The failure of two large banks in California and New York and the historic fallout has left a quagmire of unanswered questions and crises for businesses who had worked with them—and those who may feel the ricocheting effects as the government moves to protect depositors and quell their panic.
On Friday, March 10, 2023, Silicon Valley Bank (“SVB”) was closed by the California Department of Financial Protection and Innovation, which appointed the Federal Deposit Insurance Corporation (“FDIC”) as receiver. SVB was unique from other banks because it was formed to serve businesses, especially tech and health care clients. Over half of its loans were made to venture funds and private equity firms, with 9% being made to early- and growth-stage companies, and it specialized in capital call lines of credit. At the end of 2022, Silicon Valley Bank was the 16th biggest bank by assets in the United States, according to the Federal Reserve, with $209 billion in assets and over $175 billion in deposits.
Then Sunday evening, New York’s Signature Bank was closed by state regulators, with the FDIC putting the bank into receivership. Largely fueled by the panic left in the wake of SVB’s collapse, Signature Bank was the third-largest failure in U.S. banking history with SVB being the second-largest. Signature had more than $110 billion in assets and almost $89 billion in deposits at the end of 2022.
There are numerous legal implications and concerns for businesses that have deposits and loans, or work with third parties who have deposits and loans, with SVB and Signature Bank. Every situation is different and the situation is extremely fluid. Below is a list of some of the most common questions many businesses may have.
My business is a deposit holder with SVB or Signature Bank. When will I receive access to my deposits?
According to the FDIC, the U.S. Treasury Department and the Federal Reserve, all depositors will have full access to their insured and uninsured deposits no later than Monday morning, March 13, 2023.
Insured deposits means $250,000 of deposits per client. For most businesses, the majority of their deposits are above the $250,000 threshold (and therefore considered uninsured). In fact, an estimated 95% of SVB deposits are thought to be uninsured.
The FDIC has reported that it will begin selling off SVB’s assets and pay uninsured depositors an advance dividend within the next week. The FDIC created a separate institution, the Deposit Insurance National Bank of Santa Clara (DINB), to take care of insured deposits and has rejected the notion of a complete bailout for SVB investors. A DINB is a form of payout where the deposit accounts are transferred to a newly chartered temporary bank operated by the FDIC, and its purpose is to ensure that depositors have continued access to their insured deposits as they transfer their deposit accounts to other financial institutions.
Employment concerns: How do companies make payroll between now and the date they receive access to their insured and insured deposits?
The failure of SVB has left some employers and payroll providers that use SVB to process payroll on behalf of employers without the ability to pay their workforce in the immediate short term. An employer’s inability to timely pay its workers exposes the business to penalties, fines and possible litigation pursuant to a patchwork of federal and state wage laws that strongly favor the payment of workers for time worked. The vast majority of these laws do not have any carveouts for the situation that faces deposit holders of SVB, meaning that unless the government steps in, deposit holders will be on the hook for these added penalties due to no fault of their own.
Employers should familiarize themselves with the wage and hour laws that apply to their respective workforces, and assess the potential penalties they could be exposed to as a result of the SVB closure and inability to access deposits Friday through today. In the interim, a short-term bridge loan may be an available solution for some (if still necessary). Further, some employers may have available insurance coverage for business interruption losses they experienced over the weekend, an avenue that should be explored immediately.
Some employers may also ask executives to defer compensation until the storm passes. This may be a viable option, depending upon the language of preexisting contractual arrangements with those employees and that the business is able to comply with relevant wage and hour laws in transitioning those employers. An employer should speak with legal counsel if it wishes to explore this option prior to imposing deferred compensation upon any of its workforce. There are also important tax considerations that employers must consider before pursuing this path.
Brownstein is following all legal, regulatory and legislative issues that may result from the SVB and Signature Bank fallout. We expect that Washington lawmakers and other policymakers will be closely examining the actions of the FDIC, banks, the crypto industry and other stakeholders over the next few weeks, and will continue to update clients about any potential impacts there might be on their businesses and industries.
This document is intended to provide you with general information regarding the collapse of Silicon Valley Bank and Signature Bank. The contents of this document are not intended to provide specific legal advice. If you have any questions about the contents of this document or if you need legal advice as to an issue, please contact the attorneys listed or your regular Brownstein Hyatt Farber Schreck, LLP attorney. This communication may be considered advertising in some jurisdictions. The information in this article is accurate as of the publication date. Because the law in this area is changing rapidly, and insights are not automatically updated, continued accuracy cannot be guaranteed.