Sunday’s joint statement by the Department of Treasury, the Federal Reserve and the Federal Deposit Insurance Corporation (FDIC) that all depositors of Silicon Valley Bank and Signature Bank of New York would have access to their deposits on Monday precipitated a collective sigh of relief among customers of those institutions as well as their investors, employees and business partners. Nonetheless, many businesses still have much work to do, whether they are depositors, creditors or do business with depositors or creditors of the institutions. Here are some important considerations for businesses in the days to come.

Should you move your funds to a new banking institution?

• While depositors will have access to their funds, simply moving them to another institution may not be the best option in the short term. Checks and other automatic payments to vendors, suppliers, landlords and other day-to-day banking activities are not always simple to change. Thought must be given to how these aspects of a business will be affected if its banking relationship is transferred to another institution. Payroll is particularly important. A misstep with employee payroll can affect not only employee morale, but could also potentially expose the organization and its leadership to liability if not swiftly corrected. If a business moves funds to another institution it will need to notify all parties that make transfers in and out of its accounts. If it stays with Silicon Valley or Signature bank, it should confirm with third parties that they will process and accept ACH transfers as some payroll providers have indicated that they are not currently accepting ACH transfers from SVB. In addition, the business’s new bank will be required to comply with Bank Secrecy Act, Know Your Customer and other regulatory requirements in the process of opening the new account. This may take some time, so if it intends to establish a relationship with a new bank, a business should do so promptly and find out what information the bank needs to complete the process.
• If a business moves its funds, simply transferring them to a single institution may not be the answer. Distributing funds across several institutions can reduce risk, but managing multiple banking relationships can also present operational challenges for many businesses. Splitting the funds between just two or three institutions may be more manageable if the objective is to minimize the risk in the unlikely event of another bank failure.

What about credit facilities and letters of credit with a failed institution?

• Businesses should continue to make loan payments under existing credit facilities.
• Businesses with a loan facility from a failed institution must keep in mind that changing its primary banking relationship can trigger a default. Many such facilities require that the borrower’s primary banking relationship be maintained with the lender. The FDIC has indicated that it intends to sell all loans, so to the extent a business has a term loan with the failed institution, it will be contacted by a new lender as the sale of that loan is completed. That lender may want to require that the borrower establish its primary banking relationship at that institution.
• Businesses with a line of credit facility will need to establish a new facility at another institution since the FDIC, in its capacity as receiver, has frozen access to further draws on all lines of credit, including home equity lines of credit. In this case, it would be more difficult for the loan to be sold by the FDIC since most borrowers will need to replace the line of credit to have access to the funding it provides. The more likely scenario is that the loan would be paid off and replaced by a similar facility with the new bank.
• Landlords and other parties that have business relationships with depositors of these institutions should initiate discussions to determine how the institution’s failure is affecting the depositor in order to assess the financial health of the party and anticipate changes in payment timing and other aspects of the business relationship. For parties that have accepted Letters of Credit as security as part of the relationship, it is critical to ensure that replacement Letters of Credit are provided. Letters of Credit are not considered deposits that would be insured up to $250,000. Rather, except in certain instances, they are considered contingent obligations of the failed bank. As receiver, the FDIC has the authority to repudiate contracts and therefore we expect it will generally not honor draws under letters of credit going forward if it determines that such agreements are burdensome to the orderly liquidation of the bank.

Businesses that have been affected by the closure of these banks will need to establish new relationships to conduct their banking and financial affairs going forward. Financial institutions in the United States are subject to a significant level of regulation, often by more than one agency. This is the primary reason failures are rare. Nonetheless, in establishing new banking relationships, or reviewing existing ones, it is advisable to consider minimizing the risk that a subsequent institution meets the same fate.

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