Closures of SVB and SBNY: What Lenders, Agents, and Borrowers Need to Know

On Friday, March 10, 2023, the Federal Deposit Insurance Corporation (FDIC) announced that Silicon Valley Bank had been closed, and in its capacity as the appointed receiver, the FDIC assumed control of SVB’s assets and liabilities. The FDIC quickly transferred SVB’s assets to a newly formed interim institution called the Deposit Insurance National Bank of Santa Clara (DINB). SVB’s collapse was the second-largest bank closing in U.S. history, behind Washington Mutual, a casualty of the 2008 financial crisis.

Two days later, on Sunday, March 12, 2023, the Department of Financial Services of New York closed Signature Bank, New York (SBNY), appointing the FDIC as receiver to control SBNY’s assets and liabilities. The FDIC established the Signature Bridge Bank, N.A. to serve as successor to the closed SBNY. (Note: This is not the same bank as Signature Bank in Illinois, which is in good standing and open for business). The FDIC and Federal Reserve also announced that all depositors of both SVB and SBNY would have access to their deposits, whether insured or uninsured, on March 13. In addition, the Federal Reserve said it would make additional funding available to other depository institutions to fend off any ripple effects of the closure.

Not surprisingly, SVB’s and SBNY’s closures have sparked questions and unease – not only for companies with deposits in SVB and SBNY but for lenders, agents, and borrowers throughout the country. The closures have also prompted reverberations in financial markets, especially among regional banks. On March 15^th, both Fitch Ratings and S&P Global Ratings downgraded First Republic Bank’s credit rating to a junk rating on fears that depositors might pull their funds.

While the situation is still fluid and evolving quickly, here are six items lenders, agents, and borrowers should know about the closures and what they mean for other lenders, agents, and borrowers.

• What Happened and Why? 

When you deposit funds at a bank in your deposit account, the bank is allowed to invest the deposited money. Banks must have a certain amount of cash on hand for its depositors, but that number is not equal to 100% of all deposits made with the bank. In the case of SVB, depositors became anxious and started withdrawing funds. Word spread very quickly, and within a short time, the bank was out of cash. SVB sold some of its assets to cover depositors who wanted their money, but it could not sell quickly enough or at high enough prices to satisfy all of its depositors. This was your classic “run on the bank”.  In this case, SVB made investments that did not pay off as expected, and SVB had to sell those investments at a discount to obtain cash quickly to fund depositors’ demands for their money.  Unfortunately, there were not enough assets to cover the requests for withdrawals.

• Depositors in SVB and SBNY can access their accounts – even beyond the $250,000 FDIC limit.

The FDIC covers deposits up to $250,000 per depositor, per bank, in each account ownership category. However, the federal government has promised to protect the total amount of deposits in SVB and SBNY, including those extending beyond the $250,000 limit. As reported in the New York Times, depositors in SVB – many start-ups and businesses in the tech industry – could access their accounts through a “bridge” successor bank as of Monday, March 13^th.

• Collateral accounts will remain intact.

Customers with collateral accounts with the closed banks will continue to have access to those accounts, though the accounts may eventually be transferred to a new depository. 

• The $250,000 FDIC limit doesn’t apply.

The FDIC has indicated that existing deposits at SVB and SBNY, whether insured or uninsured, will be accessible. However, whether federal banking authorities will cover post-receivership deposits over the $250,000 FDIC-insured limit remains unknown.

• Questions remain about whether SVB or SBNY are considered a “defaulting lender.”

Many syndicated credit agreements include provisions regarding a “defaulting lender” that trigger other rights and obligations, such as a waterfall provision for principal and interest payments received by an agent on behalf of the defaulting lender and assignment requirements. It is unclear whether SVB and SBNY are deemed defaulting lenders since the FDIC has agreed to honor all deposits and accounts in the banks. 

Further, the FDIC’s role as a receiver gives it the authority to enforce contracts to which SVB and SBNY are a party. Moreover, it prohibits counterparties – such as depositors, borrowers, or agents – from terminating, accelerating, or declaring a default within 90 days post-receivership. For this reason, attempts to replace SVB or SBNY as an agent may be challenged during the 90 days after receivership. 

• Federal banking authorities have indicated they will take decisive action to stem any ripple effects and calm fears. 

On March 12, the Federal Reserve issued the following statement: “Today we are taking decisive actions to protect the U.S. economy by strengthening public confidence in our banking system. This step will ensure that the U.S. banking system continues to perform its vital roles of protecting deposits and providing access to credit to households and businesses in a manner that promotes strong and sustainable economic growth… Depositors will have access to all of their money starting Monday, March 13. No losses associated with the resolution of Silicon Valley Bank will be borne by the taxpayer.” The Federal Reserve will make a program available to banks whereby banks can borrow money against its investments in order to obtain necessary cash to satisfy depositors.

The Federal Reserve also said they would invoke a similar systemic risk exception for SBNY, with no losses born by taxpayers.

However, shareholders and certain unsecured debtholders in the banks will not be protected, and senior management has been removed.

On March 13, the Federal Reserve also announced that Vice Chair for Supervision Michael S. Barr had been appointed to lead a review of the supervision and regulation of SVB, which will be publicly available on May 1.

The attorneys in LP’s Financial Services and Restructuring Group will continue to monitor the evolving events and provide updates as necessary. We are available to answer any questions that borrowers, lenders, and agents may have.