(March 13, 2023 / JNS) There was a tongue-in-cheek scene in the 1964 children’s film “Mary Poppins,” in which young Jane and Michael Banks, demanding their tuppence (“two pence”), inadvertently cause a run on an English bank. Chaos ensues with customers withdrawing all assets until the bank had to close.
Decades later, we are watching the high-tech version of a bank run in real-time as the Santa Clara, Calif.-based Silicon Valley Bank announced its closure on the morning before the weekend.
A Friday-morning panic evolved into a Monday-morning sigh of relief with the announcement that the U.S. federal government will preserve bank customers, which includes approximately half of all Silicon Valley businesses, access to their Silicon Valley Bank accounts.
Bank customers woke up to the news that Secretary of the Treasury Janet Yellen, Federal Reserve Board chair Jerome Powell and Federal Deposit Insurance Corporation (FDIC) chairman Martin Gruenberg have approved actions enabling the FDIC to complete its resolution of Silicon Valley Bank in Santa Clara, Calif. This allowed depositors access to all of their money on March 13. They assert that no losses associated with the resolution of Silicon Valley Bank will be borne by the taxpayer.
The bailout, which is not being called a bailout but rather a systemic risk exception, assures that the FDIC will guarantee all deposits from the two failed banks using a specialized fund specifically designated for this purpose and financed through fees paid by other banks.
They also announced a similar systemic risk exception for Signature Bank in New York City, which was closed on Sunday by its state chartering authority.
Additional funding will be made available by the Federal Reserve Board to eligible depository institutions to help assure banks have the ability to meet the needs of all their depositors.
A few hours after the American announcement, it was announced that HSBC purchased Silicon Valley Bank UK for 1 pound, giving relieved bank customers access to their funds.
‘This is not a typical bank failure’
Since the collapse of the Silicon Valley Bank on Friday, the banking world has been in freefall, while Israeli startups and venture-capitalist customers were wondering where this week’s operating capital and credit lines would come from. The Tel Aviv Stock Market reverberated with the news, and there were whispers that VC funds are likely to shrink even more than they did last year. Today’s assurances that the bank’s account holders will have access to their funds came as welcome news.
An estimated 89% of the bank’s $172 billion in deposit liabilities exceed the maximum insured by the FDIC.
Dan Shamgar and Itay Frishman, partners at the Ramat Gan-based Meitar law firm, held a late-night post-protest webinar with partners from the New York-based Skadden, Arps, Slate, Meagher & Flom LLP and Affiliates on Saturday night to try to answer panicked clients’ questions about money invested with Silicon Valley Bank. It is estimated that at least 500 companies—both investors and startups—had holdings at the bank, which failed on Friday and closed all its branches in 13 countries and regions, including the one in Herzliya Pituach.
Yossi Vebman, head of Israel practice at Skadden, Arps, said that the situation is highly unusual, and even more serious than the 2008 collapse of Washington Mutual.
“A lot of our Israeli tech company clients used Silicon Valley Bank as their U.S. bank because initially big U.S. banks would not take them,” said Frishman. “SVB knew how to work with startups culturally and how to build effective business relationships. They were very accessible, and it was easy to get loans. Israeli startups are like a herd; they follow each other, and it was friendly. Everyone knew everyone.”
Brian D. Christiansen, a financial regulatory law partner at Skadden, Arps, examined the structural overview of Silicon Valley Bank, and carefully gave handling advice and answered pre-submitted questions from startups with holdings at it.
What makes this bank collapse different from what Christiansen described as “normal bank failure?”
“The closest thing we have to compare it to what was the Washington Mutual failure in 2008,” he explained. “But unlike that, this is not a typical bank failure. Since 2008, almost every bank failure of size in the United States has followed a certain pattern. As the bank started to become troubled the FDIC secretly identified a healthier bank to become the buyer so when the bank failed—always on a Friday, preceding the U.S. weekend, the FDIC would announce two things.
“One, that the bank has gone into receivership; and two, that the receivership would enter into a purchase and assumption agreement with the healthy bank so the healthy bank acquires assets, assumes all liabilities of the failed bank including all of the deposits—not just the insured deposits,” said Christiansen.
In all these cases, by the time the banks opened on Monday morning, the depositors were depositors with a healthy bank that would honor the totality of their deposits. That is not what happened here. No healthy bank showed up to assume all of Silicon Valley Bank’s deposit liabilities. And, according to Christiansen, that is where the situation became complex.
Silicon Valley Bank is a subsidiary of the Silicon Valley Financial Group. The Financial Group, a separate entity, has declared bankruptcy, which is a separate process. The bank, the entity that held deposits and made loans, is not eligible for bankruptcy. On March 10, just before opening, regulators in California declared the bank insolvent and placed it into receivership with the FDIC. That put the FDIC in control.
“It is still in receivership,” explained Frishman. “But it is backed by money, so people are guaranteed their assets. People are back in business and now have access to all, not just a portion, of their money.”
The government has now bought time to sell the assets of the receivership and convert them to cash to pay towards the liabilities and claimants of the receivership. And bank customers are likely to start moving uninsured funds into small retail banks or large commercial banks that are more stable.
“Payroll is the easiest part to manage,” said Jonah Crane, Klaros Group. “There will still be pressure around deposit flows into the bank. Money might flow into treasury bills or money market funds, but large uninsured deposits are still going to have issues.”
Jon Medved, OurCrowd founder and CEO, mourns the special 30-plus-year relationship he has had with the bank as has many of the startups he works with. “We’ve always gotten very good service from the Silicon Valley bank,” he said. “I hope that whether it’s this bank or if they come back in another guise, they will be as nice to work with and as efficient.”
‘Keep as best a record as you can’
“Now that it is in the hands of the federal government, we have to wait and see who will take over,” noted Frishman. “People still have loans with SVB—loans that initially required a covenant that required the debtor to deposit all US dollars at SVB.”
With skittish bank customers likely to diversify and want to go to more than one bank, this may present a problem. But as Frishman said, “it’s going to be a process.”
“We can’t draw on past experiences because the ability to recover here is totally dependent on the specifics of the assets of Silicon Valley Bank,” added Christiansen. “Most observers believe that with SVB (unlike previous situations where the portfolio didn’t have the expected value), the loan portfolio is rather strong.”
Nguyen Bao, another Skadden partner and an expert in global finance, said “I’ve heard of people being on hold for 12 hours or more in a valiant effort to be connected with someone. This is the largest banking resolution in U.S. history and the second largest of any financial institution in the regulated financial space.”
“Errors will inevitably be made,” added Christiansen. “Skadden strongly advises that all clients keep excellent records in case you need to dispute things later on.”
One client asked: If I haven’t seen a transfer come through, how long should I wait?
Christiansen advised: “What you may see on your customer dashboard may not be what is actually in the pipeline of the back-end system and general ledger of the bank. Take screenshots of your dashboard and keep records of when you initiated various transactions. Keep as best a record as you can.”
Another wanted to know if companies need to act or submit something to claim funds.
Christiansen again stressed good record-keeping. “The bank’s records are captured by the IT General Ledger, but check for errors so that you will be able to dispute that. Right now, there is no one to talk to and no way to access the FDIC. Subscribe to the FDIC newsfeed to access links to processes as they develop.”
Like everyone else, Christiansen is hoping to get a message soon from the Federal government about next steps.
Shamgar concluded the webinar by saying, “We expect further development in the next weeks and months.”
“From the latest news, we should have access to all our funds this week,” Singh shared optimistically. “However, for the future, we are definitely thinking about how to avoid this situation for ourselves and having a strategy/accounts with at least two separate banks.”
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