Rimon Managing Partner Juan Zúñiga comments on the Silicon Valley Bank crisis in interview with Asuntos Legales

Rimon Managing Partner Juan Zúñiga was interviewed on the Silicon Valley Bank crisis by Colombian publication, Asuntos Legales. The interview has been translated for English readers below. Click here to read the full interview in Spanish. 

Republished in English with credit given to Asuntos Legales.

What legal actions are available to you if you lost money in the Silicon Valley Bank crisis?

A short time ago Silicon Valley Bank (SVB), one of the most influential banks in the United States, collapsed, becoming the financial institution faced with the biggest crisis since 2008.

The Federal Deposit Insurance Corporation (or Fdic) took control of the bank on Friday and created a new entity called Santa Clara National Deposit Insurance Bank.

Under new control by the U.S. Federal Government, account holders’ deposits were insured and they could get their money back. But it is not the same for the company’s shareholders, who are likely to lose their money.

Juan Zúñiga, managing partner of the international law firm Rimon Law, clarified the instances in which those affected by the collapse of SVB could recover their resources.

CARLOS FRADIQUE MÉNDEZ

SENIOR PARTNER OF BRIGARD URRUTIA

“The effects of the SVB crisis in Colombia will probably be few and of concise impact, thanks to the application of prudential regulation rules”.

JUAN ZÚÑIGA

MANAGING PARTNER OF RIMON LAW IN THE US

“When the bank collapsed, account holders only had US$250,000 of their deposits insured because of a U.S. law backing them.”

According to Zúñiga, over the weekend all SVB deposits were transferred to the new bank. However, the only up to US$250,000 in cash from depositors was insured. Those with larger savings at SVB might not be able to withdraw their money anytime soon.

“When the bank collapsed, the account holders only had US$250,000 of their deposits insured because of a U.S. law backing them. However, at that time, anyone with more than US$250,000 was no longer insured for the full amount,” said Zúñiga.

But the Rimon Law  expert clarified that the Federal Government, through the Treasury Department, announced that all deposits, even those above US$250,000, will be honored. “That is to say, the account holders are not going to lose their deposits.”

This means, then, that if you had US$1 million deposited at SVB, after the bank’s failure, you would have US$250,000 insured by the Fdic reserve, and the remaining US$750,000 would be backed by the Federal Government, which agreed to lend all balances to Fdic.

This was a great relief for many depositors because, as Zúñiga explains, the day of SVB’s collapse also coincided with payroll obligations for many customers. “We have clients that Friday who were in a panic because they said ‘I have US$2 million that I have to pay in payroll and I only have access to US$250,000,” he said.

What about private shareholders?

As Zuñiga suggests, the federal government is not responsible for insuring capital invested in a bank as an equity contribution. “They (the Federal government) were only looking at the situation to protect the account holders,” he said.

Then, by order of the U.S. Government, the bank is forced to sell all of its assets to pay its liabilities, which falls short of ensuring that shareholders are repaid.

“Whatever is received first from those assets, goes to the bank’s creditors and, if there is a remainder, only in that eventuality, a distribution will be made to shareholders. Most likely, shareholders will not receive anything,” he added.

How does it affect Colombia?

According to a statement issued by the Financial Superintendence, the Colombian financial system will not have a significant impact because there are no direct investments of Colombian entities in SVB.

However, it is necessary to wait a few days to see what decisions the US regulators make and to see how the market behaves to know the impacts on different sectors, experts assure.

“For the moment, one of the big questions that can be raised in the face of SVB’s fall is how banks will deal with the needs of a sector such as technology companies and startups. A time of crisis is the right environment to know the shortcomings and generate mitigating measures to correct them,” said Camila Orrego, senior associate at Cuatrecasas.

“For this reason, banks (traditional, neo banks, and fintech) have a great task to promote and enhance technological development, to offer products and services to a sector that demands agility, speed, and efficiency, as they expect the services and products received to match the ordinary line of business,” added Orrego.

One of the experts’ concerns was that this moment of crisis in the sector would radiate to Colombia. However, Carlos Fradique-Méndez, senior partner of Brigard Urrutia’s financial team said, “the effects of the SVB crisis in Colombia will probably be few and of concise impact, thanks to the application of prudential regulation and risk-based supervision rules”.

Several financial lawyers agreed with this premise. “Situations like this generate stress in economic agents. Simultaneously with the fall of SVB, another New York bank called Signature Bank, which participated in a business niche oriented to digital assets, was falling,” said Julian Aguirre, an associate at Posse Herrera Ruiz.

However, it appears that the mechanisms put in place by the US authorities have maintained its financial system with a high degree of reliability and the systemic effects generated by the fall of SVB seem not to be dramatic.

However, the global macroeconomic environment of high inflation and tightened monetary policy may be generating stress in the balance sheets of several financial economic agents.

Background

The Fed’s high rates were one of the reasons for the plunge. In addition, SVB placed more than half of its deposits in Treasury bonds, which, as rates rose, lost value. Several clients in the technology sector withdrew their deposits to have more liquidity, forcing SVB to sell a $21 billion bond portfolio and, as a result, took on $1.8 billion in debt.

Rimon has 47 offices across five continents. The firm is widely known as being at the vanguard of legal innovation. The firm has been repeatedly recognized by the Financial Times as one of North America’s most innovative law firms. The firm’s Founding Partners were both named ‘Legal Rebels’ by the American Bar Association’s ABA Journal and have spoken on innovations in the practice of law at Harvard and Stanford Law Schools. Rimon and its lawyers have also received numerous awards for excellence, including from Best Lawyers and Chambers.