Silicon Valley Bank's Receivership: Frequently Asked Questions

Silicon Valley Bank's Receivership: Frequently Asked Questions

March 12, 2023, Covington Alert

On Friday, March 10, 2023, the California Department of Financial Protection and Innovation (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.

SVB is the second-largest bank in U.S. history to be placed into FDIC receivership, and the ramifications of its failure for its customer base and the financial services industry are significant. This client alert answers frequently asked questions that Covington has received from clients seeking to understand SVB's receivership and what it means for them.

What does this mean for depositors of SVB?

• The FDIC has said that all insured depositors will have full access to their insured deposits - i.e., balances up to the FDIC standard insurance maximum amount of $250,000 per depositor per account ownership category - no later than Monday, March 13, 2023.
  • Some deposits that require supplemental documentation from the depositors, such as accounts linked to a formal written trust agreement, funds placed by a fiduciary on behalf of an owner, or deposits placed by an administrator of an employee benefit plan may take more time.
• For depositors with deposits above the FDIC insurance maximum amount:
  • Depositors will have access to $250,000 of their deposits per account ownership category, again no later than Monday, March 13, 2023.
  • The FDIC has said it will pay uninsured depositors an advance "dividend" payment in respect of their uninsured deposits (i.e., a partial payment of such uninsured deposits) within the next week. We do not know the amount or timing of such payment.
  • Depositors will receive from the FDIC a receivership certificate in the amount of their uninsured deposits. If the dividend payment is paid by the FDIC to uninsured depositors prior to distribution of the receivership certificate, the receivership certificate will be the net remaining unpaid amount of the uninsured deposit.

What if a company and its subsidiaries have separate bank accounts at SVB?

As long as these entities were not set up to increase deposit insurance coverage, deposits at SVB in accounts held separately by parent and subsidiary entities can be insured up to the deposit insurance maximum amount for each entity; as a result, a consolidated group of entities could have more than $250,000 in insured deposits.

Do I need to take any action now?

• If your deposits are below the deposit insurance maximum amount, you do not need to take any action now unless you want to
  • change your mailing address or
  • have your insured deposits sent electronically to an account at another bank.
• If your deposits are uninsured, you should go to the FDIC's Claims Portal at this link to register your claim for your uninsured deposits; while it is likely that your uninsured deposits will be protected even if you do not register at the FDIC's Claims Portal, it is best to do so out of an abundance of caution.

Will some depositors receive their deposits ahead of other depositors?

No, all insured deposits will be available at the same time and advanced dividends to return uninsured deposits should be paid at the same time.

Will some uninsured depositors receive more of their deposits than other uninsured depositors?

No, all uninsured depositors will receive the same percentage of their claims through the payment of advanced dividends by the FDIC.

How will I receive my receivership certificate?

Historically, the FDIC has mailed receivership certificates to uninsured depositors. For SVB uninsured depositors, we expect the FDIC to either mail the certificates and/or use the online portal to deliver them electronically.

How will the FDIC pay my advanced dividend?

It is likely to deposit the funds in your account at DINB, although depositors may provide account information for another bank in order to receive funds into that account.

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 Monday morning to see if the funds were received.
• Since the DFPI and 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.
  • We believe that the FDIC is currently determining the status of transactions initiated prior to the applicable receivership cutoff time, and it is possible that transfers initiated on Thursday will be processed on Monday; it is less likely that transfers initiated on Friday will be processed.

What will happen to checks and automatic payments that have not cleared an account before SVB was closed?

• Any outstanding automatic payments or checks presented after SVB was closed cannot be paid or charged against the account.
• Any outstanding checks or automatic payment requests presented after SVB was closed will be returned unpaid and will be marked to indicate that SVB is closed.

What will happen to direct deposits?

It is likely that direct deposits will be accepted at DINB starting on Monday, March 13, 2023.

How are custody and fiduciary accounts treated?

• In principle, assets that a bank holds in an agency capacity such as in custody accounts or fiduciary accounts are not treated as part of the bank's estate in receivership.
• However, the rules for properly structuring agency accounts so that client assets are bankruptcy-remote are technical and complex, and the FDIC may scrutinize such arrangements closely to ensure their compliance with these rules.

What if I have a loan with SVB?

• You should continue to make scheduled interest, principal, fee and other payments on the loan to until you are notified otherwise by the FDIC or another bank if a bank acquires the loan.
• If your loan is not delinquent, you may be able to set off your uninsured deposits against your loan balance.
  • Specific requirements need to be met to set off your uninsured deposits against your loan so it is best to consult with legal counsel.
• If your loan is delinquent, the FDIC could set off your insured deposits against your loan balance and thereby reduce the amount of insured deposits available to you.

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

• The FDIC is allowed to repudiate SVB's contracts that it deems burdensome, which could include loan commitments such as undrawn or partially drawn revolving lines of credit.
• Guidance on the FDIC's website indicates that the FDIC is unlikely to honor new drawdown requests except in rare circumstances where the advancement of funds would protect or enhance collateral.

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

• The FDIC could exercise its repudiation authority to repudiate contracts for services that SVB no longer needs now that it is a bank under receivership.
• At the same time, federal law prohibits a counterparty to SVB 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's entry into receivership.
• As a result, the FDIC has significant discretion, and a counterparty would generally be contractually bound to perform on its contracts with SVB unless and until it has received notice from the FDIC of the agency's intent to repudiate such contracts.

What will happen to SVB?

• A sale of some or all of SVB or its assets may occur in the near term; if such a sale occurs then depositors and borrowers will be notified by the FDIC or the acquiring bank about the sale and will receive instructions on what actions they need to take.
  • A quick sale of SVB 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 guarantees about certain or all of SVB's assets.
  • Given the size of SVB, as well as recent completed and pending transactions, there is only a small pool of potential buyers for SVB as an enterprise.
  • Furthermore, as a result of the high level of government support provided during the financial crisis to banks and other financial services firms, there is currently a negative view in Washington to providing these types of government guarantees or support to banks or financial services firms.
• If SVB is not sold quickly, the FDIC will explore sales of SVB assets, including its loan and investment portfolios as well as its subsidiaries.
• As the FDIC sells SVB assets, it will then assess whether it can make additional dividends to uninsured depositors and, if it can, uninsured depositors will receive additional uninsured deposits.

How long will it take to find out if I will receive 100% of my uninsured deposits?

• If SVB is sold quickly, or if its assets and subsidiaries are sold within the next four to eight weeks, then uninsured depositors should find out how much of their uninsured deposits they will receive within the next couple of months.
• While there are historical precedents where it has taken years to completely resolve a failed bank, in the case of SVB we believe that it will take a few months to determine the percentage payout of uninsured deposits.

If you have any questions concerning the material discussed in this advisory, please contact the following members of our Financial Services Group: Michael Nonaka, Randy Benjenk, Michael Reed.

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