On 13 March 2023, the Bank of England (BoE), in consultation with the Prudential Regulation Authority (PRA), HM Treasury (HMT), and the Financial Conduct Authority (FCA), made the decision to sell Silicon Valley Bank UK Limited (SVB UK) to HSBC UK Bank Plc for £1 (the “Sale”). This followed the decision by U.S. regulators on 10 March 2023 to shutdown Silicon Valley Bank (SVB) in the U.S.
UK Modified Insolvency
The BoE announced on 10 March 2023 that “absent any meaningful further information”[1], it planned to apply to the Court to place SVB UK into a Bank Insolvency Procedure (BIP), which would have involved the appointment of a liquidator with broad powers, including the management of SVB UK’s assets, liabilities, and distributions to creditors. Unlike a general insolvency process, a BIP prioritises rapid payouts or transfers of deposits protected by the Financial Services Compensation Scheme (FSCS),[2] simultaneously stopping SVB UK from making payments or accepting deposits.
U.S. Backstop
On 12 March 2023, it was announced that the U.S. Federal Deposit Insurance Corporation’s deposit insurance fund would be used to fully protect all SVB depositors (the “FDIC Scheme”). At the same time, the U.S. Federal Reserve Board exercised its authority[3] to establish the Bank Term Funding Program for the protection of SVB depositors.[4] The FDIC Scheme applies to SVB depositors only and does not offer any protection for SVB UK depositors.
The Sale
The Sale of SVB UK, which at the point of failure had an estimated balance sheet of £8.8 billion, secured the deposits of more than 3,000 customers worth £6.7 billion and loans worth approximately £5.5 billion. The Sale was facilitated by the UK Special Resolution Regime (UK SRR).[5] Despite the balance sheet of SVB UK, the BoE determined that the position was not recoverable based on the scale of the deterioration of liquidity and confidence.
The UK SRR applies to banks, building societies, and certain investment firms, and their financial holding companies that are incorporated in the UK. It therefore includes the UK subsidiaries of foreign firms, including SVB UK.
The UK SRR equips the BoE with stabilisation powers which can be exercised (following consultation with the PRA, HMT, and FCA, as appropriate) if relevant conditions are satisfied.[6] This includes the power to transfer a failed bank to a willing and authorised private sector purchaser. This is similar in effect to a corporate restructuring transaction; however, the BoE is empowered to act without the consent of the failed bank, its shareholders, or creditors.[7]
As a result of the Sale, SVB UK has confirmed that all depositors’ money is safe and secure and that it will continue to operate normally.[8] The BoE noted the Sale would “stabilise SVB UK, ensuring the continuity of banking services, minimising disruption to the UK technology sector and supporting confidence in the financial system”.[9]
[1] See BoE statement dated 10 March 2023.
[2] The Financial Services Compensation Scheme, which is funded by fees paid by firms authorised by the FCA and PRA (“UK Authorised Banks”), compensates customers for money held with UK Authorised Banks (including SVB UK) up to £85,000 per eligible person per UK Authorised Bank, and up to £170,000 per joint account per UK Authorised Bank.
[3] See section 13(3) of the Federal Reserve Act.
[4] This makes additional funding available to eligible borrowers (generally, U.S. depository institutions such as SVB) in order to help ensure that banks have the ability to meet the needs of their depositors.
[5] As set out in the Banking Act 2009.
[6] The following conditions need to be satisfied for the BoE to exercise its stabilisation powers:
- The bank is failing or likely to fail;
- With regard to timing and other relevant circumstances, it is not reasonably likely that (ignoring the stabilisation powers) action will be taken by or in respect of the bank that will result in condition 1 ceasing to be met;
- The exercise of the power is necessary with regard to the public interest in the advancement of one or more of the special resolution objectives; and
- One or more of the special resolution objectives would not be met to the same extent by the winding up of the bank.
[7] See The Silicon Valley Bank UK Limited Mandatory Reduction and Share Transfer Instrument 2023, which gave effect to the Sale.
[8] See SVB UK Press Release.
[9] See BoE statement dated 13 March 2023.
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