Distressed Banks Resource Center

The rapid collapses of Silicon Valley Bank, Signature Bank and First Republic Bank, self-liquidation of Silvergate Bank and financial distress at other financial institutions continue to create uncertainty in the U.S. and global financial markets and economy. Customers and counterparties worldwide—including funds, portfolio companies and individuals—are facing unique legal, commercial and operational challenges as a result. Companies are actively working to overcome disruptions in their daily business operations and to address and mitigate short- and long-term risks arising from these bank failures and related fallout. Gibson Dunn has created a multidisciplinary task force to assist our clients during these challenging times.

These bank failures represent a highly fluid and complex situation that continues to evolve. In addition, each customer deposit account, loan or other relationship is subject to specific contractual arrangements between a customer and its bank or other financial services provider that should be individually reviewed. Moreover, the expected response from federal and state financial regulatory agencies will shape and shift—in some cases dramatically—the regulatory landscape and supervisory expectations for institutions of all sizes. Gibson Dunn is equipped to provide strategic counsel and advise clients on how best to approach many of the key issues. We can assist in addressing specific questions, including by executing a comprehensive approach to guide clients.

To provide real-time and accurate information, Gibson Dunn attorneys across practice groups are closely monitoring the guidance issued by federal and state financial regulatory agencies and officials as well aggregating information collected from our cross-section of relationships. Please feel free to reach out to any of the individuals with whom you have an existing relationship at Gibson Dunn with questions or concerns. To receive our ongoing regular communications to our clients and friends addressing issues raised by recent banking crises, as they arise, please contact us at feedback@gibsondunn.com.

Given the rapidly evolving circumstances, please review the latest updates via the FDIC and Federal Reserve Board, in addition to the summaries below. This page was last updated May 2, 2023.

LATEST UPDATES

First Republic Bank

On May 1, 2023, the California Department of Financial Protection and Innovation announced it had closed First Republic Bank (FRB) and appointed the FDIC as receiver of FRB. Following a competitive bidding process over the weekend, once appointed as receiver, the FDIC entered into a purchase and assumption agreement (the Purchase Agreement) with JPMorgan Chase Bank (JPM) pursuant to which JPM assumed approximately $92 billion of deposits, including $30 billion of large bank deposits, and acquired the substantial majority of assets of FRB, including approximately $173 billion of loans and approximately $30 billion of securities, from the FDIC, as receiver. JPM did not assume FRB’s corporate debt or preferred stock as part of the transaction.

The failure of FRB is the second largest bank failure in U.S. history, supplanting the recent failure of Silicon Valley Bank. The Federal Reserve, FDIC and U.S. Department of the Treasury did not, however, invoke the systemic risk exception in connection with the failure of FRB, as the agencies had previously done in connection with the failures of Silicon Valley Bank and Signature Bank.

According to the FDIC’s press release and Frequently Asked Questions issued in connection with FRB’s failure: FRB’s 84 offices will reopen for business as branches of JPM; customers of the former FRB should continue to make loan payments according to the terms of their loan agreement; lines of credit have been transferred to JPM and customers should contact their banker with any questions concerning use of existing lines or new lending activities; all services previously performed related to loans will continue to be performed; and customers with loans in process should contact their loan officer directly.

Substantially all deposit liabilities (both insured and uninsured) were assumed by JPM. Under the FDIC’s transition rule (12 C.F.R. § 330.4), for entities or individuals with accounts in the same ownership category at both FRB and JPM, those accounts will be insured separately up to the standard maximum deposit insurance amount for six months from May 1, 2023. After six months, assumed deposits will be aggregated with existing deposits with JPM in the same ownership category for purposes of FDIC deposit insurance coverage.

The Purchase Agreement has yet to be published on the FDIC’s website or filed with the SEC on a Current Report on Form 8-K. A summary of the relevant terms of the Purchase Agreement will follow.

FDIC: Options for Deposit Reform

On May 1, 2023, the FDIC published a timely report, Options for Deposit Insurance Reform, which provides a comprehensive overview of the federal deposit insurance system and its history and presents three options to reform the federal deposit insurance system. FDIC Chairman Gruenberg directed the agency to conduct an analysis of the current federal deposit insurance framework and propose reforms following the failures of Silicon Valley Bank and Signature Bank.

The report examines three options for deposit insurance reform:

  • Limited Coverage: Maintaining the current deposit insurance framework;
  • Unlimited Coverage: Extending unlimited deposit insurance coverage to all depositors; and
  • Targeted Coverage: Offering different deposit insurance limits across account types, with business payment accounts receiving significantly higher coverage than other account types.

According to the press release accompanying the report, the FDIC believes Targeted Coverage “best meets the objectives of deposit insurance of financial stability and depositor protection relative to its costs.” The report is not a proposed rulemaking or request for additional information and public comments have not been invited at this time. Any proposals in the report, including effecting Targeted Coverage reform, would require Congressional action.

Silicon Valley Bank

On March 10, 2023, the California Department of Financial Protection and Innovation announced it had closed Silicon Valley Bank (SVB) and appointed the FDIC as receiver of SVB. On March 13, 2023, the FDIC transferred all deposits—both insured and uninsured—and substantially all assets of SVB to a newly formed, full-service FDIC-operated “bridge bank,” Silicon Valley Bridge Bank, N.A. (Bridge Bank). The transfer of deposits was completed under the systemic risk exception. Bridge Bank effectively operated as a full-service bank while the FDIC worked to stabilize the failed institution, prepare for an orderly resolution and continue to explore strategic options.

On March 27, 2023, First-Citizens Bank & Trust Company (FCB), a North Carolina state-chartered bank and direct, wholly owned subsidiary of First Citizens BancShares, Inc., assumed all customer deposits and certain other liabilities, and acquired substantially all loans and certain other assets, of Bridge Bank from the FDIC, as receiver, pursuant to a purchase and assumption agreement (the Purchase Agreement).

Under the Purchase Agreement, FCB acquired approximately $110.1 billion in assets, including approximately $72.1 billion in loans held by Bridge Bank and approximately $2.7 billion of other assets. FCB also assumed approximately $59.0 billion in liabilities, including approximately $56.5 billion in customer deposits. Approximately $87 billion in securities and other assets remained in the receivership for disposition by the FDIC.

The Purchase Agreement expressly excluded any obligation for FCB to purchase (i) qualified financial contracts or any other derivative instruments to the extent FCB had not acquired the underlying assets or assumed the underlying liability, (ii) cryptocurrency assets or any assets backed by cryptocurrency, (iii) SPD Silicon Valley Bank Co., Ltd., SVB’s 50/50 joint venture in China, (iv) the Cayman branch, and (v) the German, Canadian, and Hong Kong[1] branches, over which FCB received an option to purchase such branches (the option had to be exercised by FCB before April 11, 2023). No assets were acquired or liabilities assumed that remained with the former SVB’s former parent company, SVB Financial Group, which filed for bankruptcy on March 17, 2023.

SVB Cayman Branch Depositors

After several weeks of uncertainty concerning the ultimate resolution of SVB’s Cayman branch, the FDIC has commenced sending notices to customers of the Cayman branch notifying those customers of their treatment as general unsecured creditors of SVB’s receivership estate and instructing those customers to file a proof of claim for such deposits with the FDIC in its capacity as receiver of the failed bank before the claims bar date of July 10, 2023 (described below).

Customers of the former SVB’s foreign operations—which included SVB’s U.K. subsidiary bank, its Canadian, Cayman, German and Hong Kong branches or representative offices and its joint venture, SPD Silicon Valley Bank Co., Ltd.—have been affected by SVB’s failure to varying degrees.

In most cases, customers of certain foreign operations of the former SVB have been adequately protected[2] or the foreign operations were not deposit-taking branches.[3] In other cases, though, customers of certain foreign operations of the former SVB, in particular customers of the Cayman branch, have been negatively impacted and, with the FDIC having been unable to arrange a resolution and sale of the branch’s assets and assumption of its liabilities, those customers have received notices from the FDIC confirming they are general unsecured creditors of SVB’s receivership estate. This, unfortunately comes after several weeks of receiving little guidance from the Cayman Islands Monetary Authority and other relevant regulators as to what efforts, if any, were being undertaken to resolve the Cayman branch and protect such depositors.

Treatment of Deposits of Foreign Branches of U.S. Banks and the National Depositor Preference

The term “deposit” is defined in Section 3(l) of the Federal Deposit Insurance Act (FDIA).[4] The statutory definition of “deposit” under Section 3(l) of the FDIA excludes from the definition of deposit any deposit obligations carried on the books and records of a foreign branch of a U.S. bank unless those deposit obligations (1) would be deposits if carried on the books and records of the U.S. bank in the United States and (2) are expressly payable in the United States (“dual-payability”). Deposit balances held by customers in accounts at the former SVB’s Cayman branch were not “dually payable” and, therefore, are not deposits under the FDIA and Part 330 of the FDIC’s regulations promulgated thereunder (12 C.F.R. Part 330). Specifically, 12 C.F.R. § 330.3(e)(1) provides that “[a]ny obligation of an insured depository institution which is payable solely at an office of that institution located outside any State … is not a deposit for the purposes of this part.”[5]

In 1993, Congress amended the FDIA to create a Depositor Preference Rule (DPR) that provided a national framework for the payment of creditors of a failed insured depository institution.[6] Prior to the DPR, all creditors, including the FDIC (as subrogee of insured depositors) and all uninsured depositors, of a failed bank, were paid pari passu, absent a contrary state depositor preference law for state-chartered banks. As the term suggests, “depositor preference” elevates the claims priority of depositors over unsecured creditors. Under these provisions, claims are paid in the following order:

  • Administrative expenses of the receiver;[7]
  • Deposit liability claims (with the FDIC as subrogee taking the place of insured depositors);
  • Other general or senior liabilities of the institution;
  • Subordinated obligations; and
  • Shareholder claims.

The FDIA does not provide a definition of “deposit liability” nor does it make any distinction between “deposit liability” in Section 11(d)(11) of the FDIA and the defined term “deposit” in Section 3(l) of the FDIA (the latter of which excludes foreign deposits that are not dually payable).

In 1994, the FDIC’s Acting General Counsel issued an advisory letter opinion that concluded the meaning of the term “deposit liability” in Section 11(d)(11) was coterminous with the definition of “deposit” in Section 3(l)(5) of the FDIA, at least insofar as related to the exclusion of foreign branch deposits from the definitions.[8]

The effect of this is, therefore, to subordinate foreign branch deposits to domestic deposits, making them pari passu with general creditor claims. In that connection, the preamble to the FDIC’s 2013 amendment to 12 C.F.R. Part 330 states:

Accordingly, an obligation in a foreign branch of a U.S. bank has not been considered a “deposit liability” for purposes of the national depositor preference provisions of section 11(d)(11) of the FDIA. Thus, if a U.S. bank were to fail, its foreign branch depositors would share in the distribution of the bank’s liquidated assets as general creditors after the claims of uninsured domestic depositors and the FDIC as subrogee of insured depositors have been satisfied. If a foreign branch deposit of a U.S. bank were expressly payable at an office of the bank in the United States, however, that deposit would be treated equally with uninsured domestic deposits in the depositor preference regime.[9]

The FDIC Claims Process

General creditors, which at this time includes the depositors of the former SVB’s Cayman branch, must submit a Proof of Claim Form along with supporting documentation of the claim (e.g., deposit account agreements, account statements and other information confirming deposit account balances, agreements for services rendered where payment is owed by the former SVB) to the FDIC by the “Claims Bar Date” of July 10, 2023.[10] Failure to file a claim on or before the Claims Bar Date will result in disallowance by the FDIC and, importantly, the disallowance will be final.[11]

In the case of a Cayman branch depositor, each legal entity that had a deposit account relationship with the Cayman branch will need to file a separate Proof of Claim Form along with supporting documentation. Thus, if an entity and its subsidiaries or affiliates each had an account with the Cayman branch, each entity would need to file its own Proof of Claim Form.

Under the FDIC’s claims process, the FDIC has 180 days from the date it receives a claimant’s Proof of Claim to determine whether to allow or to disallow the claim. If the claim is disallowed or a claimant does not receive a timely notice of disallowance of the claim, a claimant has the right to file a lawsuit on the claim, which lawsuit must be filed in the appropriate United States District Court within 60 days after the date of the notice of disallowance by the FDIC or within 60 days after the end of the 180-day period, whichever is earlier. If a claimant does not file a lawsuit before the end of the 60-day period, the disallowance of the claim will be final and the claimant will have no further rights or remedies with respect to the claim.

The FDIA expressly strips courts of jurisdiction over claims that have not been exhausted through the FDIC’s administrative process.[12]Thus, the failure to file a Proof of Claim with the FDIC will preclude a creditor from pursuing other causes of action outside the FDIC claims process on the grounds that the courts would not have jurisdiction to hear such causes of action where the creditor had not yet exhausted its administrative remedies—in this case, the FDIC claims process.

As noted above, under the FDIA, claims are paid in the following order: administrative expenses are paid first, after which insured depositors are paid back their deposits, followed by the uninsured depositors, and then general creditors being paid on their approved claims (followed by subordinated debt holders, followed by stockholders). As a result, in most cases, general creditors and stockholders realize little or no recovery. However, because the systemic risk exception was invoked by the government to guarantee all of the deposits—both insured and uninsured—of the former SVB, it is unclear whether the FDIC will subrogate to the claims of the insured depositors of the former SVB because the systemic risk exception, once invoked, provides that the FDIC “shall recover the loss to the Deposit Insurance Fund arising from any action taken or assistance provided” with respect to a bank under the systemic risk exception “from 1 or more special assessments on insured depository institutions, depository institution holding companies, or both.” Moreover, uninsured depositors retain their claim for any uninsured deposit and the FDIC does not subrogate to their claims. In the case of the uninsured depositors of the former SVB, all uninsured deposits were paid and any loss to the Deposit Insurance Fund would be recovered through industry assessments and not the receivership process and related sale of assets.

Please feel free to reach out to any of the individuals with whom you have an existing relationship at Gibson Dunn with questions or concerns relating to the FDIC’s claims process or for assistance with completing those forms and/or navigating the claims process.

Signature Bank

On March 12, 2023, the New York State Department of Financial Services closed Signature Bank and appointed the FDIC as receiver of Signature Bank. In connection with its closure, the FDIC transferred all the deposits—both insured and uninsured—and substantially all of the assets of Signature Bank to Signature Bridge Bank, N.A., a full-service bridge bank that was operated by the FDIC as it stabilized the institution and marketed it to potential bidders and prepared for an orderly resolution. On March 19, 2023, Flagstar Bank, N.A. (Flagstar), a wholly owned subsidiary of New York Community Bancorp, Inc., assumed substantially all of the deposits and certain assets and business lines of Signature Bridge Bank, N.A., from the FDIC, as receiver for Signature Bank. Notably, Flagstar did not assume approximately $4 billion of deposit liabilities related to the former Signature Bank’s digital-assets banking business. According to the FDIC, the FDIC will pay those deposits directly to customers whose accounts were associated with the former Signature Bank’s digital-assets banking business.

[1] SVB has described its Hong Kong office as a “representative office” that did not take deposits, and not as a deposit-taking branch, and the Hong Kong Monetary Authority has publicly stated that the office is only a representative office that did not have the authority to engage in banking business or take deposits; however, the Purchase Agreement includes the Hong Kong office in the definition of “Foreign Branches” that were subject to FCB’s option to purchase.

[2] SVB’s UK subsidiary bank, Silicon Valley Bank UK Ltd. was acquired by HSBC Bank UK plc on March 13, 2023, and all depositors and loan customers were adequately protected.

[3] SVB’s Canada and Germany branches were not deposit-taking branches and the relevant financial regulators took steps to stabilize the lending-only operations; as noted above, SVB has described its Hong Kong office as a “representative office” that did not take deposits; and SPD Silicon Valley Bank Co., Ltd., the former SVB’s 50/50 joint venture in China, is a standalone entity that operated with an independent balance sheet and its overall exposure to SVB was limited.

[4] 12 U.S.C. § 1811, et seq.

[5] Under the FDIA and 12 C.F.R. Part 330, foreign branch deposits are not insured deposits for purposes of the FDIA, regardless of the location at which the deposit is payable. Deposit balance held by customers in accounts at the former SVB’s Cayman branch were not insured.

[6] Omnibus Budget Reconciliation Act of 1993, Public Law 103–66, 107 Stat. 312. “Depositor preference” refers to a resolution distribution regime in which the claims of depositors have priority over (that is, are satisfied before) the claims of general unsecured creditors.

[7] Note that all Federal Home Loan Bank (FHLB) advances are subject to the statutory super-lien, which means that in the case of a failed bank’s insolvency, any security interest granted to an FHLB by the failed bank has priority over the claims and rights of any other party, including the FDIC. Secured claims are satisfied based upon the governing security documents.

[8] FDIC Advisory Opinion, “Deposit Liability” for Purposes of National Depositor Preference Includes Only Deposits Payable in U.S., FDIC 94-1 (Feb. 28, 1994) (“‘Deposit liability’ is defined with reference to other provisions of United States law and excludes any obligation payable only outside of the United States and its territories. 12 U.S.C. § 1813(l). Therefore, ‘deposit liability’ under the National Depositor Preference statute does not include obligations payable solely at a foreign branch of a United States chartered bank.”).

[9] 78 Fed. Reg. 56583, at 56584 (Sep. 13, 2013).

[10] Claims forms may be submitted on-line, by mail, or by fax. Claims may also be filed online at https://resolutions.fdic.gov/claimsportal/s/.

[11] 12 U.S.C. § 1821(d)(5)(C)(i). Late claims are disallowed and “such disallowance shall be final” unless the claimant did not receive notice of the appointment of the receiver in time to file such claim before Claims Bar Date and the claim is filed in time to permit payment of such claim. Id.

[12]See 12 U.S.C. § 1821(d)(13)(D).

A New Paradigm. Silicon Valley Bridge Bank, N.A. – the successor-in-interest to Silicon Valley Bank – posted a website notice on Tuesday stating that it has “fully stepped into the shoes of the former Silicon Valley Bank”. The notice further advised that all loans will now be administered by the new Silicon Valley Bridge Bank, N.A. and existing credit commitments will be honored. The website also contained a link to a 75 page “Transfer Agreement” between the FDIC, as receiver for Silicon Valley Bank (the state chartered now-defunct bank) and Silicon Valley Bridge Bank, N.A. (the federally-chartered new bank) that appears to transfer various assets and liabilities to the bridge bank to enable it to operate in the ordinary course in a manner similar to the predecessor bank for domestic operations. Additionally, Silicon Valley Bridge Bank CEO Tim Mayopoulos issued a statement asking depositors to return to SVB, affirming that depositors have full access to their money and that all new and existing deposits are fully protected by the FDIC (even beyond the typical $250,000 limit). The website clarified that Silicon Valley Bridge Bank is not under FDIC receivership.

All of this implements a new paradigm that replaces the receivership model from the past weekend with a ”fully functioning” bank that seeks to continue operations in the ordinary course. The Deposit Insurance Bank of Santa Clara that was established Friday, and the other trappings of FDIC receivership, are gone.

While Signature Bridge Bank, N.A.’s website does not contain similar documentation, its operations on Monday appeared to be in the ordinary course, with Signature Bridge Bank appearing to fund its loan obligations and its employees providing standard services.

What About Loan Covenants Regarding Deposits? A top question resulting from the new bridge bank paradigm is whether the bridge banks will enforce covenants under which borrowers promised to hold many or all of their deposits in the lender’s bank. The FDIC issued a Financial Institution Letter FIL -10-2023 emphasizing that it has the ability to enforce all contracts held in receivership[1] and, in a separate letter, stated that the bridge bank intends to enforce such contracts[2]. Notwithstanding such guidance, given the novel issues of public policy, it remains to be seen whether, in fact, SVB borrowers who moved deposits to other institutions will now be expected by the FDIC and Silicon Valley Bridge Bank to move those deposits back to Silicon Valley Bridge Bank, particularly given that it appears that regulators are pursuing the potential sale of SVB loans to third parties, as discussed below.

Will Letters of Credit issued by SVB be honored? The Financial Institution Letter issued by the FDIC states that “The bridge bank is performing under all failed bank contracts and expects all counterparties to similarly fulfill their contractual obligations.” These bank contracts would presumably include the letters of credit issued by SVB and Signature Bank.

What Happens to Derivatives? All Qualified Financial Contracts of each of SVB and Signature Bank have been transferred to the applicable bridge bank established by the FDIC. The definition of “Qualified Financial Contract” includes, but is not limited to derivatives (e.g., swaps, options, forwards, etc.), repurchase, reverse repurchase, and securities lending transactions. As a result, the applicable bridge bank is now the counterparty to derivatives entered into with SVB and Signature Bank.Payments and collateral calls under derivatives contracts should function as normal between the counterparty and the applicable bridge bank entities of SVB and Signature Bank, as noted in the Financial Institution Letter mentioned above.

Given that derivatives contracts are often heavily negotiated, the terms of any derivatives trading documentation and the special provisions in 12 U.S.C. § 1821 should be reviewed to understand your specific rights with respect to your derivatives.

Cayman Islands Depositors. While the UK branch of SVB has been purchased by HSBC, there is no word on the fate of SVB’s Cayman branch, which is outside of the U.S. receivership and treated separately under Cayman law. Those with deposits in SVB’s Cayman branch may be continuing to experience challenges with the transfer of funds out of accounts. There is no indication from the Cayman regulators that they have taken possession of the Cayman branch, though they have the authority to do so. There also is an MOU between the Cayman regulators and the FDIC related to their ongoing cooperation and information sharing for the supervision and resolution of banks with branches in Cayman. Today’s FDIC guidance states that, “All vendors providing services, except for the Cayman Islands Branch, should continue to provide such services.” We note that unless Silicon Valley Bridge Bank is connected to SWIFT, it cannot accept foreign wire transfers.

SVB All or Nothing Sale Off the Table? On the heels of yesterday’s Wall Street Journal report that a second auction round for SVB would be held, several national media outlets reported Tuesday that five top U.S. private equity firms are reviewing SVB books in order to potentially bid for purchasing SVB loans. In addition, SVB Financial Group, the parent company, hired Alvarez & Marsal as restructuring advisor and appointed William Kostouros of Alvarez & Marsal as Chief Restructuring Officer. Mr. Kostrouos previously served in an identical capacity for Washington Mutual. SVB Financial also disclosed that it is exploring strategic alternatives for itself, as well as SVB Securities (the investment bank) and SVB Capital (the investment management arm), with potentially a management buy-out being explored for SVB Securities. Accordingly, it is unclear whether a second auction for SVB will in fact be held, or whether the auction will be for separate businesses and loan portfolios of SVB Financial. Media reports also indicate that a group of creditors is organizing to represent their interests with respect to holdings in SVB Financial’s bonds, which in total have $3.4 billion in face value of which reportedly over $1.5 billion has traded hands since Friday.

Signature Bank Bid Process. Bloomberg reports that the FDIC has opened a virtual data room for third parties to conduct due diligence in anticipation of potential bidding to purchase, presumably in part or all of, Signature Bank.

Capitol Hill Updates. Senate Banking Committee Chairman Sherrod Brown said his committee plans to hold a hearing, though they are still deciding on witnesses. Similarly, House Financial Services Committee Chairman Patrick McHenry said today that his committee would be talking with SVB and regulators to understand what led to the bank’s failure. Separately, Senator Warren and Rep. Katie Porter have introduced companion bills to re-impose heightened regulations on small- and medium-sized banks.

Government Investigations Reportedly Begin. Multiple media sources report that the SEC and Justice Department have opened investigations into events surrounding SVB’s failure, while at least one state regulator (Massachusetts) has announced a formal investigation into stock trading by SVB executives prior to the bank’s failure. The Federal Reserve is also investigating both its internal oversight procedures as well as risk management at SVB, according to media sources. Fed Chairman Jerome Powell stated in a Monday press release, “The events surrounding Silicon Valley Bank demand a thorough, transparent, and swift review by the Federal Reserve.”

Public Company Disclosure Issues. Publicly traded companies should be aware that responding to questions from investors about the extent of their exposure to a bank in receivership, or now in a ‘bridge bank,’ could implicate the federal securities laws’ selective disclosure rules, such as Regulation FD, and the administration of their insider trading policies. Any of such companies that have banking relationships with banks that have failed should consider whether a Current Report on Form 8-K is appropriate to address potential exposure risk, and whether an update to the company’s risk factors or other disclosures is appropriate with the company’s next periodic filing.

Atmosphere Situation Report

Government Response (US): The Department of the Treasury, FDIC and Federal Reserve announced multiple actions on Sunday, March 12, 2023 including:

  • Depositors of Silicon Valley Bank (“SVB”) will be made whole and have access to their funds as of Monday, March 13, 2023, through establishment of a newly created “bridge bank,” Silicon Valley Bridge Bank N.A. A bridge bank is a chartered national bank that operates under a board appointed by the FDIC. Former Fannie Mae head Tim Mayopoulos has been named the CEO of the bridge bank. (https://www.federalreserve.gov/newsevents/pressreleases/monetary20230312b.htm)
  • Depositors of Signature Bank will also be made whole, with access to funds on March 13, 2023. The FDIC established a bridge bank, Signature Bridge Bank, N.A. for this purpose. The former CEO of Fifth Third, Greg Carmichael, has been named the CEO of the bridge bank. (https://www.fdic.gov/news/press-releases/2023/pr23018.html)
  • A Bank Term Funding Program (“BTFP”) created by the Federal Reserve will provide loans of up to one year to banks, credit unions and other eligible depository institutions that pledge qualifying assets. Collateral will be valued at par. The Treasury will make up to $25 billion from the Exchange Stabilization Fund available to backstop the BFTP. (https://www.federalreserve.gov/newsevents/pressreleases/monetary20230312a.htm)

Market Updates:

  • The SVB and Signature bridge banks were open and functioning on Monday, with staff at each bank returning communications. That said, it has been reported that SVB funding transfer completions were episodic, presumably due to the high volume of customer requests. Multiple users have reported long hold times and electronic bank interface delays amid heavy traffic.
  • No buyer has been announced as of Monday afternoon for the U.S. portion of SVB or for Signature Bank. The Wall Street Journal reported Monday that with the absence of a buyer for SVB after an initial FDIC auction round closed on Sunday, the FDIC intends to re-launch a second auction under which the FDIC will have additional authority for flexibility in negotiating sale terms because SVB’s failure now has been deemed a systemic threat to the financial system. The same report stated that none of the ‘largest U.S. banks’ submitted a bid in the initial auction. CNBC reported earlier on Monday that PNC had submitted an indication of interest to acquire SVB but was not proceeding. It is unknown whether other potential bidders existed in the first auction round. Separately, HSBC purchased Silicon Valley Bank UK Limited (“SVB UK”), the UK affiliate of SVB, for £1. All SVB UK deposits are backed by HSBC.
  • While it will take time to evaluate the many events of last week, certain details are emerging. Reuters reports that SVB’s Wednesday announcement of the sale of its available for sale (AFS) securities came after Moody’s the prior week informed SVB of an impending credit downgrade. In turn, SVB then liquidated approximately $21 billion of AFS securities, resulting in a $1.8 billion loss. To offset that, SVB concurrently announced a $500 million investment from General Atlantic conditioned upon SVB first raising a planned $1.75 billion, which never came to fruition.

Capitol Hill Updates: House Financial Services Committee Chairman Patrick McHenry released a statement dubbing the failure as “the first Twitter fueled bank run.” He called for calm. Ranking Member Maxine Waters has told the press that the Committee is working on a bipartisan basis to hold a hearing as soon as possible.

  • Eighteen Democratic House members signed a letter to Treasury Secretary Yellen, FDIC Chair Martin Gruenberg, Federal Reserve Chair Jerome Powell, and Acting Comptroller Michael Hsu urging swift action to protect depositors, calling on Congress to increase the FDIC deposit insurance limit of $250,000, and clarifying that they did not believe regulators should bail out the bank’s shareholders. (Congressional SVB Letter)
  • The Biden administration has been providing briefings to Capitol Hill over the last several days. They provided a bipartisan, bicameral briefing Sunday evening and met with Senate Banking Committee Republicans (who said they had not received the invitation to the previous briefing) on Monday.
  • Senate Majority Leader Chuck Schumer and House Minority Leader Hakeem Jeffries have said they plan to examine the Bank’s failure. They did not say which congressional committees they would tap to lead that investigation.

SEC Response Update: Yesterday (March 12, 2023) SEC Chair Gary Gensler released the following statement, “In times of increased volatility and uncertainty, we at the SEC are particularly focused on monitoring for market stability and identifying and prosecuting any form of misconduct that might threaten investors, capital formation, or the markets more broadly. Without speaking to any individual entity or person, we will investigate and bring enforcement actions if we find violations of the federal securities laws.” Gurbir Grewal, the SEC Director of Enforcement spoke today (Monday, March 13, 2023) at the annual Securities Industry and Financial Markets Association Conference but did not specifically address the bank failures; though he did note the SEC’s focus on enhancing the public trust by focusing on the failures of those parties in gatekeeping functions.


Depositor/Debtor Specific Issues Report

What Happens to Money in Deposit Accounts: Deposit accounts are cash accounts and may be labeled as an “operating account” or a “money market deposit account” (sometimes labeled as an “MMDA account”). Note that the money market deposit account is distinct from the Money Market Mutual Fund Accounts described below. The funds in deposit accounts will be fully paid, even for balances in excess of the standard $250,000 FDIC limit.

What Happens to Money in Cash Sweep Money Market Mutual Fund Accounts: Cash sweep accounts can be structured in a variety of ways. In the case of SVB, it appears that many of their customers are subject to one of their various cash sweep programs. For this category of accounts (the “SVB Cash Sweep Accounts”), the “cash sweep” program involves regular (usually daily or next day) cash sweeps from customer deposit accounts into an SVB ‘Omnibus Account’ which is then used to purchase money market mutual fund securities on behalf of the customers. Companies seeking return of these assets, whether in cash or in kind, may need to submit a proof of claim to the FDIC if it appears that the cash value of such assets are not readily available via the online portal. In addition, Companies desiring to liquidate securities in connection with such return should consider any potential negative tax implications.

What Happens to Money in ‘Asset Management’ Accounts: These are securities brokerage accounts advised by Silicon Asset Management (an affiliate of SVB) where the securities are physically held by US Bank as custodian and segregated by client name on the custodian’s books. These accounts should not be part of the receivership or the bank estate. The custodian of these investment accounts may be contacted directly for more information on how to transfer those accounts from the SAM managed program to another advisor.

What Happens to Money in Intrafi/Promontory Interfinancial Network Accounts: Some SVB customers have an arrangement with Intrafi (formerly known as Promontory Interfinancial Network), where cash held in an SVB deposit account above the $250,000 FDIC insured limit is swept into a syndicate of other banks, each holding less than $250,000 of the customer’s deposits. Cash deposits that were swept into syndicated banks through Intrafi should not be part of the receivership or the bank estate.

Can I Draw on Existing Credit and Loan Facilities?:  On Friday, the FDIC suggested it would not be honoring drawdowns on loans and credit facilities loans with Silicon Valley Bank, N.A. (i.e., the bridge bank). However, as of Monday we understand that at least some borrowers have been able to draw on lines of credit at SVB and Signature.

What is the Status of Domestic Wires Out of SVB that I Sent Before the Receivership Was in Place?: If you have a pending domestic wire request out of SVB that has not yet been honored, the expectation is that those funds will be honored without further action by the directing party. At this time it does not appear necessary to terminate wires submitted last week but not processed before the receivership and reinitiate new requests.

What Will Happen to Deposits and External Domestic Wires Into SVB: External domestic wires that arrive in your SVB account after Friday should be available through the bridge bank. Public statements from financial regulators suggest that 100% protection will apply so long as the bridge bank is accepting deposits.

What Are My Payment Obligations, If Any, on My SVB Loans?: The FDIC has instructed in their FAQs that Debtors to SVB continue to pay on their loans and remain subject to the loan terms. The FDIC appears to be operating the bridge bank in quasi-ordinary course without regard to the more limited receivership arrangements previously announced by the FDIC.

What Do I Do About Loan Defaults or Waiver? As borrowers under loans with SVB consider withdrawing funds, care should be taken to review existing loan arrangements with SVB, as many of them require minimum levels of cash and cash equivalents to be maintained with SVB. While is not expected that FDIC will enforce such covenants, the FDIC has also indicated that it intends to sell the SVB loans, and it is possible that, for example, a buyer could request that borrower comply with the existing requirements by establishing its accounts with the buyer. In addition, consideration should be given to where the technical default would result in cross-defaults in other company debt or other arrangements.

This document is for informational purposes only and does not, and is not intended to, constitute legal advice or create an attorney-client relationship. You should contact a Gibson Dunn attorney directly to see if they are able to provide legal advice with respect to a particular legal matter.