Bank Failure Impact on Legal Departments

First Reviewed : April 27, 2023
Last Reviewed: April 27, 2023

Follow on:

2023 has the legal industry on its toes, by starting the year with a recession and global instability. If that wasn’t bad enough, now bank failures have been making headline news. JD Supra notes that bank failures are a regulatory and compliance nightmare, with millions of client dollars at stake, not to mention lives in the balance. 

The Federal Deposit Insurance Corporation (FDIC) made strides to mitigate bank account holder losses by creating the Deposit Insurance National Bank of Santa Clara (DINB). The FDIC transferred insured deposits to the DINB as a security measure for bank account holders. In the wake of these bank failures, federal authorities have been investigating the reason for these bank failures. 

A Wolters Kluwer article notes that a class action lawsuit is already underway. The lawsuit involves the Silicon Valley Bank Failure, and may be the first of many litigation nightmares. Legal departments are already on edge, dealing with shoestring budgets, even as compliance and regulatory affairs such as these pile up and overflow their plates. 

Mitigating Financial Losses 

Receivership

The FDIC establishes a receivership for a bank as soon as a bank failure occurs. Receivers are entities that process a failed bank’s processes and functions. Receiverships are in effect until all of the failed bank’s assets are sold, and “all claims against the bank are resolved”. These receiverships may also pay out the bank to recover some portion of the losses. 

However, the Silicon Valley Bank situation warranted the FDIC creating the new DINB bank to pay bank account holders at the very least. Financial experts predict that the FDIC will try to salvage the losses by selling the bank in part or in whole. 

Selling the Bank 

Generally, failed banks are sold to financially stable banks. There are 3 ways the FDIC sells a bank post-bank failure. 

  • Basic P&A: The stable bank buys all of the failed bank’s assets, deposits, cash and cash equivalents.
  • Loan purchase P&A: The stable bank will buy some of the bank’s loan portfolio, deposits, cash and cash equivalents.
  • Bridge bank: If the two bank selling methods fail, the FDIC temporarily buys the bank until they find a bank or entity to buy the failed bank. 

Payout

The payout bank failure mitigation tactic is a contingency plan if the bank cannot be sold or if a receivership cannot be established. The FDIC will identify the depositors of the failed bank, and determine how much the failed bank owes them. After the bank closes down, the FDIC pays the insured deposits.

Bank Failures and Contracts 

Contracts are the keystone to any business, and especially more so for banks. The FDIC can enforce contracts that the failed bank entered into. 

  • No one can terminate, accelerate, or declare as default any contract that involves the failed bank. In addition, nobody has the authority to possess or exercise control over any of the failed bank’s properties, or rights, without permission from the receiver during the 90-day period beginning from when the receiver takes their place.
  • The FDIC can reject any contract that involves the failed bank, and these terms are at their discretion.
  • A contract that the FDIC rejects and has damages against, are limited to the actual direct compensatory damages on the date of repudiation.

Regulatory and compliance especially when it comes to finance and bank failures can be a nightmare. Instead of spending long hours, money, and resources on staying compliant with local regulatory measures, you can rely on our Compliance Solutions. 

Share the Post: