the whole bank or specific bank assets can be found and the sale or sales can be consummated. All assets and liabilities of SVB and SB were transferred to their respective bridge banks. While bridge banks make efforts to retain employees from the failed banks to manage the bridge bank operations (e.g., paying 150 percent of prior salaries for a period of time), the board and management of the failed banks are removed and replaced with people selected by the FDIC.
With the formation of Silicon Valley Bank, NA, the insured deposits of SVB previously transferred to DINB two days prior were then transferred to Silicon Valley Bank, NA. All customers (depositor and creditor) of the failed banks became customers of the respective bridge banks without any action on their part.
While the urgency of the weekend has settled somewhat as it relates to depositors of SVB and SB, the events raise many questions and are causing banks and their customers to re-assess their operations and relationships. Some are (or should be) asking whether their deposits are insured and to what amount/extent. Others are preparing for participation in assets sales from the receiverships of SVB and SB, if particular operations or assets fit within their business strategies.
Insured deposit status
Insured deposit products include:
- Checking accounts
- Savings accounts
- Money market deposit accounts
- Certificates of deposit (CD) and
- Prepaid cards (assuming certain FDIC requirements are met).
Depositors do not need to apply for FDIC insurance; coverage is automatic whenever a deposit account is opened at an FDIC-insured bank or financial institution.
As noted above, the FDIC insurance limit is $250,000 per accountholder per ownership category, not per account. Examples of FDIC ownership categories include single accounts (checking accounts, savings accounts, and money market deposit accounts); joint accounts; certain retirement accounts and employee benefit plan accounts; trust accounts; and business accounts. A subsidiary entity or portfolio company is a separate depositor with its own deposit insurance limit, notwithstanding common ownership. However, divisions or offices that are not separate legal entities are aggregated for deposit calculation purposes, even if operating under a trade name or “DBA.”
Priority of status of uninsured deposits and other claims
Payments made to various stakeholders in a standard failed bank are made as follows:
- Insured deposits to depositors, with the FDIC subrogated for repayment of such amount from the receivership with other uninsured deposits (see item 3.b., below).
- Federal Home Loan banks as secured creditor, which is granted priority treatment among secured creditors.
- Other secured claims which are paid out by the receivership from the assets securing them to the extent of such assets. (Any unsecured portion becomes a general unsecured claim against the receivership.)
- Unsecured claims (in the following order):
- Administrative expenses of the receiver
- Deposit liability claims, generally consisting of the uninsured portion of any deposit account and including FDIC as subrogee of insured deposits
- Other general or senior liabilities of the bank
- Subordinated obligations
With the announcement on Sunday, the FDIC effectively “promoted” uninsured depositors from group 4(b) in the waterfall above, to group 1.
Deposits versus other financial products
Various deposit account sweep products offered by depository institutions have terms that differ dramatically from product to product. Relevant FDIC rules (12 CFR 360.8(d)) try to keep up with the products, but not all products fit nicely into a “bucket.” Depending on the specific financial product involved, some funds from those accounts might not be deposits (for example, amounts exceeding a “target” balance in the customer’s deposit account may have been held by the bank as an agent for its customers in securities issued by funds).
If funds are swept to a third-party to acquire government bonds or securities or to a money market mutual fund, for example, those assets are likely investment assets which belong to the customer of bank and should not be considered deposits or part of the bank’s receivership estate. The governing agreement will include language making this clear, including specifically the warnings that the funds:
- Are not insured by the FDIC or any other federal government agency
- Are not deposits of or guaranteed by a bank and
- May lose value.
Such a disclosure is referred to as the “not, not, may” disclosure. While the timing and process for accessing funds in such investment accounts is unclear at this point, the full amount of such funds should ultimately be made available to the customer.
Accountholders should ultimately recover those amounts, but there could be some delay as the funds issuing these securities and other financial institutions confirm accountholder ownership interests in these securities or funds and receive instructions from either the FDIC as receiver or elsewhere as to the appropriate disposition of these amounts.
By contrast, a sweep product that places depositor funds into a money market account at the bank to earn interest are likely still deposits and the “not, not, may” disclosure is not likely provided in the associated account documentation. It is essentially a sweep from one deposit account to another. Funds swept in these products above the FDIC limits are likely still uninsured deposits.
When swept funds are held by the bank as agent in an omnibus account (external to the bank), the customer should look to see exactly how the bank discloses its rights at failure. FDIC rules (see, 12 CFR 360.8(e)) require the bank to disclose, for example, the customer holds those assets as a secured creditor of the bank, putting the customer much higher in the waterfall of payees if the bank fails, or as an unsecured creditor.
Finally, sweeps must be completed on the ledger of the bank at the time of receivership (referred to in the FDIC rules as the “Applicable Cutoff Time”). This factor is why many “overnight sweeps” are structured such that the funds are swept from a deposit account right before the close of business and returned to the deposit account right after the opening of business the next day. However, the SVB failure occurred during the business day (which is unusual), making it unclear how overnight sweep products would be handled by the FDIC. Presumably, sweep products structured to return funds to the bank at the opening of a business day would not provide any benefit to depositors if the bank were closed during operating hours.
It will be critical to (i) review and understand the terms of the specific sweep products that depositors enter into; (ii) to retain records of any selected allocation made by the depositor and any defined “target balance” that must be retained in the associated depository accounts; and (iii) be certain the depositor has readily available complete agreements, with all schedules and appendices, and is not in a position of seeking copies from the failed bank.
Purchasing assets from the receiverships
As receiver, the FDIC will sell assets or both SVB and SB or will sell the whole bridge bank to eligible parties. If the FDIC negotiates a “whole bank” sale, which is typically the FDIC’s preference, there won’t be an opportunity to buy specific assets. However, if they consider asset sales the FDIC accepts bids from eligible bidders that result in the “least cost resolution of the bank,” meaning they make every effort to get the best aggregate price for the failed bank’s assets. Some details about the process are published on the FDIC’s Institution and Asset Sales page. There is also information about qualifying for the process.
Purchasing assets form the FDIC can be a complicated process and strict timelines are often set by the FDIC, but making interest known and obtaining access to related data rooms with content about the assets being sold is a crucial first step.
There will certainly be addition questions over the next few days and weeks.