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By Celeste Mitchell-Byars and Mark Haut
Many in-house counsel at companies across all industries were caught off-guard by a flurry of disconcerting bank failures last month.
Following the collapse of crypto exchange FTX in late-2022, U.S. bank regulators began raising concerns on bank risks and vulnerabilities from crypto assets. The first public sign of problems brewing was on March 8, 2023, when California-based Silvergate Capital announced that it was voluntarily liquidating and winding down the operations of Silvergate Bank. Silvergate, which served as one of the central lenders for crypto companies (including FTX), had more than $11 billion in assets.
But the next shoe to drop was a shocker. Two days later, California financial regulators stepped in and took possession of Silicon Valley Bank (SVB), placing it into Federal Deposit Insurance Corporation (FDIC) receivership. The SVB collapse transpired in a breathtaking matter of hours, as the combination of a run on deposits and a sharp drop in the value of the bank’s bond holdings created a rapid death spiral. It was the largest failure of a U.S. bank since 2008, with roughly $167 billion in assets at the time of its closure.
Then just two days after the SVB failure, New York financial regulators took possession of Signature Bank and placed it into FDIC receivership as well. Signature Bank had served as the other top lender for crypto companies, along with Silvergate, and had total assets of $110 billion when it was taken over by the FDIC.
These three bank failures — one voluntary liquidation and two FDIC receiverships — within the span of just one week set off alarm bells across the U.S. and the fear of contagion was felt around the world. In the weeks since these developments, regulators have stepped in to begin the work of stabilizing the assets of the banks and assuring both businesses and consumers that their deposits are safe. Markets have so far responded favorably.
But for in-house counsel at all sorts of organizations, the specter of a bank failure raises important risk management considerations. If you work in the corporate legal department of a bank or other financial institution, there are major questions about how to reduce the risk of joining a club for which no one seeks membership. If you work in corporate legal at a company in other industry, there are major questions about how to mitigate the risk of exposure to a failure at a bank that lends your organization money or provides your day-to-day cash management services.
LexisNexis has assembled a wide range of resources to help in-house counsel better understand the various legal and regulatory areas related to bank failures. A Lexis Practical Guidance practice note, “Navigating a Failed Bank Receivership,” provides key highlights of the FDIC’s conduct, activities, and operations in connection with any failed bank receivership. This information can help in-house counsel to anticipate the specific steps the FDIC will take in the receivership process, so they can navigate these crucial events with more clarity.
Here are the four distinct stages of a failed bank FDIC receivership management process, excerpted from that Lexis Practical Guidance practice note:
A failed bank is typically closed on a Friday evening to give the FDIC a weekend to transition the bank’s operation to the acquiring institution. The closure is scheduled for, and coincides with, an institution's end of day to minimize operational disruption and to prevent a run on deposits. In unusual circumstances (e.g., a religious or bank holiday, or an urgent liquidity constraints), closure may occur sooner or later than the targeted failure time.
The weekend closing process begins the moment a bank is deemed to have failed. The FDIC closing staff will be on-site at the failed bank’s main office, with different FDIC branch managers each assigned to oversee a specific branch. The receiver will work with the acquiring institution over the closing weekend to ensure the smooth transition of operations to the acquirer and fulfill other key statutory and regulatory requirements, such as notification to depositors and identification of creditor claims.
Receivership administration is an ongoing process as the receivership remains open to administer third-party claims.
The FDIC terminates receiverships in an expeditious fashion. Once the FDIC has disposed of the receivership's assets and resolved all obligations, claims, and other legal impediments, the receivership is terminated, and a final distribution is made to the receiver's creditors. These creditors may include, among other parties, secured creditors, unsecured creditors (including general trade creditors), subordinate debt holders, shareholders, uninsured depositors, and the FDIC.
The Lexis Practical Guidance team has just released the Bank Failure Resource Kit. This comprehensive collection of information resources provides practical insights on bank failures and related legal issues, including detailed practice notes, articles, templates, and checklists. Specific areas of practice covered by the resource kit include:
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All of these news, analysis, and practical guidance resources regarding how to navigate a bank failure are accessible from Lexis+ General Counsel Suite. Lexis+ GC Suite is an all-in-one information resource designed for the modern GC that provides in-house counsel with a vast collection of legal resources, breaking business and legal news, and practical guidance content.
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Celeste Mitchell-Byars is an attorney and content manager for Practical Guidance on Lexis+, focused on financial services regulation. Mitchell-Byars has spent more than 20 years in-house at U.S. and foreign financial services institutions, advising boards and management in connection with banking regulations, risk and compliance management, finance, and financial technology.
Mark Haut is an attorney and content manager for Practical Guidance with an MBA in Finance from Frank G. Zarb School of Business. He was counsel at Norton Rose Fulbright, an associate at Morgan Lewis & Blockius, and previously clerked for Judge Bernstein of the United States Bankruptcy Court for the Southern District of New York.