Seyfarth has received a large number of client inquiries on the Federal Deposit Insurance Corporation's ("FDIC") appointment as receiver of Silicon Valley Bank, Santa Clara, California ("SVB"). SVB was closed by the California Department of Financial Protection and Innovation on March 10, 2023, and at the time of closing the FDIC as receiver immediately transferred to the Deposit Insurance National Bank of Santa Clara ("DINB") all insured deposits of SVB.
What this means for depositors
At the time of this writing on Friday, March 10, 2023, depositors are cut off from accessing their funds on deposit, which have been transferred to DINB. The FDIC has announced that all insured depositors will have full access to their insured deposits by Monday morning, March 13, 2023. The standard insurance amount is $250,000 per depositor, per insured bank, for each account ownership category. The FDIC as receiver will pay uninsured depositors an advance dividend within the next week and will issue receivership certificates for the remaining amounts of uninsured funds. The FDIC as receiver will seek to sell SVB now DINB's assets, including the deposits it retains as receiver. As it does so, it may make additional dividend payments to uninsured depositors. No indication is given of what percentage of the deposit amounts depositors may expect to see returned, but the closure order reports that at the close of business on March 9, 2023, due to a "run on the bank" involving the withdrawal of $42 billion in deposits on that date (approximately ¼ of the total funds that had been on deposit), SVB had a negative cash balance of $958 million. A large return would be welcomed but cannot be expected. There is no assurance that the receivership can be completed quickly, and it is not likely to be closed for some time.
What this means for employers
Many of SVB's depositors kept their operating funds on deposit with SVB, including funds they intended to use to meet their payroll obligations. These funds are no longer available to meet such expenses. Businesses should not incur payroll expenses they potentially cannot pay. Labor requirements, which are governed by the Fair Labor Standards Act and by a plethora of state and local laws, regulate the timing and form of wages. Employers that cannot make payroll should consider alternative sources of funding and financing, and making timely furloughs and layoffs of any personnel whom it may not be able to pay. Employers that may suffer a business interruption should review their insurance for potentially applicable business interruption or other coverages.
What this means for borrowers
The FDIC as receiver is taking the position that loan customers (borrowers of the former SVB) should continue to make their payments as usual. Banking activities including on-line banking and other services are announced to resume no later than Monday, March 13, 2023. Seyfarth encourages borrowers of the former SVB, particularly those borrowers with cash management systems or lockboxes at SVB, to confer with legal counsel to discuss their individual loan repayment situations.
What this means for letters of credit
Letters of credit issued by the former SVB are now obligations that are potential liabilities of DINB that can be repudiated by the FDIC as receiver "within a reasonable period" pursuant to 12 U.S.C. § 1821(e)(2). Consideration should be given to replacing them with other financial institutions' letters of credit.
What this means for businesses generally
Even if they were not directly affected by the SVB closure, businesses should, as a matter of corporate governance and responsibility, reevaluate whether they have sufficiently insured and diversified their deposits by spreading them out amongst multiple financial institutions. Businesses should further evaluate which of their business partners will be affected by the receivership and consider appropriate communications. SVB's receivership was sudden and unexpected, and will be impactful in innumerable ways.
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