Distressed Banks Resource Center

The rapid collapse of Silicon Valley Bank, Signature Bank and distress at others, continues to create uncertainty in the global economic economy. Customers and counterparties worldwide—including funds, portfolio companies, and individuals—are facing unique legal and operational challenges as a result. Companies are working to overcome disruptions in their daily business operations and to mitigate short- and long-term risks amidst the bank failures.

These bank failures present a highly fluid and complex situation. In addition, each customer account loan or other relationship is subject to specific contractual arrangements between the customer and the bank that should be individually reviewed. Gibson Dunn is equipped to provide strategic counsel and advise clients on how to best approach many of the key issues. We can assist in addressing specific questions, including by executing a comprehensive approach to guide clients.

Gibson Dunn has created a multidisciplinary task force to assist our clients. To provide real time and accurate information, we are closely monitoring the guidance issued by government finance and banking officials as well aggregating information collected from our cross sector of relationships. Please feel free to reach out to any of the individuals with whom you have an existing relationship at Gibson Dunn with questions or concerns. To receive our ongoing regular communications to our clients and friends addressing issues raised by the banking crises, as they arise, please contact us at feedback@gibsondunn.com.

Given the rapidly evolving circumstances, please review the latest updates via the FDIC, Federal Reserve Board and Silicon Valley Bridge Bank, in addition to the summary below.  This page was last updated Tuesday, March 14, 2023.

LATEST UPDATES

A New Paradigm. Silicon Valley Bridge Bank, N.A. – the successor-in-interest to Silicon Valley Bank – posted a website notice on Tuesday stating that it has “fully stepped into the shoes of the former Silicon Valley Bank”. The notice further advised that all loans will now be administered by the new Silicon Valley Bridge Bank, N.A. and existing credit commitments will be honored. The website also contained a link to a 75 page “Transfer Agreement” between the FDIC, as receiver for Silicon Valley Bank (the state chartered now-defunct bank) and Silicon Valley Bridge Bank, N.A. (the federally-chartered new bank) that appears to transfer various assets and liabilities to the bridge bank to enable it to operate in the ordinary course in a manner similar to the predecessor bank for domestic operations. Additionally, Silicon Valley Bridge Bank CEO Tim Mayopoulos issued a statement asking depositors to return to SVB, affirming that depositors have full access to their money and that all new and existing deposits are fully protected by the FDIC (even beyond the typical $250,000 limit). The website clarified that Silicon Valley Bridge Bank is not under FDIC receivership.

All of this implements a new paradigm that replaces the receivership model from the past weekend with a ”fully functioning” bank that seeks to continue operations in the ordinary course. The Deposit Insurance Bank of Santa Clara that was established Friday, and the other trappings of FDIC receivership, are gone.

While Signature Bridge Bank, N.A.’s website does not contain similar documentation, its operations on Monday appeared to be in the ordinary course, with Signature Bridge Bank appearing to fund its loan obligations and its employees providing standard services.

What About Loan Covenants Regarding Deposits? A top question resulting from the new bridge bank paradigm is whether the bridge banks will enforce covenants under which borrowers promised to hold many or all of their deposits in the lender’s bank. The FDIC issued a Financial Institution Letter FIL -10-2023 emphasizing that it has the ability to enforce all contracts held in receivership[1] and, in a separate letter, stated that the bridge bank intends to enforce such contracts[2]. Notwithstanding such guidance, given the novel issues of public policy, it remains to be seen whether, in fact, SVB borrowers who moved deposits to other institutions will now be expected by the FDIC and Silicon Valley Bridge Bank to move those deposits back to Silicon Valley Bridge Bank, particularly given that it appears that regulators are pursuing the potential sale of SVB loans to third parties, as discussed below.

Will Letters of Credit issued by SVB be honored? The Financial Institution Letter issued by the FDIC states that “The bridge bank is performing under all failed bank contracts and expects all counterparties to similarly fulfill their contractual obligations.” These bank contracts would presumably include the letters of credit issued by SVB and Signature Bank.

What Happens to Derivatives? All Qualified Financial Contracts of each of SVB and Signature Bank have been transferred to the applicable bridge bank established by the FDIC. The definition of “Qualified Financial Contract” includes, but is not limited to derivatives (e.g., swaps, options, forwards, etc.), repurchase, reverse repurchase, and securities lending transactions. As a result, the applicable bridge bank is now the counterparty to derivatives entered into with SVB and Signature Bank.Payments and collateral calls under derivatives contracts should function as normal between the counterparty and the applicable bridge bank entities of SVB and Signature Bank, as noted in the Financial Institution Letter mentioned above.

Given that derivatives contracts are often heavily negotiated, the terms of any derivatives trading documentation and the special provisions in 12 U.S.C. § 1821 should be reviewed to understand your specific rights with respect to your derivatives.

Cayman Islands Depositors. While the UK branch of SVB has been purchased by HSBC, there is no word on the fate of SVB’s Cayman branch, which is outside of the U.S. receivership and treated separately under Cayman law. Those with deposits in SVB’s Cayman branch may be continuing to experience challenges with the transfer of funds out of accounts. There is no indication from the Cayman regulators that they have taken possession of the Cayman branch, though they have the authority to do so. There also is an MOU between the Cayman regulators and the FDIC related to their ongoing cooperation and information sharing for the supervision and resolution of banks with branches in Cayman. Today’s FDIC guidance states that, “All vendors providing services, except for the Cayman Islands Branch, should continue to provide such services.” We note that unless Silicon Valley Bridge Bank is connected to SWIFT, it cannot accept foreign wire transfers.

SVB All or Nothing Sale Off the Table? On the heels of yesterday’s Wall Street Journal report that a second auction round for SVB would be held, several national media outlets reported Tuesday that five top U.S. private equity firms are reviewing SVB books in order to potentially bid for purchasing SVB loans. In addition, SVB Financial Group, the parent company, hired Alvarez & Marsal as restructuring advisor and appointed William Kostouros of Alvarez & Marsal as Chief Restructuring Officer. Mr. Kostrouos previously served in an identical capacity for Washington Mutual. SVB Financial also disclosed that it is exploring strategic alternatives for itself, as well as SVB Securities (the investment bank) and SVB Capital (the investment management arm), with potentially a management buy-out being explored for SVB Securities. Accordingly, it is unclear whether a second auction for SVB will in fact be held, or whether the auction will be for separate businesses and loan portfolios of SVB Financial. Media reports also indicate that a group of creditors is organizing to represent their interests with respect to holdings in SVB Financial’s bonds, which in total have $3.4 billion in face value of which reportedly over $1.5 billion has traded hands since Friday.

Signature Bank Bid Process. Bloomberg reports that the FDIC has opened a virtual data room for third parties to conduct due diligence in anticipation of potential bidding to purchase, presumably in part or all of, Signature Bank.

Capitol Hill Updates. Senate Banking Committee Chairman Sherrod Brown said his committee plans to hold a hearing, though they are still deciding on witnesses. Similarly, House Financial Services Committee Chairman Patrick McHenry said today that his committee would be talking with SVB and regulators to understand what led to the bank’s failure. Separately, Senator Warren and Rep. Katie Porter have introduced companion bills to re-impose heightened regulations on small- and medium-sized banks.

Government Investigations Reportedly Begin. Multiple media sources report that the SEC and Justice Department have opened investigations into events surrounding SVB’s failure, while at least one state regulator (Massachusetts) has announced a formal investigation into stock trading by SVB executives prior to the bank’s failure. The Federal Reserve is also investigating both its internal oversight procedures as well as risk management at SVB, according to media sources. Fed Chairman Jerome Powell stated in a Monday press release, “The events surrounding Silicon Valley Bank demand a thorough, transparent, and swift review by the Federal Reserve.”

Public Company Disclosure Issues. Publicly traded companies should be aware that responding to questions from investors about the extent of their exposure to a bank in receivership, or now in a ‘bridge bank,’ could implicate the federal securities laws’ selective disclosure rules, such as Regulation FD, and the administration of their insider trading policies. Any of such companies that have banking relationships with banks that have failed should consider whether a Current Report on Form 8-K is appropriate to address potential exposure risk, and whether an update to the company’s risk factors or other disclosures is appropriate with the company’s next periodic filing.

Atmosphere Situation Report

Government Response (US): The Department of the Treasury, FDIC and Federal Reserve announced multiple actions on Sunday, March 12, 2023 including:

  • Depositors of Silicon Valley Bank (“SVB”) will be made whole and have access to their funds as of Monday, March 13, 2023, through establishment of a newly created “bridge bank,” Silicon Valley Bridge Bank N.A. A bridge bank is a chartered national bank that operates under a board appointed by the FDIC. Former Fannie Mae head Tim Mayopoulos has been named the CEO of the bridge bank. (https://www.federalreserve.gov/newsevents/pressreleases/monetary20230312b.htm)
  • Depositors of Signature Bank will also be made whole, with access to funds on March 13, 2023. The FDIC established a bridge bank, Signature Bridge Bank, N.A. for this purpose. The former CEO of Fifth Third, Greg Carmichael, has been named the CEO of the bridge bank. (https://www.fdic.gov/news/press-releases/2023/pr23018.html)
  • A Bank Term Funding Program (“BTFP”) created by the Federal Reserve will provide loans of up to one year to banks, credit unions and other eligible depository institutions that pledge qualifying assets. Collateral will be valued at par. The Treasury will make up to $25 billion from the Exchange Stabilization Fund available to backstop the BFTP. (https://www.federalreserve.gov/newsevents/pressreleases/monetary20230312a.htm)

Market Updates:

  • The SVB and Signature bridge banks were open and functioning on Monday, with staff at each bank returning communications. That said, it has been reported that SVB funding transfer completions were episodic, presumably due to the high volume of customer requests. Multiple users have reported long hold times and electronic bank interface delays amid heavy traffic.
  • No buyer has been announced as of Monday afternoon for the U.S. portion of SVB or for Signature Bank. The Wall Street Journal reported Monday that with the absence of a buyer for SVB after an initial FDIC auction round closed on Sunday, the FDIC intends to re-launch a second auction under which the FDIC will have additional authority for flexibility in negotiating sale terms because SVB’s failure now has been deemed a systemic threat to the financial system. The same report stated that none of the ‘largest U.S. banks’ submitted a bid in the initial auction. CNBC reported earlier on Monday that PNC had submitted an indication of interest to acquire SVB but was not proceeding. It is unknown whether other potential bidders existed in the first auction round. Separately, HSBC purchased Silicon Valley Bank UK Limited (“SVB UK”), the UK affiliate of SVB, for £1. All SVB UK deposits are backed by HSBC.
  • While it will take time to evaluate the many events of last week, certain details are emerging. Reuters reports that SVB’s Wednesday announcement of the sale of its available for sale (AFS) securities came after Moody’s the prior week informed SVB of an impending credit downgrade. In turn, SVB then liquidated approximately $21 billion of AFS securities, resulting in a $1.8 billion loss. To offset that, SVB concurrently announced a $500 million investment from General Atlantic conditioned upon SVB first raising a planned $1.75 billion, which never came to fruition.

Capitol Hill Updates: House Financial Services Committee Chairman Patrick McHenry released a statement dubbing the failure as “the first Twitter fueled bank run.” He called for calm. Ranking Member Maxine Waters has told the press that the Committee is working on a bipartisan basis to hold a hearing as soon as possible.

  • Eighteen Democratic House members signed a letter to Treasury Secretary Yellen, FDIC Chair Martin Gruenberg, Federal Reserve Chair Jerome Powell, and Acting Comptroller Michael Hsu urging swift action to protect depositors, calling on Congress to increase the FDIC deposit insurance limit of $250,000, and clarifying that they did not believe regulators should bail out the bank’s shareholders. (Congressional SVB Letter)
  • The Biden administration has been providing briefings to Capitol Hill over the last several days. They provided a bipartisan, bicameral briefing Sunday evening and met with Senate Banking Committee Republicans (who said they had not received the invitation to the previous briefing) on Monday.
  • Senate Majority Leader Chuck Schumer and House Minority Leader Hakeem Jeffries have said they plan to examine the Bank’s failure. They did not say which congressional committees they would tap to lead that investigation.

SEC Response Update: Yesterday (March 12, 2023) SEC Chair Gary Gensler released the following statement, “In times of increased volatility and uncertainty, we at the SEC are particularly focused on monitoring for market stability and identifying and prosecuting any form of misconduct that might threaten investors, capital formation, or the markets more broadly. Without speaking to any individual entity or person, we will investigate and bring enforcement actions if we find violations of the federal securities laws.” Gurbir Grewal, the SEC Director of Enforcement spoke today (Monday, March 13, 2023) at the annual Securities Industry and Financial Markets Association Conference but did not specifically address the bank failures; though he did note the SEC’s focus on enhancing the public trust by focusing on the failures of those parties in gatekeeping functions.


Depositor/Debtor Specific Issues Report

What Happens to Money in Deposit Accounts: Deposit accounts are cash accounts and may be labeled as an “operating account” or a “money market deposit account” (sometimes labeled as an “MMDA account”). Note that the money market deposit account is distinct from the Money Market Mutual Fund Accounts described below. The funds in deposit accounts will be fully paid, even for balances in excess of the standard $250,000 FDIC limit.

What Happens to Money in Cash Sweep Money Market Mutual Fund Accounts: Cash sweep accounts can be structured in a variety of ways. In the case of SVB, it appears that many of their customers are subject to one of their various cash sweep programs. For this category of accounts (the “SVB Cash Sweep Accounts”), the “cash sweep” program involves regular (usually daily or next day) cash sweeps from customer deposit accounts into an SVB ‘Omnibus Account’ which is then used to purchase money market mutual fund securities on behalf of the customers. Companies seeking return of these assets, whether in cash or in kind, may need to submit a proof of claim to the FDIC if it appears that the cash value of such assets are not readily available via the online portal. In addition, Companies desiring to liquidate securities in connection with such return should consider any potential negative tax implications.

What Happens to Money in ‘Asset Management’ Accounts: These are securities brokerage accounts advised by Silicon Asset Management (an affiliate of SVB) where the securities are physically held by US Bank as custodian and segregated by client name on the custodian’s books. These accounts should not be part of the receivership or the bank estate. The custodian of these investment accounts may be contacted directly for more information on how to transfer those accounts from the SAM managed program to another advisor.

What Happens to Money in Intrafi/Promontory Interfinancial Network Accounts: Some SVB customers have an arrangement with Intrafi (formerly known as Promontory Interfinancial Network), where cash held in an SVB deposit account above the $250,000 FDIC insured limit is swept into a syndicate of other banks, each holding less than $250,000 of the customer’s deposits. Cash deposits that were swept into syndicated banks through Intrafi should not be part of the receivership or the bank estate.

Can I Draw on Existing Credit and Loan Facilities?:  On Friday, the FDIC suggested it would not be honoring drawdowns on loans and credit facilities loans with Silicon Valley Bank, N.A. (i.e., the bridge bank). However, as of Monday we understand that at least some borrowers have been able to draw on lines of credit at SVB and Signature.

What is the Status of Domestic Wires Out of SVB that I Sent Before the Receivership Was in Place?: If you have a pending domestic wire request out of SVB that has not yet been honored, the expectation is that those funds will be honored without further action by the directing party. At this time it does not appear necessary to terminate wires submitted last week but not processed before the receivership and reinitiate new requests.

What Will Happen to Deposits and External Domestic Wires Into SVB: External domestic wires that arrive in your SVB account after Friday should be available through the bridge bank. Public statements from financial regulators suggest that 100% protection will apply so long as the bridge bank is accepting deposits.

What Are My Payment Obligations, If Any, on My SVB Loans?: The FDIC has instructed in their FAQs that Debtors to SVB continue to pay on their loans and remain subject to the loan terms. The FDIC appears to be operating the bridge bank in quasi-ordinary course without regard to the more limited receivership arrangements previously announced by the FDIC.

What Do I Do About Loan Defaults or Waiver? As borrowers under loans with SVB consider withdrawing funds, care should be taken to review existing loan arrangements with SVB, as many of them require minimum levels of cash and cash equivalents to be maintained with SVB. While is not expected that FDIC will enforce such covenants, the FDIC has also indicated that it intends to sell the SVB loans, and it is possible that, for example, a buyer could request that borrower comply with the existing requirements by establishing its accounts with the buyer. In addition, consideration should be given to where the technical default would result in cross-defaults in other company debt or other arrangements.

This document is for informational purposes only and does not, and is not intended to, constitute legal advice or create an attorney-client relationship. You should contact a Gibson Dunn attorney directly to see if they are able to provide legal advice with respect to a particular legal matter.