The fast and furious developments related to Silicon Valley Bank (“SVB”), Signature Bank, and others had depositors, employees, landlords, lawyers, accountants, and fiduciaries from nearly every sector scrambling for solutions to very real and challenging liquidity problems for their businesses and clients.
Fortunately, after stepping in as receiver last Friday, the Federal Deposit Insurance Corporation (“FDIC”) was able to put much of the unrest at ease. Then, earlier this week, the FDIC announced that it had transferred all deposits (both insured and uninsured) from SVB into an FDIC-controlled bridge bank, Silicon Valley Bridge Bank, N.A. While the initial storm has largely passed, there are sure to be some long-lasting aftershocks from these events. We have provided some key takeaways that those with corporate bank accounts should review with their counsel and advisors and have provided strategies that businesses and individuals may employ to ensure that their assets are protected should their depository institution go underwater.
How is your relationship with your current bank? When was the last time you evaluated their risk profile? According to the FDIC, there have been 563 bank failures between 2001 and 2023. While most of these occurred during the height of the financial crisis from 2008–2012, there are still occasional failures. Organizations with employees, payroll, and retirement obligations should take steps to evaluate their banking programs to ensure that events such as what happened last week will not jeopardize any of their compliance or legal obligations.
Individuals and businesses are generally aware that the FDIC insures up to $250,000 per depositor per bank. This begs the question, then, how can your organization diversify and protect deposits in excess of $250,000? Consider the following strategies:
- Open Multiple Types of Accounts at One Banking Institution. The FDIC insures up to $250,000 per depositor per bank for each account ownership category. This means that corporate, individual, joint, retirement, and trust accounts, among others, are each separately insured up to $250,000, which, in the aggregate, may provide protection for a far greater sum. This aggregation may not be quite as helpful for business accounts, as the FDIC limits combine all accounts in each category for each depositor to meet the $250,000 limit. A single depositor could not, for example, open four separate checking accounts at a single bank and expect $1 million in FDIC coverage.
- Use Multiple Banking Institutions. Depositors may open accounts of the same category at more than one bank. Although this is a simple, and obvious, solution, it may also be impractical to manage multiple bank accounts (and the policies of individual banks). This solution is best for those who wish to deposit a sum that is not in significant excess of $250,000 but are strongly partial to a single account category.
- Use a Credit Union. While FDIC insurance coverage is widely discussed, many are surprised to learn that the National Credit Union Administration (NCUA) insures deposits of up to $250,000 per depositor per credit union. Although this is similar in all material respects to FDIC coverage, credit unions may offer advantages over traditional banks, such as lower fees, more favorable interest rates on loans, and higher interest rates for deposits.
- Utilize Bank Networks and/or Cash Management Accounts. Several services exist that will spread cash deposits across multiple banks, credit unions, and account types to ensure that deposits in excess of $250,000 are insured.
- Use Brokerage Accounts. Brokerage services are policed by separate federal agencies compared to banks or credit unions, while agencies, such as the Securities and Exchange Commission, impose more stringent requirements on such services to ensure that investor funds are safe. The Securities Investor Protection Corporation (“SIPC”) is a government mandated, but privately operated nonprofit that can provide coverage of up to $500,000 in securities and $250,000 for cash deposits if your brokerage firm becomes insolvent. All brokerage firms that sell stocks or bonds to the investing public, or that clear such transactions, introducing or clearing firms respectively, are required to be members of SIPC.
- Depositors Insurance Fund. The Massachusetts Depositors Insurance Fund (“DIF”) is a unique deposit insurance protection plan to cover all deposit amounts above the $250,000 FDIC limit, with no coverage cap. Banks and credit unions chartered in Massachusetts are required to pay into the fund, which is not backstopped by the Commonwealth or the federal government. No other states have similar programs. According to the DIF, no depositor has ever lost a penny in a bank insured by both the FDIC and the DIF. Coverage is automatic for all deposit accounts in a member bank, both personal and business. Qualifying accounts include savings accounts, checking and NOW accounts, CDs, money market deposit accounts, and retirement deposit accounts. Member banks can be found at difxs.com.
Real Estate Considerations
Landlords should review their commercial/office tenant rolls and determine if they are holding letters of credit for any tenants doing business with SVB or other impacted banks. The joint statement from the FDIC, Treasury, and the Federal Reserve indicates that while depositors will be protected, shareholders and “unsecured” debtholders will not enjoy those protections. Tenant letters of credit are typically considered unsecured in this respect.
A typical letter of credit will include provisions that require the bank/lender to maintain a certain financial rating and allow the landlord to require that the tenant replace the letter of credit if the bank’s financial rating falls below that threshold. Property owners should carefully review each of their leases and the terms surrounding letters of credit to best understand whether they can demand additional assurances from the tenant.
Similarly, tenants should review their leases to understand their obligations related to letters of credit, updating their landlord on any change in banking information and cooperating as much as possible to the extent required under their leases.
There will be a host of other considerations that will arise in the weeks and months to come. Does your business have additional operational risk factors that need to be evaluated? Is your insurance program up to date and appropriate for the growth of your business? Are you maximizing your revenue collection or are you letting delinquent accounts negatively impact your potential cash flow? Are your customer contracts designed to fully protect the risk of your financial investment into each order/project? Have you granted any equity interests to your bank or other lenders subject to these risk factors? Do they have preferential rights over any other investors?
Executives are encouraged to reach out to their attorneys and advisors to help get ahead of these various issues that impact their organizations. Companies who approach the difficult self-analysis process with openness and careful consideration of the many internal and external factors that impact their organizations will be best positioned to withstand the next wave of challenges.
This DarrowEverett Insight should not be construed as legal advice or a legal opinion on any specific facts or circumstances. This Insight is not intended to create, and receipt of it does not constitute, a lawyer-client relationship. The contents are intended for general informational purposes only, and you are urged to consult your attorney concerning any particular situation and any specific legal question you may have. We are working diligently to remain well informed and up to date on information and advisements as they become available. As such, please reach out to us if you need help addressing any of the issues discussed in this Insight, or any other issues or concerns you may have relating to your business. We are ready to help guide you through these challenging times.
Unless expressly provided, this Insight does not constitute written tax advice as described in 31 C.F.R. §10, et seq. and is not intended or written by us to be used and/or relied on as written tax advice for any purpose including, without limitation, the marketing of any transaction addressed herein. Any U.S. federal tax advice rendered by DarrowEverett LLP shall be conspicuously labeled as such, shall include a discussion of all relevant facts and circumstances, as well as of any representations, statements, findings, or agreements (including projections, financial forecasts, or appraisals) upon which we rely, applicable to transactions discussed therein in compliance with 31 C.F.R. §10.37, shall relate the applicable law and authorities to the facts, and shall set forth any applicable limits on the use of such advice.
 There are 14 FDIC deposit insurance ownership categories: single accounts, joint accounts, revocable trust accounts, irrevocable trust accounts, certain retirement accounts, employee benefit plan accounts, business/organization accounts, government accounts, mortgage servicing accounts for principal and interest payments, accounts held by a depository institution as the trustee of an irrevocable trust, annuity contract accounts, public bond accounts, custodian accounts for Native American and accounts deposited by an IDI pursuant to the Bank Deposit Financial Assistance Program of the Department of Energy (https://www.fdic.gov/resources/deposit-insurance/diguidebankers/general-principles/index.html )