The former parent of Silicon Valley Bank has no access to about $2 billion it deposited with the failing bank after regulators froze the company’s accounts and are examining whether they will bear the costs associated with the bank’s collapse should.
Lawyers for SVB Financial Group, the holding company that formerly controlled the now-defunct bank, alleged during the company’s first bankruptcy court hearing Tuesday that the Federal Deposit Insurance Corp. unlawfully blocked access to cash held in accounts with it Successor to Silicon Valley Bank.
They also alleged that the FDIC cut off communications with SVB Financial and ordered Silicon Valley Bank’s successor to reclaim transfers from SVB Financial to other bank accounts.
“Right now, not just the bank, all of the cash has been taken,” James Bromley, a lawyer for SVB Financial Group, said at the New York hearing.
After Silicon Valley Bank was acquired by the FDIC on March 10, regulators ordered all of the failed bank’s deposits and assets to be transferred to a new corporate entity called Silicon Valley Bridge Bank NA. All depositors at the old bank were allowed to withdraw any funds they had from accounts at the new bank.
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However, the FDIC on March 16 ordered SVB Financial’s approximately $1.9 billion in deposits Tuesday.
“The bridge bank cannot withdraw from this account … without the consent of the FDIC recipient,” Sandeep Qusba, an attorney for Silicon Valley Bridge Bank, said in court.
The Chapter 11 case is likely to involve legal questions that have existed since the 2007-09 financial crisis over when bank holding companies can recover losses from failed subsidiary banks.
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If the FDIC successfully pursues lawsuits against SVB Financial and its assets, it could erode the amount available to pay the company’s unsecured bondholders, who owe nearly $3.4 billion.
On Tuesday, attorneys for the FDIC did not specify what claims they might have against SVB Financial or how much they might be worth. But attorneys for the FDIC said they had legal authority to freeze the deposits and would later pursue any claims against the parent company.
The FDIC hasn’t disclosed how much it has spent from its deposit insurance fund to ensure all Silicon Valley Bank depositors can withdraw their money. The FDIC did not respond to requests for comment.
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SVB Financial Group filed for Chapter 11 protection on Friday, just a week after regulators took over Silicon Valley Bank. The bank failed after a shot for depositor exits, marking the second largest bank failure in US history.
“It used to take a while for a bank run to happen, you literally had to run to the bank. Now all you have to do is turn on your phone and push a few buttons, and the money will start flying,” said Mr. Bromley.
SVB Financial’s bankruptcy will facilitate the sale of a number of businesses it still owns, including a broker-dealer arm and a venture capital investment manager. Silicon Valley Bank and its successor, Silicon Valley Bridge Bank, are no longer affiliated with SVB Financial Group, according to the former parent company.
However, attorneys for both SVB Financial Group and the FDIC on Tuesday highlighted the close ties between both the bridge bank and the holding company. Although the bridge bank now houses most of the old bank’s deposits and assets, the holding company continues to provide health insurance to the bank’s employees. In addition, several employees working for the holding company are legally employees of the bank.
Judge
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Martin Glenn, who is leading the bankruptcy of SVB Financial, said the company, the successor bank and regulators needed to work better together.
“They all share a common interest in making sure the debtor’s case runs smoothly [and] Information is available,” the judge said. “To the extent that the FDIC believes it can make up any shortfalls, maximizing the value of the debtor is … critical.”
After being taken over by regulators, the successor to Silicon Valley Bank has yet to find new owners. The FDIC is seeking bids for Silicon Valley Bridge Bank through Friday night, the agency said in a press release Monday. Bids for the new company’s wealth management subsidiary, Silicon Valley Private Bank, are due by Wednesday night.
Other banks whose finances were in jeopardy earlier this month have managed to find white knight buyers. UBS Group AG has agreed to buy Credit Suisse Group AG for $3 billion this weekend while Signature Bank’s deposits are taken over by New York Community Bancorp.
Write to Alexander Saeedy at [email protected]