Considerations for Customers of Silicon Valley Bank
March 10, 2023
Today, the Federal Deposit Insurance Corporation (“FDIC”) was appointed receiver for Silicon Valley Bank (“SVB”).
As receiver, the FDIC transferred the insured deposits of SVB to a newly chartered Deposit Insurance National Bank of Santa Clara (“DINB”). The FDIC did not transfer SVB’s uninsured deposits to the DINB. Instead, it announced that it would “pay uninsured depositors an advance dividend within the next week.” Uninsured depositors will receive receivership certificates for the remainder of their uninsured funds, which certificates will entitle depositors to dividends as the FDIC liquidates the assets of SVB.
To assess their exposure, SVB customers may wish to consider the following facts:
- What type of relationship does the customer have with SVB?
- As a general matter, customers for whom SVB acts in a custodial or investment management capacity should not be exposed to SVB’s credit risk on account of these relationships.
- However, customers that maintain cash deposits at SVB may be at risk of loss on their deposits to the extent those deposits are uninsured.
- In assessing these relationships, customers should consult their documentation. Arrangements that are often described as “custodial” may actually create cash deposit relationships.
- Are the deposit accounts subject to sweep arrangements that may mitigate loss?
- Like many banks, SVB offered sweep arrangements that provided for SVB to use certain customer funds to purchase money market funds or other securities.
- Customers for whom SVB purchased and, as of the date of the receivership, holds money market fund securities should not generally be exposed to the credit risk of SVB because SVB acts in a custodial capacity in relation to those securities.
- Does the customer have setoff rights in relation to their positions?
- Customers that have both outstanding loans and deposit accounts with SVB may be able to assert that they can set off their obligation to pay under the loans against SVB’s obligation to pay on the deposit.
- Note, however, that the analysis of whether setoff rights are available is not entirely certain and failing to pay under a loan could be grounds for calling an event of default.