March 15, 2023 – On Sunday evening, March 12, 2023, two extraordinary joint press releases were simultaneously issued by the U.S. Department of Treasury, the Federal Reserve Bank, and the Federal Deposit Insurance Corporation (FDIC). The press releases were distributed simultaneously with the FDIC announcement of the seizure and closure of Signature Bank (Signature) located in New York. The closure of Signature happened on the heels of the closure of Silicon Valley Bank (SVB), which took place on Friday, March 10.
The first joint press release said that all customer deposits at both SVB and Signature would be available for withdrawal, starting Monday, March 13. A second joint press release announced the availability of a new funding mechanism to eligible depository institutions to assure that each such institution had the ability to meet its depositors’ needs. The government’s stated intent of both announcements was to strengthen public confidence in the U.S. banking system.
What Precipitated the Joint Press Releases?
Fast-moving developments occurred last week in the banking industry. First, on Wednesday, March 8, 2023, Silvergate Bank, which concentrated on the crypto-currency market, announced its own wind-down and liquidation of operations had commenced.
Then on Friday, March 10, the California Department of Financial Protection and Innovation and the FDIC closed SVB. The FDIC’s March 10 press release announced: (i) a new resolution bank, the Deposit Insurance National Bank of Santa Clara, was established to administer and liquidate the SVB assets, and (ii) all deposit accounts insured by the FDIC (up to the standard $250,000 amount), would be available starting Monday, March 13. It said that a preliminary dividend would be paid with regard to the uninsured deposits within the next week, with a receivership certificate for the remaining uninsured deposits to be potentially paid a future dividend once the SVB assets were liquidated.
SVB was in a unique market space, and claimed to serve more than half of all venture capital firms and companies in the tech-startup and biotech ecosphere. Many of those startups had raised significant venture capital, and much of that money was deposited at SVB. It is estimated that more than 90% of all deposits at SVB exceeded the $250,000 FDIC insurance limit. When seized on Friday, SVB became the second largest bank failure in U.S. history, with approximately $209 billion in assets.
Due to the closure, many startup founders expressed grave concern that without access to the remainder of their uninsured deposits, they might not be able to pay their employees or stay open. Other commenters in the press and social media wondered aloud about possible bank contagion.
By comparison, Signature was considered crypto-friendly, while also offering other more traditional banking products. CNBC reported that, spooked by the sudden SVB collapse, customers withdrew large sums from Signature. When Signature was seized on Sunday, it became the third largest bank failure in U.S. history.
Deposit Insurance Expanded Under Systemic Risk Exception
The first joint press release announced the expansion of the FDIC insurance to all deposits at SVB and Signature, calling this action to insure all deposits a systemic risk exception. There is no recent precedent for this action. Normal FDIC insurance protects deposits up to $250,000 per depositor. This protection extends to checking accounts, savings accounts, money market accounts, certificates of deposit, and cashier’s checks. For a corporation, partnership, or limited liability company, all deposit accounts of every description at the same bank are aggregated, but are only covered for a total of $250,000 for the entire group of accounts.
The joint press release said SVB and Signature depositors would have access to all of their money starting Monday, March 13, not just the standard $250,000 insured amount. This action is applicable only to those two seized banks, and is intended to protect their depositors so they are “made whole.” The press release said no losses would be borne by taxpayers, but rather would be paid from the Deposit Insurance Fund. Losses to the Deposit Insurance Fund will be recovered by special assessments on banks, as required by law. Finally, the press release said the shareholders and unsecured debtholders of both failed banks will not be protected, and senior bank management had been removed.
This joint press release effectively superseded significant portions of the March 10 FDIC press release that was issued when SVB was shuttered. This means that startup tech businesses, venture capital companies, and all other depositors at SVB and Signature can withdraw all their deposits. Those withdrawals began on Monday as announced. Based on initial media reports, it may take some time for the FDIC to handle the logistics of all the withdrawal requests at the former SVB and Signature branches.
Loan/Liquidity Facility for Depository Institutions
The second surprising joint press release announced the new Bank Term Funding Program (BTFP), to provide additional credit for eligible depository institutions for their own liquidity purposes. The scope of BTFP is unprecedented.
Industry experts cite SVB’s heavy investment in long-maturity government bonds, agency bonds, and mortgage backed securities, which were purchased when interest rates were low, as a significant factor contributing to SVB’s collapse. But with the rising interest rate environment, the market value of those bonds and securities decreased materially. In its last week of operations, SVB announced several steps taken to generate liquidity, reporting a $1.8 billion loss on the sale of bonds.
Under the new BTFP, depository banks can pledge their government securities and other high quality assets as collateral if they owned those assets on March 12, 2023. The Federal Reserve will then advance the bank up to a one-year loan at the par value of the pledged assets. The interest rate is fixed, and the loan can be prepaid without penalty. The depository bank can then use that loan to meet their liquidity needs to protect businesses and families without the bank selling the pledged assets immediately at a loss.
Banking industry experts agree that banks are now much stronger than they were in 2008 and 2009. Much stricter capital requirements are now in place, the quality of banks’ assets are generally much better, and the lessons learned during the Great Recession are still fresh in bankers’ and regulators’ memories. In addition to their normal liquidity, the new BTFP provides even more ability for banks to protect depositors and meet their needs.
Any bank failure should cause every business to re-examine the $250,000 FDIC insurance limits, and evaluate your business’ risk tolerance. All of a company’s deposit accounts at one bank are aggregated, but are only insured for a total of $250,000. Many businesses may exceed that limit when all accounts are combined. It is important to analyze whether your business chooses to diversify some deposits among multiple FDIC insured institutions. There may be fees, costs, and logistical effort required to maintain such diversification.
If your business needs to withdraw deposits from SVB or Signature, it needs a place to relocate that money. There are many strong banks throughout our country to choose from, but it takes time to open new bank accounts. Plan ahead, make sure the new bank is FDIC insured, and be mindful of the standard $250,000 per depositor insurance limit.
Before a business opens new bank accounts and transfers money, it is important to review any requirements under its existing loan agreements. Such agreements often require primary operating accounts and treasury management to remain at the lending bank. There may be security agreements pledging specific deposit accounts that must remain where they are. Your business may also have financial covenants that must be met, and the existing bank accounts may be critical to compliance with those requirements.
Finally, if your business owed money to SVB or Signature, your business still owes that loan on exactly the same terms and requirements as before the bank seizure. But now the loan must be repaid to the FDIC, as the receiver. It remains to be seen if the FDIC will honor any new loan advance terms in your loan agreement, so you may have to quickly explore other liquidity alternatives. We urge businesses to make a good faith effort to remain in compliance with their loan documents, since the FDIC is not likely to exhibit much flexibility when they administer the loan.
Ulmer will continue to monitor developments surrounding this issue and will share additional updates as new information becomes available. For additional guidance, please reach out to a member of Ulmer’s Banking & Commercial Finance Practice Group.