Silicon Valley Bank and Signature Bank’s Receiverships: Frequently Asked Questions

Silicon Valley Bank and Signature Bank’s Receiverships: Frequently Asked Questions

March 15, 2023, Covington Alert

This FAQ has been updated to take account of developments through March 15, 2023.

On Friday, March 10, 2023, the California Department of Financial Protection and Innovation (CA DFPI) took possession of and closed Silicon Valley Bank (SVB), citing SVB’s inadequate liquidity position and insolvency and appointed the Federal Deposit Insurance Corporation (FDIC) as receiver. Upon being appointed receiver, the FDIC created the Deposit Insurance National Bank of Santa Clara (DINB) and transferred to DINB all of the insured deposits of SVB. The FDIC has since created Silicon Valley Bridge Bank, N.A. (SVBB), and transferred to SVBB all the insured and uninsured deposits and substantially all the assets of SVB/DINB.

On Sunday, March 12, 2023, the New York State Department of Financial Services (NY DFS) took possession of Signature Bank (Signature) and likewise appointed the FDIC as receiver. The FDIC created Signature Bridge Bank, N.A. (SBB) and transferred to SBB all of the insured and uninsured deposits and substantially all the assets of Signature.

Also on Sunday, March 12, 2023, the FDIC, in conjunction with the Treasury Department and Federal Reserve, announced that, pursuant to the “systemic risk exception” in the 1999 FDIC Improvement Act (FDICIA),[1] the FDIC would resolve SVB and Signature in a manner that “fully protects all depositors,” regardless of insured status. At the same time, the Federal Reserve announced a new lending facility, the Bank Term Funding Program (BTFP), which makes available additional funding to eligible depository institutions. The BTFP is meant to assure banks have the ability to meet the needs of all their depositors and it enables eligible banks with interest rate-driven losses in their security portfolios to access liquidity, if needed. A brief overview of the terms of the BTFP is included below.

SVB and Signature are the second- and third-largest banks in U.S. history to be placed into FDIC receivership, and the ramifications of SVB’s and Signature’s failure for the financial services industry and end users are significant. This client alert answers frequently asked questions that Covington has received from clients seeking to understand SVB and Signature’s receiverships and what they mean for them.

• As noted above, using the systemic risk exception, the FDIC will make all depositors of SVB and Signature, whether insured or uninsured, whole.
• As of Monday, March 13, 2023, all depositors of SVB and Signature should be able to access their funds as usual. All deposits have been transferred to SVBB and SBB, respectively.
• According to the FDIC, SVB and Signature ATM and debit cards will continue to function, as will direct deposits, scheduled autopayments, and online bill payments.
• Your account number(s) will remain the same, until you are notified otherwise by SVBB or SBB.

Do I need to take any action now?

• No. If you would like to move your money out of SVBB or SBB, you may do so, but all deposits in those two banks have now been guaranteed by the FDIC, regardless of their previous insured or uninsured status.

Will some depositors receive their deposits ahead of other depositors?

• No. All deposits should now be available, regardless of their insured or uninsured status.

What if I attempted to wire or ACH funds from my account at SVB on Friday, March 10, 2023? Will those funds be transferred to my receiving bank?

• Check your account at the receiving bank to see if the funds were received.
• Since the FDIC took over SVB during the business day, many of those wire and ACH transactions were halted.
• Typically, any transfers initiated prior to a bank entering receivership would have otherwise been processed normally through the end of a bank’s standard daily processing cycle until the FDIC takes control of the failed institution.
• If your transfer did not go through on Friday, those funds should still be available, at SVBB, and you may now submit your transfer again.

What will happen to checks and automatic payments that did not clear an account before SVB or Signature was closed?

• Any outstanding automatic payments or checks presented after SVB and Signature were closed will be honored by SVBB and SBB.
• If a check or payment presented or submitted around the time SVB and Signature closed did not clear, those funds should still be available in your account, now held by SVBB or SBB, as applicable. You may make checks and payments as normal, using the same account number(s) as you had at SVB / Signature.

How are custody and fiduciary accounts treated?

• Because they are generally operating “business as usual,” SVBB and SBB will continue to make assets in custody and fiduciary accounts available to customers.

What if I have a loan with SVB or Signature?

• Borrowers will automatically become customers of SVBB or SBB. You should continue to make scheduled interest, principal, fee and other payments on the loan until you are notified otherwise by the FDIC or another institution that acquires the loan.
• You may continue to send your payments to the same address and made out to SVB or Signature, and you should receive a letter advising of any changes.

What if I have an undrawn or partially drawn line of credit from SVB?

• All lines of credit at SVB and Signature have been transferred to SVBB and SBB, and the FDIC has instructed borrowers to contact SVBB or SBB with any questions on this topic.
• The FDIC is allowed to repudiate SVB’s and Signature’s contracts that it deems burdensome, which could include loan commitments such as undrawn or partially drawn revolving lines of credit.
• However, guidance on SVB’s website states that SVBB will honor commitments to advance under existing credit agreements, suggesting that the FDIC will not, at least for now, exercise its repudiation authority in this context.

What if I am a vendor to SVB or Signature, or other type of counterparty that is not a borrower or depositor?

• You must continue to perform on your contract(s) entered into with SVB and Signature before they were closed.
• On Tuesday, March 14, 2023, the FDIC released guidance stating that SVBB and SBB are performing under all contracts transferred to them from SVB and Signature, and that counterparties are legally required and expected to similarly fulfill their contractual obligations.
• The FDIC could exercise its repudiation authority to repudiate contracts for services that SVB or Signature no longer need now that they are banks under receivership. However, unless and until the FDIC exercises this authority, you are generally contractually bound to perform on your contracts with SVB and Signature.
• Of note, federal law prohibits a counterparty to SVB or Signature in most types of contracts – excluding “qualified financial contracts” such as swaps and securities contracts – from exercising contractual provisions that would otherwise give the counterparty the right to terminate the agreement and/or seek damages based on SVB or Signatures’ entry into receivership. The FDIC has transferred all qualified financial contracts of SVB and Signature to SVBB and SBB, respectively.

What will happen to SVB and Signature?

• A sale of some or all of SVBB / SBB or their assets may occur in the near term; if such a sale occurs then the FDIC will make a public announcement and instruct interested parties on any actions they need to take.
  • A quick sale of either of these entities as an enterprise (or a substantial portion of its assets such as its loan portfolio) would likely involve an acquirer requiring the government to provide loss sharing guarantees.
  • Given the size of SVBB and SBB, as well as recent completed and pending transactions, there is only a small pool of potential buyers for these banks as an enterprise.
• If SVBB and SBB are not sold quickly, the FDIC will explore sales of their assets, including their loan and investment portfolios as well as their subsidiaries.

What are the terms of the BTFP?

• The BTFP will offer loans to eligible borrowers of up to one year in length and up to the value of the eligible collateral pledged by the eligible borrower. Eligible collateral for these loans includes any collateral eligible for purchase by the Federal Reserve Bank in open market operations (such as US Treasuries, agency debt, and agency mortgage-backed securities) as long as the collateral was owned by the borrower as of March 12, 2023.
• Eligible borrowers include any US federally insured depository institution or US branch or agency of a foreign bank that is eligible for primary credit.
• The rate for BTFP loans will be the one-year overnight index swap rate plus 10 basis points and the rate is fixed for the term of the loan on the day the loan is made.
• All BTFP loans will be made with recourse beyond the pledged collateral to the eligible borrower.
• Borrowers may prepay BTFP loans (including for purposes of refinancing) at any time with no penalty.
• Treasury has made available up to $25 billion from the Exchange Stabilization Fund as a backstop for the BTFP.
• BTFP loans can be requested until at least March 11, 2024.