Applying the lessons of the SVB and Signature Bank failures: Steps for boards and management

The failures of Silicon Valley Bank and Signature Bank sent many companies into credit and liquidity crises. With the most pressing short-term impacts now stabilized, corporate boards and management should consider steps to be better prepared in the future.

What happened

On 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. Two days later, New York regulators stepped in to close Signature Bank under the same structure. On March 12, 2023, the Federal Reserve, FDIC and Treasury Department jointly announced an emergency program to backstop all deposits at both SVB and Signature Bank.

As the FDIC looks for a purchaser of the SVB and Signature assets, it has established the Silicon Valley Bridge Bank and Signature Bridge Bank and transferred all insured and uninsured deposits to these new “bridge banks.” On March 14, 2023, the FDIC announced that all customers of the predecessor banks would automatically become customers of the new bridge banks, which will hold “normal banking hours and activities.”

Moving forward

Companies seeking to evaluate their risk, rights and obligations and to stabilize their banking and financial positions should consider the following steps, whether or not they were a customer of the predecessor banks:

• Revisit your company’s investment policies – The company should review any existing investment policies on the company’s liquid assets and update such policies to include diversity of account requirements and other measures intended to secure the financial condition of the company against sudden shifts in market conditions. Investment policies should reflect that certain kinds of accounts and cash equivalents are protected from the credit risk of the deposit bank.
• Review any cash management services – The company should carefully review all sweep allocations, customer deposit instructions and auto-debit arrangements as they may need to be adjusted, turned off or replaced based on service availability and stability with deposit banks.
• Review your loan documents – If the company has loans with financial institutions, review the affirmative covenants to determine if there are limitations on the company’s ability to set up bank accounts and investment accounts at other financial institutions or hold cash in other bank accounts. Loan agreements generally survive bank takeovers and borrowers are expected to continue to comply with their terms. There may be exceptions to rules which place limitations on the company’s ability to put in place its investment policies. Recent events may also provide an opportunity to renegotiate with banking partners the scope of any covenants that would impact the company’s investment policy.
• Review your commercial contracts – For companies holding letters of credit as a beneficiary, review the terms of the applicable contracts that require letters of credit to determine any rights to demand replacement letters of credit from other financial institutions or cash collateral.
• Consider alternative liquidity structures – Many companies rushed to put in place bridge loan facilities or equity raises to stem a potential liquidity crisis. Companies should discuss and have contingency plans in place for addressing similar issues in the future.
• Consider establishing, or adjusting allocations to, deposit accounts under insured cash sweep programs – Your deposit bank may offer insured cash sweep (ICS) programs that sweep excess cash into secure investments that are not subject to credit risk of the deposit bank.

Importantly, properly document all decision-making regarding cash management and investment to support the record of action by the company. As part of their corporate oversight, the board of directors of the company (or the audit committee, if established) should work with company management to complete the matters contemplated above and document their attention to these matters in corporate minutes.

If you have further questions about these actions or about the implications on your business of the SVB and Signature Bank receiverships, please contact the author or your DLA Piper relationship partner.