Oops. How the FDIC Guaranteed the Deposits of SVB Financial Group

When President Biden announced the rescue of Silicon Valley Bank depositors, he emphasized that "investors in the banks will not be protected.  They knowingly took a risk and when the risk didn’t pay off, investors lose their money.  That’s how capitalism works." Unfortunately, that's not how US law works. 

There seems to be a gap in the Federal Deposit Insurance Act that is going to protect some investors in Silicon Valley Bank’s holding company, SVB Financial Group. The holdco’s equity in the bank will be wiped out in the FDIC receivership, but the FDIC doesn’t have any automatic claim on the holdco. This is basic structural priority/limited liability:  creditors of a subsidiary have no claim on the assets of a parent.

What's worse is that the holdco, which filed for bankruptcy today, has substantial assets including around $2 billion on deposit with SVB. Almost all of that $2 billion deposit at SVB would have been uninsured, but by guarantying all the deposits, FDIC accidentally ensured that the holdco’s bondholders would be able to recover that from that full $2 billion deposit.

There any provision in the Federal Deposit Insurance Act that subordinates the claims of insiders—like corporate affiliates or executives—that exceed the insured deposit limit to other creditors. So once FDIC guaranteed all deposits, it necessarily guaranteed the deposits of the holdco and other insiders. 

Now the FDIC might have some sort of tort-based claim against the holding company—breach of fiduciary duty or the like—but that's fact-dependent, and no complaint has been filed yet. The key problem is that there's no automatic claim for the FDIC against a bank holding company when the FDIC takes over the failed bank as a receiver and pays out on the deposit insurance. The situation is different for G-SIBs (really, really big banks)--their holds are required to have a certain amount of bail-in-able capital (TLAC) and to have a single-point-of-entry resolution model. But that doesn't apply to smaller bank holding companies like SVB Financial Group. There's also the source-of-strength doctrine, codified in Dodd-Frank, but that doesn't create any concrete financial liability—it's just exhortatory.  

Bankruptcy law prioritizes claims for commitments to federal bank regulators to maintain the capital of insured depository institutions, but I don't think we have such a claim here--a commitment has traditionally meant a specific promise to do so (that's why it's covered under section 365(o)). I don't think we have one here. Perhaps the holdco's resolution plan, which is supposed to state how the holdco will be a "source of strength" for the depository would suffice, but I'm very skeptical of that argument. It's just too vague of an obligation and a resolution plan doesn't seem like an otherwise enforceable commitment. So I don't think there's any obvious FDIC claim on SVB Financial Group. There should be, but that's another matter. 

Maybe the FDIC will come up with a theory that gives it a bankruptcy claim against SVB Financial Group. But if not, the FDIC seems to have accidentally guarantied $2 billion for the creditors of SVB Financial Group without any offsetting claim.