Monitoring Developments with Silicon Valley Bank

Earlier today, the California Department of Financial Protection and Innovation closed Silicon Valley Bank (SVB) and appointed the Federal Deposit Insurance Corporation (FDIC) as receiver. The FDIC created the Deposit Insurance National Bank of Santa Clara (DINB) and transferred all of SVB’s insured deposits to the DINB.

To assist clients, we have formed a task force of lawyers from our Emerging Companies and Venture Capital, Finance, and Securities/Capital Markets Groups to monitor developments and provide strategic counsel.

The following FAQs are intended to help navigate some of the complex legal issues that arise from this development.

What Funds Are FDIC Insured?

The FDIC insures checking accounts, savings accounts, money market deposit accounts, certificates of deposits, and cashier’s checks for FDIC insured banks. The FDIC insurance limit for each SVB depositor is up to $250,000. Per the FDIC’s press release regarding SVB, insured depositors should have access to their insured deposits no later than Monday morning, March 13, 2023. The insurance limit is determined on a depositor as opposed to an account basis. A depositor would include deposits owned by corporations, partnerships, and unincorporated associations, including for-profit and not-for-profit organizations. If you manage multiple depositors, the corporation, partnership, or unincorporated association must be separately organized under state law and operate separately in order to qualify for multiplicity in FDIC coverage. There are additional rules for joint accounts, trust accounts, and employee benefit accounts. 

What Happens to Uninsured Funds?

Deposit amounts in excess of $250,000 are uninsured deposits. The FDIC has announced that it will pay uninsured depositors an “advanced dividend” within the next week, with potential additional dividend payments as the FDIC sells SVB’s assets. After the payment of any initial advanced dividend, depositors may receive a receivership certificate for the remaining amount of a depositor’s uninsured funds. Whether you will get all of your funds back will depend on how much there is to distribute after the sale of the assets by the FDIC.

In many prior failed bank cases, the FDIC found a bank that agreed to assume all deposits of the failed bank, including uninsured deposits. This scenario remains a possibility with respect to the SVB situation.

How Are Funds That Were in the Process of Being Transferred or Will Be Transferred Next Week Impacted?

Access to funds in transit depends upon when the transit process was initiated. Deposits in transit initiated prior to the receivership may be at risk, meaning the funds could be restricted or frozen once received into the account. Prior experience and regulations are not exactly clear on this issue.

Deposits that are initiated after the receivership and received next week will not be deemed uninsured deposits for SVB, meaning that the funds should not be restricted or frozen.

How Is My Ability to Use My Account to Fund Payroll or Other Obligations Impacted?

If you have payment obligations that exceed the sum of your insured amount plus any deposits made after the appointment of the receivership, you should look to make alternative arrangements to facilitate such payments as you may not have access to funds in excess of the insured amount plus receivables initiated after Friday.

Are Investment or Sweep Accounts Impacted?

The accounts should not be restricted or frozen by the receivership and you should be able to move these investment accounts.

How Will Lines of Credit Be Impacted?

While it is expected that the FDIC will honor requests for draws on lines of credit, it is unclear at this point whether and when you will be able to draw on any lines of credit from the bank or receiver. Note, however, that if your loan documents require you to keep your primary banking or deposit accounts with SVB, those requirements are not automatically excused as a result of the receivership.

How Will Vendors of SVB Be Treated?

The FDIC must pay any amounts owed to vendors for services provided from and after the date of the receivership but can repudiate any contract with a vendor. The FDIC is not obligated to pay a vendor amounts that were owed prior to the receivership. Instead, for amounts owed prior to the receivership, the vendor will have to submit a claim with the receiver.

Are There Other Considerations for Public Companies?

Public company disclosures on Form 8-K that have been released as of Friday afternoon have primarily been disclosures by companies who do not expect to have liquidity issues as a result of the receivership at SVB. Public companies that are affected by the SVB receivership likely will have a disclosure obligation. If a public company is having liquidity issues as a result of the receivership, consider counsel of a securities lawyer.

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This alert is a periodic publication of Ballard Spahr LLP and is intended to notify recipients of new developments in the law. It should not be construed as legal advice or legal opinion on any specific facts or circumstances. The contents are intended for general informational purposes only, and you are urged to consult your own attorney concerning your situation and specific legal questions you have.