The Silicon Valley Bank (SVB) UK rescue over the weekend gave a dramatic warning of the continuing risks for businesses in an uncertain world economy.
It is very positive that a solution was found, and one which leaves customers intact.
However, the uncertainty remains. Some of our immediate thoughts for SVB customers and the wider business community on how to address the aftermath are set out below.
What’s happened?
Following the closure of the California-based lender by US regulators on Friday 10 March 2023, that same evening, the Bank of England announced that, “absent any meaningful information” it intends to apply to Court to put Silicon Valley Bank UK Limited (SVB UK) into a Bank Insolvency Procedure. A Bank Insolvency Procedure is a modified form of liquidation under Part 2 of the Banking Act 2009, specifically designed for bank failures, and it has its own set of insolvency rules: The Bank Insolvency (England and Wales) Rules 2009.
After energetic intervention by regulators, it was announced on 13 March that HSBC would buy SVB UK and keep it in operation.
That is great news for SVB UK customers. However, it may not be the end of the market turbulence.
We’ve set out some questions and answers you should equip yourself with going forwards.
"In a bank collapse how do I get my money out?"
SVB UK has been rescued. But if there is a future insolvency bank, will depositors get their money out?
The SVB rescue underlines the Bank of England’s priority to protect deposit holders and illustrates its interventionist approach to find a rescue partner.
If no rescue is fund, the Financial Services Compensation Scheme (FSCS) will compensate “eligible depositors” up to the amount of £85,000 or £175,000 for joint accounts.
Broadly, “eligible depositors” are individuals, small businesses and some fund vehicles. An authorised investment firm or AIFM will not be eligible. If the same entity has multiple deposits in different accounts, the maximum they will be compensated by the FSCS is £85,000.
Any return (the amount that a depositor will receive for every £1 that the depositor has deposited in the bank) over and above the FSCS guarantee, will depend on the assets and liabilities of the bank.
"What about the bank's borrowers?"
Liabilities under any facility agreement will continue to be owed to the bank. However, the liquidators only have the rights set out in the facility agreement, so they can’t, for example, demand repayment or call in the facility unless a borrower default or enforcements event has occurred.
It’s very unlikely that a formally insolvent bank will fund any utilisation or drawdown requests (e.g. under subscription or bridging facilities). This would be a breach of the facility agreement but, as the bank would be in a Bank Insolvency Procedure, any litigation is stayed. It is advisable to check whether the facility agreement contains “defaulting lender” provisions. If not, alternative options could include voluntary cancellation or termination for repudiatory breach.
Liquidators may disclaim any onerous contracts – for example, where the bank has an obligation to fund – although that is probably unlikely with a loan agreement. The liquidators may try to sell any loans. It will be important to check specific terms of the facility agreement to assess whether borrower consent or consultation would be required.
In capacity as borrower, if a bank enters into a formal Bank Insolvency Procedure, mandatory set-off provisions will apply and this should be
considered with appropriate advice.
"What practical steps can I take now?"
Open accounts with more than one bank and share deposits across them. Consider using better capitalised banks, even if they are more bureaucratic than nimble challenger banks. If one bank collapses (and you are limited to the FSCS compensation at best) you can still use other accounts.
If there is a period of major uncertainty, it may be difficult to borrow funds or raise new equity. Try to shave costs, fix rates or other variable costs with hedging and hold a cash buffer.
If your bank appears to be in difficulty, act swiftly. While panic is unhelpful, a bank run can accelerate rapidly and lead to quick collapse of the bank. If the concern is real, consider withdrawing substantial deposits – even if this means a financial penalty to break term deposits.
"And if my bank does collapse?"
- If the worst happens, and the bank goes into formal insolvency, take advice to assess if you’re an “eligible depositor”. If so, make a claim to the FSCS.
- Keep up to date with statements made by The Bank of England, HM Treasury and the SVB UK website.
- Take advice on the claims process as and when the liquidators of the bank outline the process and submit a proof of debt (how much the bank owes you).
- Assess what monies you have deposited in, or borrowed from, the bank and collate all relevant documentation and terms and conditions. Does the bank owe you any money which can be set off against amounts you owe to the bank?
- Until you receive a formal notice to the contrary, keep servicing all capital and interest repayments due under any facility. However, if the bank is an agent for other lenders, take legal advice before making payments.
- Explore alternative banking arrangements and redirect funds that would ordinarily be paid to the bank.
Please get us in contact with our restructuring and insolvency team if you are experiencing difficulties from SVB’s rescue or difficulties with other banks.
