United States: Silicon Valley Bank Collapse: What You Need To Know

On Friday, March 10, 2023, US and California regulators closed Silicon Valley Bank (SVB), marking the second-largest US bank failure in history and the first since the global financial crisis in 2008. Much has been said already about what caused this failure. However, less has been said about the immediate question: what happens now, particularly for SVB customers.

Lack of clear guidance on this pressing question is because (1) this is a rapidly developing situation and (2) the regulators have yet to issue clear guidance for all depositors and account holders. We have set out below what we currently know about this situation and some practical insights on issues SVB account holders should be considering and consulting with lawyers about.

The FDIC has assumed control of SVB

On March 10, the Federal Deposit Insurance Corporation (FDIC) took over SVB and froze all SVB accounts. Deposits held in SVB have been transferred to an entity created by the FDIC called the Deposit Insurance National Bank of Santa Clara (DINB). The FDIC efforts thus far have been focused on taking protective measures to preserve SVB's assets and account holders' funds.

Can I currently access funds held at SVB or DINB?

The FDIC stated that SVB account holders will be able to access up to $250,000 in insured deposits as of March 13, 2023. The FDIC indicated that banking operations at SVB are likely to restart on that date, including online transactions. "Insured deposits" are those made into checking accounts, negotiable order of withdrawal accounts, savings accounts, money market deposit accounts, time deposits (such as certificates of deposit), and "cashier's checks, money orders, and other official items issued by a bank."

For deposits over $250,000, the FDIC stated that it may need more time to determine "the amount of deposit insurance coverage" for those deposits that are linked to trust accounts or third-party brokers:

"[A]s the insurer of the bank's deposits, the FDIC pays insurance to depositors up to the insurance limit. Historically, the FDIC pays insurance within a few days after a bank closing, usually the next business day, by either 1) providing each depositor with a new account at another insured bank in an amount equal to the insured balance of their account at the failed bank, or 2) issuing a check to each depositor for the insured balance of their account at the failed bank. In some cases—for example, deposits that exceed $250,000 and are linked to trust documents or deposits established by a third-party broker—the FDIC may need additional time to determine the amount of deposit insurance coverage and may request supplemental information from the depositor in order to complete the insurance determination."

Additionally, the amount of FDIC insurance available to any particular customer depends on the number of accounts held, the type of account, and who or what entity own each account. For example, if the same person holds 11 accounts at SVB, that person will only have $250,000 insured. However, as set forth below in an example obtained from the FDIC's website, where SVB accounts are owned by different people or entities and are different account types, the account holders may have access to much larger insured amounts.

For uninsured deposits, and any deposit amounts exceeding the FDIC's insurance limits, the FDIC has stated that account holders will receive (a) a receivership certificate for the remaining amount of their uninsured funds; (b) an advance dividend payment next week; and (c) possible future dividend payments. The certificate will show the amounts that remain while the FDIC liquidates SVB.

We expect further guidance from FDIC this week, including whether there will be payment of any advance dividend to depositors. Until we receive further information from the regulators, there will continue to be uncertainty with respect to how the excess funds will be handled and the ongoing impact on SVB customers. Withers is here to assist its clients through this difficult time, and you should reach out to your contact at Withers for any specific questions or requests for assistance. If you do contact us, it will be helpful if you could provide us with a summary of your accounts, including for each account (1) the balance, (2) the nominal owner(s), and (3) any indirect owners.

In the meantime, we note the following practical insights. However, keep in mind that this is based on what we currently know and that the situation is rapidly evolving. Check back here for updates or call your contact at Withers for specific guidance and advice.

Should I attempt to move my funds to another bank?

The short answer is yes. The longer answer depends on how the FDIC's takeover and liquidation process plays out in the coming days and weeks. However, the extent you are able to access insured deposits and any amounts exceeding or excepted from those insured amounts, you should move those funds expeditiously to another bank.

You should consider setting up accounts with some traditional banks, many of which have offered streamlined onboarding and account set up for former SVB account holders. For example, the Bank of New York Mellon has set up special operations for SVB account holders to quickly open accounts with same day wire and cash transfers available.

Withers is happy to assist with this process. Please contact your Withers representative for further advice and help on setting up and transferring funds to another bank.

Are there other sources of capital I should consider?

There are short-term loan facilities available and many companies have credit lines they can access. In addition, it may be possible to obtain bridge financing from existing investors. You should consult your Withers attorney regarding the specifics of any emergency financing in order to comply with fiduciary obligations, federal and state laws, and other legal requirements.

What about funds in sweep programs?

Many companies participate in sweep programs in which excess cash is "swept" into other accounts, such as money market mutual funds and other investment securities. The nature of those sweep programs varies, so you should check on the specifics of your program. However, in general, swept funds in external investment accounts should not constitute "deposits" at SVB and therefore would be expected to not be subject to the resolution of excess funds on deposit at SVB.

Claims process

As of March 12, 2023, the FDIC has not announced a process for uninsured depositors to obtain their funds. We expect the FDIC to make substantive announcements in the coming days.

Payroll obligations

In most states, the failure to pay wages in a timely manner may result in penalties and D&O liability. We advise all clients to prioritize payment of wages in a timely manner. In the event that the insured amount ($250,000) is insufficient to meet payroll, companies should make efforts to obtain financing to do so and keep records of good-faith efforts to make payroll. We also strongly advise clients to contact Withers to discuss specific guidance in the event that payment of wages is in doubt.

Should I be reconsidering my other banking relationships?

Other similarly situated banks have been feeling the impact of the SVB fallout, and several have seen their share prices drop in the double-digits. However, it is unclear whether those banks suffer from the specific issues that led to SVB's collapse, and several analysts have noted that SVB appears to be an outlier in terms of its risk profile.

To the extent you are concerned about your current holdings in a particular bank, please contact your Withers lawyer for advice on making a potential transition as a number of different factors will impact this decision, including, the particular institution at issue, the amount on deposit at that institution, how many accounts you hold at that institution, and the types of banking products you have with that institution.

What's next for SVB account holders?

There is still substantial uncertainty around how the FDIC will handle uninsured deposit amounts, and what will happen to the insured deposit amounts in excess of the $250,000 insured limit. We hope to receive additional guidance in the coming days. We are also hopeful that account holders will not be left with significant losses. This will be determined as the FDIC sells SVB assets and other banks take ownership of the remaining assets. As of December 31, 2022, it has been reported that SVB had approximately $209 billion in assets and about $175.4 billion in total deposits.

In terms of seniority, insured deposits are the first to be paid, followed generally by uninsured deposits, general creditors (such as senior unsecured notes, lease liabilities, and accrued liabilities), subordinated debt, and finally shareholders. This means that, if a bank fails, insured depositors will have priority in receiving their funds back before any other stakeholders, followed by uninsured depositors and then other creditors. Subordinated debt holders and shareholders will be paid last and may receive little or nothing if there are not enough assets to cover all of the bank's liabilities.

In the near-term, companies should consider alternative sources of short-term capital and prioritize payroll. In addition, there may be downstream impacts affecting suppliers, customers and the like that may impact your ability to operate.

Lastly, in the worst-case scenario that account holders are not made whole, the landscape set in the 2008 and 2009 financial crisis provides potential avenues for recouping those funds through litigation. Withers is prepared to assist with such litigation, should it come to that.

We understand that this may be a troubling time for you. We urge you to contact your Withers partner for specific advice relevant to your situation or contact us on the email below.

SVB SUPPORT

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.