On Sunday, March 12, 2023, the Department of Treasury, Federal Reserve and FDIC issued a joint statement confirming that they were taking decisive action to protect the U.S. economy by strengthening public confidence in our banking system. In separate press releases, the FDIC promised full recourse to all depositors at Silicon Valley Bank (“SVB”) that all depositors at SVB – whether the depositor’s account is fully insured up to the $250,000 threshold for FDIC insurance or exceeds the $250,000 insurance threshold – will have full access to their money beginning Monday, March 13, 2023. The actions are a positive development for accounts that exceed the typical $250,000 threshold for FDIC insurance. The joint actions apply to depositors only. Shareholders and certain other unsecured debt holders are not protected by the proposed joint actions
As part of its commitment to cover all deposits at SVB, the FDIC transferred SVB’s deposit accounts, and certain other assets of SVB, to Silicon Valley Bridge Bank, N.A. (“SVB Bridge Bank”). As a result depositors and borrowers of SVB will automatically become customers of SVB Bridge Bank and should have customer service and access to their funds by ATM, debit cards, and writing checks in the same manner as before. SVB’s official checks, written before the receivership, will continue to clear.
It is important to remember that SVB Bridge Bank is operating under the receivership established when the FDIC took over SVB.
Lines of Credit
The FDIC has reported that qualified financial contracts of SVB, as defined in 12 U.S.C. 1821(e), have been transferred to SVB Bridge Bank. Thus, while the FDIC intends to provide depositors of SVB full access to their deposit accounts, it remains unclear at this time if SVB Bridge Bank will honor any funding requests under any loan agreements, letters of credit or other financing commitment entered into or issued by SVB. Clients should check with their WBD team representative as to the nature, extent and enforceability of any loan agreements, letters of credit or other financing commitment, especially where the loan/funding obligation is a part of syndicated loan or where SVB served as an administrative agent under the loan/funding obligation.
It is important to note that since SVB Bridge Bank is operating under receivership, SVB Bridge Bank has the right to “repudiate”, within a reasonable period of time, burdensome contracts, including loan agreements with borrowers. To date, the FDIC has advised borrowers with unfunded loans or commitments with SVB that it is not required to make further advances under SVB’s loans, but will consider doing so on a case-by-case basis. Borrowers with loan agreements or other credit agreements with SVB, now transferred to and held by SVB Bridge Bank, should continue to honor their obligations under such loan or credit agreements. Borrowers may want to check with their WBD team representative as to whether any right of set off exists under the loan or credit agreement.
Federal Reserve Action
As part of the joint actions, the Federal Reserve announced the creation of the Bank Term Funding Program (“BFTP”). The BFTP will offer loans of up to one year in length to banks, savings associations, credit unions, and other eligible depository institutions pledging U.S. Treasuries, agency debt and mortgage-backed securities, and other qualifying assets as collateral. These assets will be valued at par. The BTFP will also be an additional source of liquidity against high-quality securities, eliminating an institution's need to quickly sell those securities in times of stress.
- Eligible Borrowers: Any U.S. federally insured depository institution (including a bank, savings association, or credit union) or U.S. branch or agency of a foreign bank that is eligible for “primary credit” (see 12 C.F.R. § 201.4(a)).
- Eligible Collateral: Eligible collateral includes any collateral eligible for purchase by the Federal Reserve Banks in open market operations (see 12 C.F.R. §201.108(b)), provided that such collateral was owned by the borrower as of March 12, 2023.
- Advance Size: Advances will be limited to the value of eligible collateral pledged by the Eligible Borrower.
- Program Duration: One year (until March 11, 2024).
- Fees: None.
- Rate: A fixed one-year overnight index swap rate plus 10 basis pts.
- Collateral Valuation: The collateral will be valued at par.
- Prepayment: No prepayment penalty.
Department of Treasury Action
As part of the joint action, the Department of Treasury will make available up to $25 billion from the Exchange Stabilization Fund as a backstop for the BTFP. The Federal Reserve does not anticipate that it will be necessary to draw on these backstop funds.
HSBC Holdings plc announced on Monday, that its UK subsidiary, HSBC UK Bank plc, acquired Silicon Valley Bank UK Limited.
SVB Bank Holding Co.
SVB Financial Group is the parent, holding, company of SVB. SVB Financial Group is not a bank. The ownership of SVB is important, as U.S. Banks are prohibited from filing for bankruptcy protection in the United States. See, 11 U.S.C. 109(b)(2). (Rather, the FDIC as receiver takes control over the bank and resolves claims asserted against the failed bank.)
While a bank may not file for bankruptcy protection, a bank’s parent company may seek bankruptcy protection, (For an example of such a filing see In re: Washington Mutual, Delaware Chapter 11 bankruptcy filing.) We expect SVB Financial Group, SVB’s parent holding company will likely seek bankruptcy protection in the near future.
Creditors and shareholders of SVB Financial Group, not SVB, will be able to assert what claims and rights they may have and hold against SVB Financial Group in the bankruptcy case. Customers of SVB, on the other hand, will resolve their claims and rights through the FDIC receivership. The interplay of the SVB receivership, and potential bankruptcy filing of SVB Financial Group will be fascinating to watch unfold. Clients who are creditors or shareholders of SVB Financial Group should be on the lookout for any such bankruptcy filing and look to quickly assess their rights and claims, including whether they would want to sit on any official committees (i.e. unsecured creditors’ committee or equity security committee) that may be appointed in the potential bankruptcy case.