Commercial leases often require tenants to deliver letters of credit instead of cash security deposits. This practice reflects the belief that an L/C gives the owner better security than a cash deposit if the tenant goes bankrupt. Until very recently, many of those L/Cs came from Signature Bank or—especially for start-up or high-tech companies—Silicon Valley Bank.
When those banks failed, the L/Cs they had issued temporarily became worthless, because they are not backed by deposit insurance and simply represent contractual obligations of the issuer. The federal government solved that problem quickly. The FDIC declared that the “bridge banks”—the temporary banks that took over for the failed banks—would honor all contracts of the failed banks. That would include any outstanding L/Cs. Thus, any owner that had accepted a Signature Bank L/C became the holder of a Signature Bridge Bank L/C instead. The FDIC’s announcement also stated that “all obligations of the bridge are backed by the FDIC and the Deposit Insurance Fund.”
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