Headlines have been dominated by the news of banks on the verge of collapse being rescued at the eleventh hour by government facilitated processes. As concerns about systemic risk grow, banking regulators have stepped in to engineer the sales of key banks in the last 10 days. In the UK, Silicon Valley Bank (SVB) was bought by HSBC. The facts have been very well publicised, and in this article we look at the wide legal powers that were used by the UK regulators to address the SVB position.
SVB, a California-based mainstay of the US start up scene, found itself in imminent danger on Thursday 9 March 2023 when a planned capital raise of more than $2.2bn faltered. The US regulators acted swiftly: by 10 March they had made the decision to shut down SVB in the US, and fears were mounting about the fate of the UK subsidiary (SVB UK). SVB UK became its own legal entity last summer, which for these purposes was helpful as it fell within the wider UK regulatory regime.
Even though SVB UK’s balance sheet was ringfenced, customers started to withdraw their cash, and shortly after 2pm on Friday, SVB UK was forced to request £1.8bn of emergency funding under the Bank of England’s (BoE) discount window facility (which was not in fact provided).
On Friday evening the BoE announced that “absent any meaningful further information” it planned to apply to the court to place SVB UK into a Bank Insolvency Procedure (BIP).
Bank Insolvency Procedure
This is one of the key powers of the BoE. This would have involved the appointment of a liquidator (Bank Liquidator) with broad powers, including the management of SVB UK’s assets, liabilities and distributions to creditors. A BIP is different from a general insolvency process in that it facilitates the payments of UK Financial Services Compensation Scheme (FSCS) deposits (up to an £85k limit or £170k for joint accounts) to eligible depositors as quickly as possible. SVB UK’s other assets and liabilities would then be managed by the Bank Liquidator and sums repaid to creditors as soon as possible.
With over half of SVB UK’s mainly tech-based customers having deposits over the FSCS limit of £85k (and therefore potentially unrecoverable), the commercial outcome of this was unattractive. Over the weekend HM Treasury (HMT), the BoE, in consultation with the Prudential Regulation Authority (PRA), and the Financial Conduct Authority (FCA) sought a viable rescue option and announced the decision to sell SVB UK to HSBC Bank Plc (HSBC) for £1 on 13 March 2023 (the Sale).
The Sale was one of the first bank resolutions under the Banking Act 2009 (BA 2009), which sets out the powers to “resolve” a bank. The BoE is the UK’s Resolution Authority, and resolution is how the BoE manages bank failure in order to minimise the impact on depositors, the financial system and public finances. “Bank” for the purposes of the BA 2009 is defined as a UK institution which has permission under the Financial Services and Markets Act 2000 to carry on the regulated activity of accepting deposits but does not include a building society or credit union.
In terms of what these powers mean, this is set out as follows:
The BoE has broad write-down (including to zero) and conversion powers of a bank’s capital instruments and liabilities. The additional Tier 1 instruments and Tier 2 instruments issued by SVB UK were reduced to zero, and any liabilities owed by SVB UK in respect of these instruments were cancelled. In addition, the value of the shares in SVB UK was written down to £1 in total.
Section 7 of the BA 2009 sets out one of the BoE’s stabilisation / resolution powers under the UK Special Resolution Regime (SRR), under which the Sale was effectively facilitated via the Silicon Valley Bank UK Limited Mandatory Reduction and Share Transfer Instrument, a legal instrument issued by the BoE which had the effect of writing down and transferring SVB UK’s share capital, and which came into force at 7am on 13 March 2023.
The SRR may be used by the BoE (following consultation with the HMT, PRA and FCA) if the following conditions are satisfied:
- The bank is failing or likely to fail,
- With regard to timing and other relevant circumstances, it is not reasonably likely that action will be taken by or in respect of the bank that will result in condition 1 above ceasing to be met,
- The exercise of power is necessary with regard to the public interest in the advancement of one or more of the SRR objectives, and
- One or more of the SRR objectives would not be met to the same extent by the winding up of the bank.
In respect of SVB UK, after consultation with the BoE, the PRA was satisfied that condition 1 above was met. The BoE, after consultation with the PRA, HMT and FCA was satisfied that conditions 2, 3 and 4 were also met for SVB UK.
The SRR also gives the BoE powers to transfer a failed bank to an authorised private sector purchaser. The BoE therefore has the power to sell all or part of the business to the bank to a commercial purchaser by way of a share or asset deal (similar to a corporate restructuring).
All the issued shares in SVB UK were transferred to HSBC for £1. Under the SRR and the BA 2009, the BoE, in consultation with the PRA, HMT and the FCA, has wide discretion to exercise one or more of the stabilisation powers, taking into account both the distressed bank’s specific circumstances, and the wider general circumstances of the financial system. The BoE also has the power to act without the consent of the failed bank, its shareholders, or creditors, which is exactly what happened in the case of SVB UK.
Whatever the commercial outcome of these recent actions, they have highlighted both the broad powers available to the UK regulators where UK banks are in financial difficulty, and that the regulators will use these powers to act quickly and decisively.
This publication is a general summary of the law. It should not replace legal advice tailored to your specific circumstances.
© Farrer & Co LLP, March 2023