Revisiting Bank Receiverships: Operation of Bridge Banks, Disposition of Failed Bank Assets, Concerns for Existing Borrowers, and Risks for D&Os

Description

When SVB and SB were closed by regulators in March, the FDIC formed "bridge banks" to operate each insolvent bank until a buyer of the whole bank or specific bank assets could be found. After invoking the Federal Deposit Insurance Act’s systemic risk exception, the FDIC announced it would cover deposits in any amount and that FDIC-insured banks would be assessed an additional premium to cover the loss to the Deposit Insurance Fund. Separately, the Federal Reserve established the Bank Term Funding Program (BTFP) to provide secured term funding to eligible depository institutions and thus additional assurance that banks would have the liquidity to meet their deposit liabilities.

All of these events raise questions about how the FDIC and the Federal Reserve would address future bank failures. They also point to coming regulatory changes, including increased capital and liquidity requirements for regional banks, potential revisions to the deposit insurance system (including an increase to the $250,000 limit for at least some types of accounts) and increased scrutiny of banks' asset liability management strategies, with closer monitoring of interest rate, liquidity, and duration risk.

The FDIC as receiver has rights similar to a receiver in bankruptcy, including the power to repudiate unfunded loans, including lines of credit, construction, and other unfunded commitments. Borrowers must continue to repay existing loans. Borrowers may have setoff rights to the extent of deposits with the failed bank but must carefully review existing documents and applicable state law to assess their setoff rights. Parties to swaps and other derivatives should also evaluate the interplay between their loan and derivatives agreements.

Public criticism by regulators of the directors and officers of these failed institutions has sharpened the focus on sound corporate governance practices and implications for both the banking and business community.

Listen as our authoritative panel discusses the key takeaways from the SVB, SB, and FRB bank failures, including the operation of a bridge bank alongside a receivership, issues borrowers must consider with regard to loans held by a bank in receivership, the requirements associated with the BTFP, and risks that former officers, directors, and other institution-affiliated parties of failed banks face.