As many of you are aware, Silicon Valley Bank (SVB), a bank licensed by the State of California whose deposits are insured by the FDIC, was seized by the California Department of Financial Protection and Innovation and placed into FDIC receivership on Friday, March 10.
On Sunday, March 12, Signature Bank was seized by the New York State Department of Financial Services and also placed into an FDIC receivership. The FDIC has now established two separate “bridge banks” that will operate as ongoing banking businesses pending the FDIC’s ultimate resolution of these institutions.
Additionally, the US federal government has invoked a “systemic risk” authority to fully protect all depositors in each of these institutions. In the case of SVB, this was a significant change from the FDIC’s initial approach, which would have only protected depositors up to the US$250,000 FDIC insurance limit, leaving depositors with balances above the insurance limit to await the outcome of the sale of SVB’s assets before they knew how much of their remaining deposits would be repaid.
Norton Rose Fulbright recognizes that many of our clients, particularly in the technology, venture capital, and financial services sectors, may have questions regarding the effect of these developments.
What is a bridge bank?
A bridge bank is a temporary federally chartered national bank that the FDIC organizes to take over and maintain banking services for customers of a failed bank. The bridge bank provides the FDIC with time to stabilize the failed bank’s business and manage an orderly wind down or sale of the institution to a buyer. The FDIC transferred all the deposit liabilities and substantially all the assets of SVB and Signature Bank to respective bridge banks. The FDIC has reportedly already restarted the process of taking bids for SVB.
I heard that HSBC has acquired SVB. Is that correct?
SVB was the lead bank in a larger financial services organization. SVB had a separately incorporated subsidiary bank in the United Kingdom, Silicon Valley Bank UK Limited. As described in a statement issued by the Bank of England on March 13, the UK regulators took actions resulting in the sale of the UK subsidiary bank to HSBC UK Bank Plc, as a result of which the UK subsidiary will continue in operation. The acquisition of SVB’s UK operations does not extend to the US bank (the assets of which have been transferred to a bridge bank), the US securities business (which has appointed a chief restructuring officer and is reportedly exploring strategic options), the German branch of the business (which has been closed by local regulators and subjected to a moratorium), or other non-UK portions of the bank.
What is the status of my deposits?
You should have access to the full amount of your deposits as of Monday, March 13, 2023. The initial actions of the FDIC as receiver of SVB resulted in a temporary freeze of all deposits. In addition, depositors would initially have received only an unspecified portion of amounts on deposit above US$250,000. However, US government officials, in consultation with the President, invoked the “systemic risk” authority to assure that all depositors of SVB and Signature Bank would be made whole, and banking services resumed on Monday morning. Official checks of these institutions will continue to be honored.
If I have a loan from SVB, can I still draw on it?
At this stage, there is no definitive statement on how the FDIC will administer the bridge banks. In the past, the FDIC has sought to continue lending and honor obligations under credit agreements so long as doing so would not increase losses to the FDIC’s deposit insurance fund.
What will happen with contracts (including swaps) involving SVB?
After the commencement of an FDIC receivership, the FDIC generally has the power to repudiate or enforce contracts, and provisions that allow termination of a contract due to the insolvency or appointment of the FDIC as receiver are generally unenforceable. The FDIC as receiver can generally prevent a third party from terminating, accelerating or declaring a default under a contract for a period of 90 days without the consent of the FDIC. The FDIC can also request that a court grant a stay of legal proceedings of up to 90 days. A new bridge bank may also request a stay of 45 days for claims against it arising from its acquisition of assets or assumption of liabilities from a failed bank.
Special rules apply to qualified financial contracts (“QFCs”). The FDIC was required to make certain decisions by Monday, March 13 at 5:00 pm regarding SVB’s QFC portfolio. The FDIC decided to transfer all QFCs of both SVB and Signature Bank to the respective bridge banks. This generally means that a counterparty may not terminate the QFCs on the grounds of appointment of a receiver for SVB or Signature Bank.
What will ultimately happen with loans owed to SVB?
In an FDIC receivership, loans made by the bank being wound-up are usually sold to a successor bank. This can be a single bank, or several. There is currently no announcement on which banks will acquire the SVB loan portfolio. In the interim, the bridge banks should continue to service the loans and other credit arrangement that were transferred from their respective predecessor institutions, and borrowers must generally continue to make their loan payments in the ordinary course.
Is there an “order of priority” of creditors in an FDIC receivership, like there is in bankruptcy?
Yes. Normally, insured deposits are made whole (unless the depositor is delinquent with respect to loans or other obligations to the bank) and the order of priority is, in descending order:
- secured creditors,
- administrative expenses of the receivership,
- deposits above the insured limit; and
- general unsecured creditors.
In the case of SVB and Signature Bank, however, the use of the “systemic risk” authority means that all depositors will be paid in full. Other claims, particularly those of shareholders and unsecured creditors are not protected by the systemic risk authority and remain subject to potential losses.
Are other banks facing the same problems as SVB and Signature Bank?
The Federal Reserve Board introduced a lending facility (called the Bank Term Funding Program) for virtually all US federally insured banks and credit unions that generally allows the banks to borrow from the Fed using the bank’s mortgage securities and bond portfolio as collateral. US branches and agencies of foreign banks are also generally eligible to borrow under the facility. Importantly, the securities can be valued at par for borrowing purposes. One of the problems that SVB faced was that it was forced to recognize losses when it sold some of the securities in its portfolio to raise cash to meet depositor withdrawals. The Fed’s lending facility means that banks do not have to sell their securities at a loss. They can instead borrow from the Fed. The market’s knowledge that banks should be able to borrow from the Fed if necessary to fund deposit withdrawals should assure depositors that they do need not race to withdraw deposits ahead of others. The Fed has stated that banks will be able to borrow from the Fed under this special loan facility for the next year. If you are a bank and want to borrow from the Fed, the Fed has prepared a standing template for such requests and provided additional information in a set of FAQs.
Where can I find further Information?
If you have questions about what this means for you, please reach out to Tim Byrne (tim.byrne@nortonrosefulbright.com), Steve Dollar (steve.dollar@nortonrosefulbright.com), Tom Delaney (thomas.delaney@nortonrosefulbright.com), Mike Keeley, (mike.keeley@nortonrosefulbright.com), Eric Daucher (eric.daucher@nortonrosefulbright.com), or your regular Norton Rose Fulbright contact.
