This article is related to a Showcase CLE program that took place at the ABA Business Law Section’s Hybrid Spring Meeting on Thursday, April 27, 2023. All Showcase CLE programs were recorded live and will be available for on-demand credit, free for Business Law Section members.
On March 10, 2023, Silicon Valley Bank (SVB) was put into FDIC receivership, and at that time it was unclear exactly what process the regulators would follow.
Over the course of the weekend, we learned that the FDIC had created the Deposit Insurance National Bank of Santa Clara and transferred to it all insured deposits of SVB. On March 12, Treasury Secretary Janet Yellen, after consulting with President Joseph Biden, granted a “systemic risk exception” that allows for all depositors—both insured and uninsured—to be protected. The FDIC approved the “systemic risk exception” for SVB and announced that it was transferring all deposits, both insured and uninsured (notably, the systemic risk exception does not protect unsecured creditors or shareholders of SVB), and substantially all assets of SVB to a newly created “bridge bank.” (A bridge bank is used by the federal regulators to run a failed or insolvent bank until it can be sold or liquidated.) The FDIC engaged former Fannie Mae CEO Tim Mayopoulos to lead the FDIC-created SVB bridge bank.
Also on March 12, the Bank Term Funding Program (BTFP), which is a broad-based lending program, was announced. The Federal Reserve’s website explains that under the BTFP it will make available additional funding to banks “to help assure banks have the ability to meet the needs of all their depositors.” The BTFP will offer loans of up to one year in length to banks pledging qualifying assets as collateral. These assets will be valued at par. The BTFP is designed to be an additional source of liquidity against high-quality securities, which means that a bank will not need quickly to sell those securities in times of stress.
There are provisions of the Federal Deposit Insurance Act that do not require parties to consent to the transfer of assets to a bridge bank; rather, it is done by operation of law. A bridge bank follows a “business as usual” approach, and the FDIC expects all contracts entered into with SVB to be performed by counterparties. The complex receivership framework can impact a particular contractual relationship, but clearly there is the authority under the FDI Act and an expectation that SVB’s business will continue in the SVB bridge bank. Not every receivership will involve a bridge bank, but SVB’s receivership does.