Special Feature: Lorraine McGowen Speaks Up on What’s Next for Silicon Valley Bank

Silicon Valley Bank’s Collapse—What’s Next for SVB and Signature Bank?

Are We Prepared for the Next Bank Failure?

By Lorraine McGowen

The “run on†Silicon Valley Bank (“SVBâ€) that commenced on Thursday, March 9th and continued through Friday, March 10th brought to mind the real-world horrors, without the fairy-tale ending of the movie It’s a Wonderful Life.   Customers withdrew more than $48 billion from their deposit accounts at SVB in a single day causing the California Commissioner of Financial Protection and Innovation (DFPI) to take possession of the property and business of Silicon Valley Bank (SVB) and appoint the Federal Deposit Insurance Corporation (FDIC) as its receiver mid-day on March 10th.[2]  In taking possession of SVB, the DFPI cited SVB’s inadequate liquidity and insolvency.  SVB’s collapse was the second-largest bank failure in U.S. history and the largest since Washington Mutual failed in 2008.  For that 72-hour period, I worked round-the-clock as a crisis manager, together with experts in Orrick’s restructuring and insolvency, labor and employment, corporate and finance groups[3], addressing urgent questions from officers, directors and VC founders and investors of companies that had funds on deposit with SVB and loans provided by SVB, clients who utilized payroll processing services provided by companies that banked with SVB, and other lenders who transacted business with SVB.  These questions ranged from the existential (“how to keep the lights onâ€, pay employees, maintain operations, and access credit facilities) to the prophylactic (requests for assistance in reviewing and revising cash management systems and other internal processes in order to mitigate damage from future bank failures).   

Uncertainty, turmoil and panic persisted until Sunday evening (March 12th), when  federal regulators (US Treasury, Federal Reserve and FDIC) provided much needed relief and certainty by issuing a statement that retail and commercial customers of SVB would have full access to their deposit accounts beginning on Monday morning (March 13th) when Silicon Valley Bridge Bank, N.A (SVBBNA), a newly formed bridge bank that acquired substantially all of the assets of SVB, would open and resume normal banking hours and activities, including online banking. Pre-receivership retail and commercial customers and borrowers of SVB automatically became customers of SVBBNA.[4] The FDIC indicated that the FDIC transferred to SVBBNA substantially all of the contracts relating to SVB’s banking business and SVBBNA assumed SVB’s obligations under those contracts.[5] 

Many white papers and case studies will be written about what went wrong at SVB, why and when SVB became financially distressed.  Market and banking regulators will no doubt implement recommendations on what can and should be done to prevent future bank failures.   Others will focus on identifying other troubled financial institutions and how to mitigate against that risk.   While each of these are important inquiries, an assessment on the impact recent regulatory actions had on SVB’s customers, borrowers, suppliers, and other creditors should be undertaken to consider whether steps can be taken to improve the process and mitigate the ensuing panic arising upon a takeover of a failed bank.  As our global economies become more interconnected and digital, efforts should be made to ensure that these forces do not exacerbate the challenge of addressing future bank failures. 

Questions have also emerged regarding the relationship between SVB’s holding company parent, SVB Financial Group, and SVB.  This article summarizes some of those potential issues, including questions about the holding company’s deposits held at SVB, what claims, if any,  federal regulators have against  the holding company, and the potential applicability of the source-of-strength doctrine.

SVB’s Receivership Had Global Impact

Name of CompanyAction TakenDate Action Taken
Silicon Valley Bank UK Ltd. (SVBUK)Assets sold to HSBC UK Bank plc for £1; The Bank of England warned on March 10th that, absent a sale, it planned to apply to the English courts to place SVBUK into a Bank Insolvency ProcedureMarch 10, 2023
Silicon Valley Bank Canadian BranchCanadian Superintendent of Financial Institutions takes temporary control of assets of the Canadian branch of SVB and issued notice indicating that he intends to seek permanent control of its assets and requesting that the Attorney General of Canada apply for a Winding-Up Order. Ontario Superior Court of Justice grants a winding up orderMarch 12, 2023; March 15th
Silicon Valley Bank German BranchGerman Federal Financial Supervisory Authority (BaFin) has imposed a moratorium on Silicon Valley Bank Germany ordering the bank to be closed for business with customersMarch 13, 2023
SVB Financial GroupChapter 11March 17, 2023

Upon appointment as receiver of a failed bank, the FDIC has several options.  The FDIC may elect to (a) sell the assets of the failed bank to one or more acquiring banks pursuant to one or more purchase and assumption agreements, (b) close the bank, revoke its license, and proceed to liquidate its remaining assets, or (c) transfer assets to a bridge bank while it solicits bids for the failed bank’s assets.

On March 13, 2023, the FDIC transferred substantially all of SVB’s assets to a bridge bank to temporarily continue the operations of SVB while a buyer is sought. To date, despite attempts, no buyer has emerged for the bank. The transfer was consummated pursuant to a transfer agreement that can be found here.

The following compares some of the unique terms of the FDIC’s transfer of SVB’s assets to SVBBNA with what ordinarily happens when the FDIC is appointed as receiver and the FDIC is not able to arrange for an immediate transfer of the failed bank’s deposit accounts and other assets to other institutions pursuant to one or more purchase and assumption agreements. 

 SVBBNA Acquires Assets and Obligations of SVB and Maintains Operations Pending Potential Sale to Third-PartyFDIC Appointed Receiver (Orderly Receivership Process)  
Access to Cash: Deposit AccountCustomers have full access to deposits on March 13th; checks will continue to clear Insured Deposits ($250,000)Uninsured DepositsSVBBNA maintains existing accounts and opens new accountsInsured Deposits ($250,000)[6]Must file a claim for the uninsured deposit amount; customer receives a receivership certificate for uninsured deposit amount  Existing accounts closed; no new accounts opened
Access to Cash: Money-Market/Cash Sweep Invested SecuritiesSVBBNA provides SVB customers with access to all funds held in money market or cash sweep accounts Shares in money market mutual fund may be released to SVB customer if (a) shares are held on customer’s behalf with a third-party custodian or (b) are held by SVB, as Agent on customer’s behalf and shares are registered on SVB’s books and records as customer property and also registered by SVB’s transfer agent as property of the customer, and not that of SVBFunds held in a money market or sweep account may be eligible for FDIC insurance coverageCustomer may have claim for uninsured deposit amount for amount held in money market/cash sweep accountCustomer may be able to obtain securities purchased through a money market or cash sweep programs that are (a) held on customer’s behalf with a third-party custodian or (b) are held by the failed bank, as agent and shares are registered on the failed bank’s books and records as customer property and failed bank’s transfer agent registers shares as property of the customer
Access to Cash: Pre-Receivership Wire Transfers/ACH TransfersUnpaid transfers prior to FDIC appointment as receiver were cancelled but customers were able to resubmit such wire transfer requests, which were subsequently honored[7]Generally, outgoing transfers or checks presented for payment after the bank has closed cannot be paid or charged against the applicable customer’s account.  The FDIC freezes all deposit accounts at the time the bank is closed to determine the amount owed to depositors for the insured deposit balances in their accounts  Outstanding checks or transfer requests presented after the bank failure will be returned unpaid and will be marked to indicate the bank is closed 
Loan Obligations: Borrower ObligationsBorrower must continue to comply with obligations under their loan agreements, including making timely payments of principal/interest/feesBorrower may have setoff rights enabling borrower to offset deposit claim (including deposits over the FDIC insured amount) against loan obligations.  Borrower should consult with counsel to review documents and determine rights  Borrower must continue to comply with obligations under loan agreement, including making timely payments of principal/interest/feesBorrower may have setoff rights enabling borrower to offset deposit claim (including deposits over the FDIC insured amount) against loan obligationsBorrower should consult with counsel to review documents and determine rights  
Loan Obligations: Unfunded Loan CommitmentsSVBBNA assumed all loan positions of SVB, whether as lender, issuing bank, administrative agent or any similar function that was formerly performed by SVBSVBBNA will honor SVB’s funding commitment obligations under existing credit agreements in accordance with contractual terms (unfunded revolving credit or delayed draw term loan facilities)SVBBNA will perform all other duties or roles under existing credit agreements in accordance with contractual termsSVBBNA will consider applications and term sheets being negotiated by SVB as of the March 10th take-over of SVBUnclear whether FDIC, as receiver, will authorize the funding of unfunded commitments or what conditions will be required, including advance requests under revolving credit or delayed draw term loan facilities.  FDIC maintains discretion to do so but is not obligated to perform.
Letters of CreditSVBBNA will honor SVB’s funding obligations under undrawn letters of credit issued by SVBFDIC may disaffirm or repudiate any contract the FDIC determines is burdensome, including letters of credit
Pledged Bank Accounts: Failed Bank Serving as Depositary Bank under a DACAAlthough your account is now with SVBBNA, the secured party is still perfected. If there is a deposit account control agreement (“DACAâ€) over the account, then SVBBNA should have assumed SVB’s role and obligations as the control bank under the DACA and SVBBNA is subject to the terms of the DACA Borrower and secured party may choose to open a new account at new bank, and enter into a new DACA with new control bank   Parties with DACA on a deposit account may not have access to amounts on deposit in excess of the insured deposit amount There may be delays in receipt of funds or denial by the FDIC as receiver of a secured party’s notice of exclusive control
Ability to replace Failed BankSVBBNA assumed duties of SVB as administration agent, issuer or advising bank under letters of credit, and servicer, lender, DACA bank, among other rolesSVBBNA is performing these roles in accordance with contractual termsSVBBNA may challenge any efforts to terminate or replace SVBBNA as administration agent, issuer or advising bank under letters of credit, lender or servicer or other roleFDIC, as receiver, may prevent termination or replacement of failed bank’s role as administrator, letter of credit issuer, servicer, lender, or DACA bankFDIC has the right to transfer contracts notwithstanding any contractual limits (even an outright prohibition) on transferShould consult with counsel to review documents and determine rights
Supply Contracts/Trade ClaimsVendors/suppliers and other counterparties who had contracts with SVB must continue to perform under the contractCounterparties may not modify terms or terminate contract based on SVB’s financial condition or appointment of receiverSVBBNA has agreed to make timely payments to vendors and counterparties and otherwise perform terms of existing contractFDIC has the right to transfer contracts notwithstanding any contractual limits on transferVendors/suppliers and other counterparties with contracts with SVB must continue to perform under the contractCounterparties may not modify terms or terminate contract based on SVB’s financial condition or appointment of receiverReceiver has right to disaffirm or repudiate contracts FDIC determines to be burdensome, including employee benefits, leases, loan agreements, standby letters of credit and vendor/supplier contractsFDIC has the right to transfer contracts notwithstanding any prohibitions or contractual limits on transfer  
Derivatives (ISDAs) (Qualified Financial Contracts)FDIC stated that QFCs were transferred to SVBBNAFDIA provides certain protection to counterparties of QFCs upon bank receivership (right to accelerate, liquidate, terminate QFCs, to liquidate collateral, and right to setoffFDIA imposes a stay until close of business one business day after appointment of FDIC as receiverFDIC has right to transfer to a single institution all QFCs between the failed bank and such party and affiliates (FDIC cannot cherry-pick QFCs to transfer; must transfer all QFCs between failed bank and the counterparty to the single institution)  

Impact of SVB Financial Group’s Bankruptcy

On March 17th (the “Petition Dateâ€), SVB Financial Group, the parent of SVB, filed a voluntary chapter 11 petition with the US bankruptcy court in New York.  In its chapter 11 petition, SVB Financial Group listed assets and liabilities of as much as $10 billion each. SVB Financial Group’s broker-dealer subsidiary (SVB Securities) and its venture capital arm (SVB Capital) are not included in the bankruptcy filing.  SVB Financial Group asserts that as of the Petition Date it had approximately $2.04 billion on deposit at SVBBNA and certain other banks and $92.8 million in marketable securities, including Treasuries.[8]  To support its operations during the pendency of its bankruptcy case, SVB Financial Group filed a number of “first-day motions†common in chapter 11 cases, including motions relating to SVB Financial Group’s cash management and operations.  As part of its cash management motion[9], SVB Financial Group attempted to compel the transfer of funds that were allegedly held at SVBBNA (approximately $2 billion) to another bank that qualified as an authorized depository bank under chapter 11 operating guidelines promulgated by the Department of Justice.    

Not surprisingly, the FDIC objected[10] to SVB Financial Group’s cash management motion, asserting that if SVB Financial Group had a claim for amounts formerly held at SVB, then SVB Financial Group must assert those claims through the FDIC’s exclusive, mandatory claims process that the FDIC has established in the SVB receivership.  The FDIC noted that, while its investigation is just beginning, some of the funds in the principal bank account claimed by SVB Financial Group may in fact be owned by SVB; that they may have been “both generated by and used for SVB’s operations, not [SVB Financial Group]’s, given the lack of observance of corporate formalities in the two entities’ day to day affairs.† In addition, the FDIC noted that the FDIC, as receiver, had contractual and common law rights of setoff against SVB Financial Group. 

The bankruptcy court held a hearing on SVB Financial Group’s first day motions on March 21, 2023, during which the bankruptcy court provided conditional approval of SVB Financial Group’s cash management motion, authorizing SVB Financial Group to spend up to $100 million during the next 30 days, subject to the bankruptcy court’s review of a supplemental declaration describing specific cash uses and transfers between SVB Financial Group and SVB Capital (its venture capital and credit investment subsidiary).

Some important questions to consider when considering the enforceability of the holding company’s deposit account claim against SVBBNA include:  What express or implied carve outs exist to the statement that uninsured deposits will be made whole?[11] Were payments made by the bank to the holding company while the bank was insolvent? What other economic relationships existed between the parties?

Bank Holding Act Source of Strength Doctrine

Even before SVB Financial Group filed for bankruptcy protection, questions arose as to whether, and the extent to which, SVB Financial Group could be compelled to contribute additional capital to SVB under the source of strength doctrine, and how would those obligations, if any be treated under Bankruptcy Code sections 507(a)(9) and 365(o).  Under the source of strength doctrine,

a bank holding company shall serve as a source of financial and managerial strength to its subsidiary banks and shall not conduct its operations in an unsafe or unsound manner.[12]

SVB Financial Group likely will challenge any efforts to make claims against it to contribute capital or assets to SVB, including the requirement that the Federal Reserve Board provide written agreement or commitment that incorporates a source-of-strength requirement.  At issue will be what commitments were made by SVB Financial Group to provide capital or be a source of strength for SVB.  Such a commitment may be contained in the resolution and recovery plan (the “living willâ€) that SVB Financial Group provided pursuant to section 165(d) of Dodd-Frank for its rapid and orderly resolution in the event of material financial distress or failure.  Section 165(d) of Dodd-Frank requires all bank holding companies with $100 billion or more in total consolidated assets to submit periodically to the FDIC a plan for the resolution of the covered institution in the event of its failure (a “living willâ€).   In 2021, SVB’s total assets exceeded this $100 billion threshold for the first time, and it was therefore required to develop and submit its first resolution plan to the FDIC in 2022.[13]

The federal bank regulators will analyze the financial, contractual, or other legal constraints that might impact SVB Financial Group’s ability to make capital contributions to SVB.

Some cases have indicated that a bank holding company may not be charged with unsafe and unsound banking practices or failure to satisfy a source-of-strength by refusing to contribute capital to a failing bank subsidiary if the failure would require the bank holding company to disregard its own separate corporate status or would amount to a waste of corporate assets in violation of its duty to shareholders.

Bankruptcy Code §§ 507(9); 365(o)

The Bankruptcy Code was amended to provide that in a chapter 11 case a commitment made to a federal depository institution’s regulatory agency to “maintain the capital of an insured depository institution will be deemed to have been assumed and any deficit under the commitment must be immediately cured.† The courts have held that the assumption of the capital maintenance agreement and the cure of any deficit under such agreement are prerequisites for confirmation of the bank holding company’s plan of reorganization.  If these prerequisites are not met, the debtor must convert the case into a case under chapter 7 of the Bankruptcy Code.  Similarly, section 507(a)(9) provides that a claim based on such a commitment will be entitled to priority senior to other general unsecured creditors in the bankruptcy case.

Specifically, section 365(o) provides: 

In a case under chapter 11 of this title, the trustee shall be deemed to have assumed (consistent with the debtor’s other obligations under section 507), and shall immediately cure any deficit under, any commitment by the debtor to a [f]ederal depository institutions regulatory agency (or predecessor to such agency) to maintain the capital of an insured depository institution, and any claim for a subsequent breach of the obligations thereunder shall be entitled to priority under section 507.

Section 507(a)(9) provides priority for:

Allowed unsecured claims based upon any commitment by the debtor to a [f]ederal depository institutions regulatory agency (or predecessor to such agency) to maintain the capital of an insured depository institutions.

This does not end the inquiry.  Efforts by the FDIC, as receiver, to require SVB Financial Group to capitalize SVB or any efforts to assert a claim against SVB Financial Group likely will be challenged. 

Some important questions to consider when considering the applicability of the source of strength doctrine and the Bankruptcy Code’s express recognition of the priority of claims of the federal banking regulators include:  What are the terms of SVB Financial Group’s “living willâ€?  While part of the living will is made publicly available, other parts are filed only with the regulators.  Did the living will contain a “commitment†to maintain the capital of SVB?  Did the federal regulators have any other written agreements to address the current or future capital requirements of SVB or the source and timing of additional funds needed to satisfy current and future capital needs of SVB.  Were there any orders (or pending orders) issued to SVB Financial Group addressing the current or future capital needs of SVB, and did those orders address the source and timing of additional funds needed to satisfy the current or future capital needs of SVB?  Would SVB Financial Group’s compliance with a source-of-strength commitment violate SVB Financial Group’s contractual provisions in its previously sold debt securities?  Would SVB Financial Group’s compliance otherwise violate its corporate law and/or fiduciary obligations?

While the federal regulators have taken significant steps to try to stabilize and restore confidence in the banking industry, many issues remain open as outlined in this article.  Some of these issues may be addressed in the SVB Financial Group bankruptcy case, particularly as it relates to the application of the source-of-strength doctrine.

Copyright 2023 Creditor Rights Coalition

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[1] Lorraine McGowen is a restructuring partner with Orrick, Herrington & Sutcliffe, LLP, a member of the firm’s Management Committee and Partner in Charge of its global Diversity, Equity & Inclusion Initiative.  She can be reached at [email protected].  This article is a summary for general information and discussion only and may be considered an advertisement for certain purposes.  It is not a full analysis of the matters presented, may not be relied upon as legal advice, and does not purport to represent the views of our clients or the firm.  The views expressed in this article are the views of the author herself.

[2] To protect insured depositors, the FDIC created the Deposit Insurance National Bank of Santa Clara (DINB) and transferred all insured deposits of SVB to DINB.  The FDIC announced on March 10th that all insured depositors will have full access to their insured deposits on March 13, 2023, and that the FDIC would pay uninsured depositors an advance distribution within the next week.  Uninsured depositors would then receive a receivership certificate for the remaining amount of their uninsured funds.  Additional distributions to uninsured depositors would be made from the proceeds of sale of SVB’s assets.

[3] Like other firms, my firm established a rapid response team consisting of colleagues across a broad-spectrum of practice areas.  Our team included, among many others, me and Shawn Atkinson, Christina Bouchot, Preetha Gist, William Haft, Evan Hollander, Scott Morrison, Jeffrey Naimon, Josh Pollick, Jonas Robison, and Walter Zalenski,.

[4]A bridge bank is not a permanent solution; it is a temporary vehicle into which the FDIC can transfer parts of a failed bank’s business and assets so it can stabilize those operations as a going concern and continue paying insured depositors while arranging a value-maximizing resolution transaction.  FDIC Resolutions Handbook, 19-20.   Pursuant to the terms of the Transfer Agreement (All Deposits) by and between FDIC and SVBBNA, dated March 13, 2023, SVBBNA will provide full-service banking for at least 90 days and satisfy its applicable regulatory and statutory requirements before it ceases to provide full-service banking. 

[5]On March 12, 2023, the New York Department of Financial Services (DFS) took possession of Signature Bank, a New York state-chartered commercial bank (“Signatureâ€) and appointed the FDIC as its receiver. The FDIC transferred all the assets and substantially all the obligations relating to Signature’s banking business to Signature Bridge Bank, N.A. (“Signature Bridge Bankâ€), a full-service bank that will be operated as the FDIC markets the bridge bank to potential bidders  On March 19, 2023,  the FDIC entered into a purchase and assumption agreement for substantially all deposits and certain loan portfolios of Signature Bridge Bank with Flagstar Bank (“Flagstarâ€), a wholly-owned subsidiary of New York Community Bancorp, Inc.  Pursuant to the purchase and assumption agreement, Flagstar acquired former Signature Bank’s core bank deposit relationships, its wealth management and broker-dealer business.  According to the FDIC’s press release, the transaction did not include approximately $4 billion of deposits related to the former Signature Bank’s digital banking business. 

[6] The limit for FDIC insurance is $250,000 per deposit account customer, per financial institution and in each account ownership category eligible for FDIC insurance.

[7] As detailed below, the deposit accounts held by SVB Financial Group at SVBBNA have zero balances because the FDIC caused the SVBBNA to return those deposits to the FDIC. See the Statement and Limited Objection of Silicon Valley Bridge Bank, N.A. filed March 21, 2023.

[8] Declaration of William C. Kosturos In Support of Debtor’s Chapter 11 Petition and First Day Pleadings, dated March 19, 2023, Docket # 21, ¶ 13.

[9] SVB Financial Group Motion For Entry Of Interim And Final Orders (I)Authorizing, But Not Directing, The Debtor To (A) Continue To Use Its Cash Management System, Including Existing Bank Accounts, (B) Pay Or Honor Certain Prepetition Obligations Related Thereto And (C) Maintain Existing Business Forms, (Ii) Authorizing Investment Activities, (Iii) Temporarily Waiving The Requirements Of Section 345(B) And (Iv) Granting Related Relief, Filed March 19, 2023, Docket #20.

[10] SVB Financial Group, Objection Of The Federal Deposit Insurance Corporation As Receiver For Silicon Valley Bank To Debtor’s Motion For Entry Of Interim And Final Orders (I) Authorizing, But Not Directing, The Debtor To (A) Continue To Use Its Cash Management System, Including Existing Bank Accounts, (B) Pay Or Honor Certain Prepetition Obligations Related Thereto And (C) Maintain Existing Business Forms, (Ii) Authorizing Investment Activities, (Iii) Temporarily Waiving The Requirements Of Section 345(B) And (Iv) Granting Related Relief, filed March 20, 2023, Docket # 23, ¶ 15.

[11] For example, the Joint Statement by Treasury, Federal Reserve and FDIC states that “Shareholders and certain unsecured debtholders will not be protected.â€

[12]12 C.F.R. § 225.4(A) (2022); and see Policy Statement on the Responsibility of Bank Holding Companies to Act as Sources of Strength to Their Subsidiary Banks, 52 Fed. Reg. 15707, 15708 (Apr. 30, 1987) (the “Source of Strength Policy Statementâ€).  Codifying the Federal Reserve’s Policy Statement under Regulation Y, as further codified in section 616(d) of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Actâ€). 

[13] 12 U.S.C. § 5365(D).