On March 10, 2023, Silicon Valley Bank and Signature Bank were closed by their respective jurisdictions’ financial service agencies due to a high influx of depositors making massive withdrawals in the week prior. The Federal Deposit Insurance Corporation (the "FDIC") – an independent federal agency created by Congress to support the broader banking industry – was formally appointed by state government agencies as a receiver for both banks. The developments involved in the FDIC’s intervention provide a host of crucial lessons for financial institutions to fully comprehend and apply. It is critical for financial institutions – banks and nonbanks alike – to understand the uniqueness of the FDIC’s interventions, the structure of such interventions, proposed legislation in banking law, and the pragmatic and legal ramifications of these particular receiverships.
Structure of the FDIC’s Intervention
The FDIC’s function is to insure deposits, oversee financial institutions for safety and soundness, assist financial institutions, and manage receiverships. In a joint statement by the Department of the Treasury, the Federal Reserve, and the FDIC, it was announced that depositors with Silicon Valley Bank and Signature Bank would have access to all deposit funds at both institutions – including both FDIC-insured and uninsured amounts. Such a joint statement represents an atypical exercise of emergency powers to prevent a broader systematic issue. The statement made assurances that no losses associated with the FDIC receivership will be borne by the taxpayer. While all insured and uninsured deposits held at the original institutions are protected, the statement also reemphasized the industry standard that shareholders and certain unsecured debtholders will not be protected.
The FDIC has created bridge institutions to take control of Silicon Valley Bank and Signature Bank deposit accounts. The FDIC transferred all deposits and assets to such institutions – also known as "bridge banks," which are institutions chartered by the Office of the Comptroller of the Currency and essentially mechanisms through which the closed institutions can fulfill their lending obligations. Under normal circumstances, a purchasing institution is found to acquire a failed bank in order to continue operations. However, the FDIC was unable to find a willing purchaser for Silicon Valley Bank pursuant to the usual timeline given the large size of the institution and the rapid expedition of the bank’s collapse due to such a high frequency of withdrawals. First Citizens Bank recently stepped in to acquire Silicon Valley Bank in a government-supported transaction that transferred $72 billion dollars in assets and $56 billion of Silicon Valley Bank’s deposits.
Assumption of Contractual Obligations with Silicon Valley Bank and Signature Bank
Under 12 U.S.C. § 1821, the FDIC holds broad power to "manage the affairs of insolvent banks as receiver of conservator." Specifically, § 1821(e) grants the FDIC the power to enforce contracts entered into by the failed depository institution for which the FDIC has become a receiver. The FDIC released a statement on March 14, 2023, addressing the status of all financial institutions with contractual obligations to Silicon Valley Bank or Signature Bank. All such contracts have been assumed by the bridge banks. This means that all parties and counterparties to agreements entered into with the original institutions before their failure, remain legally required to fulfill their obligations. Vendors and counterparties engaged in contractual relationships with either bank should be cognizant that 12 U.S.C. § 1821(e)(13) enables the FDIC to enforce such contracts, as well as transfer them under 12 U.S.C. § 1821(d)(2). The bridge institutions have corresponding authority to commence legal actions against counterparties that do not meet their contractual obligations under the assumed agreements.
Vendors and counterparties to contracts with Silicon Valley Bank or Signature Bank should review the terms and conditions of such contracts, with the understanding that clauses purporting to terminate such agreements upon transfer may not be enforceable. The Eleventh Circuit Court of Appeals determined in Iberiabank v. Beneva 41-I, LLC that a termination clause within a sublease transferred to the FDIC as a receiver, was unenforceable and unsupported by § 1821(e)’s strong emphasis on providing the FDIC broad authority to manage the affairs of insolvent banks. While Beneva – a banking institution that had assumed the contractual obligations of the failed bank that had entered into the sublease – tried to argue it had the right to terminate the sublease, the Court of Appeals reasoned that enforcing the termination provision would interfere with the FDIC’s authority to manage banks. Therefore, vendors and counterparties cannot rely solely on termination clauses within assumed contracts that would run contrary to the FDIC’s purpose of maintaining the health of banking systems.
The Bank Term Funding Program
The Federal Reserve Board has announced that it has established additional funding to assist eligible depository institutions via the Bank Term Funding Program (the "BTFP"). The BTFP will offer loans of up to one year 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." The BTFP will be funded by special assessments on banks, rather than through taxpayer obligations. The one-year loans will be provided at the rate of a one-year overnight index swap plus 10 basis points. The Federal Reserve has also established that the Department of the Treasury will make up to $25 billion available from the Exchange Stabilization Fund as a cushion for the BTFP. In addition, banks benefiting from the plan are able to use government securities to guarantee their BTFP loan.
Amid a broad push for tighter banking regulations, Senator Elizabeth Warren and Representative Katie Porter have introduced legislation to repeal bank deregulation initiatives established in 2018. The recently introduced bill seeks to repeal a 2018 deregulation law that rolled back certain requirements of the Dodd-Frank Act by exempting institutions with less than $250 billion in assets. It is yet to be determined what other initiatives may be established by Congress and banking regulators in the wake of the recent receiverships. While the present legislative push for stricter regulation is unlikely to pass, financial institutions and parties with whom they contract must remain vigilant with respect to these developments.
What Financial Institutions Need To Know
- Regulators used extreme measures to insure deposits above FDIC limits, and there is no guarantee this exercise of authority will not be used again. Financial institutions should prioritize ensuring liquidity and stress-testing their balance sheets.
- Vendors and counterparties in privity with Silicon Valley Bank and Signature Bank must fulfill their contractual obligations with the bridge institutions that have assumed those agreements. The FDIC has statutory authority to enforce such contracts, and termination provisions contained in such agreements may be unenforceable.
- The Bank Term Funding Program will provide eligible institutions with a one-year loan to enable institutions to meet the needs of their depositors.
- Financial institutions should understand that while the receiverships of Silicon Valley Bank and Signature Bank may kick start changes to the legal rules and regulations governing banking practices, the FDIC opined in its press release that the broader United States banking system remains functioning and broadly stable. It is crucial that financial institutions maintain awareness of how these developments will affect their operations by consulting counsel.