For those interested, there then follows some further detailed Q&A.
The key takeaways
For those short on time:
- SVB US: the FDIC, acting as receiver, transferred all deposits (insured and uninsured), substantially all assets, and all qualified financial contracts to a newly created bridge bank. Our general expectation is that, barring a sale of the whole bank, the FDIC may begin to explore a piecemeal sale of SVB US' book across multiple transactions as a means to recoup value. For those facing SVB US, see further detail below on the receivership and how that process impacts customers and counterparties.
- SVB UK has been sold to HSBC UK Bank Plc pursuant to the UK bank special resolution regime. SVB UK therefore continues to exist as a legal entity, as a subsidiary of HSBC. For those facing SVB UK, see further below for the detail on how the resolution regime impacts customers and counterparties.
- For tech companies and their investors: now is the time for reflection, with a focus on preparedness for any future risk of a similar collapse with a key stakeholder in their business.
- For counterparties to SVB (such as swap counterparties): it is vital that counterparties identify which SVB entity they have a relationship with. Collate and continue to review your documents, and keep an eye on ongoing performance by SVB US or SVB UK (as applicable) of its obligations.
Further detail follows.
A quick recap: what is SVB and why is it important?
Founded in 1983, SVB had grown to become the 16th largest bank in the US. At the end of 2022, its US operations had $209bn in total assets and $175bn in deposits. SVB became an integral banking partner to the technology ecosystem. Reports suggest that many tech customers bank only with SVB. Consequently, prior to the collapse, many of SVB's customers (reportedly 50% of US VC-backed startups) faced severe liquidity problems in the event they could not access their deposits or banking lines with SVB. For investors in tech, as well as exposure at a portfolio company level, SVB was seen as a first-mover as a bank for private equity and venture capital with its sub line products.
SVB also had a sizeable business in the UK. Launched in 2004 as a branch of the US bank, the UK business was transferred to a standalone legal entity – Silicon Valley Bank UK Limited (SVB UK) – in August 2022 under a statutory transfer scheme. Reports indicate that at the point of failure, SVB UK had a total balance sheet of around £8.8bn and deposits of around £6.7bn.
SVB in the US: the collapse into FDIC receivership
What is the status of SVB US today?
On 10 March, the California Department of Financial Protection and Innovation took possession of SVB US and appointed the FDIC to act as receiver in accordance with the Federal Deposit Insurance Act (the FDIA). On 13 March, the FDIC, acting as receiver, transferred all deposits (insured and uninsured), substantially all assets, and all qualified financial contracts (see further below) of SVB US to a newly created bridge bank called Silicon Valley Bridge Bank, N.A. (SVBB NA). Our general expectation is that, barring a sale of the whole bank, the FDIC may begin to explore a piecemeal sale of SVB US' book across multiple transactions as a means to recoup value.
What happened to SVB US in the days after the collapse?
Initially, the US Treasury dismissed a bailout of SVB US. On 10 March, the date of its appointment, the FDIC initially created a temporary bridge bank called the Deposit Insurance National Bank of Santa Clara. Insured deposits – that is, based on the deposit insurance amount of up to US$250,000 – were transferred into that new bank with a view to providing depositors with access to those funds by 13 March.
Over the weekend, the FDIC ran an auction to sell the bank but failed to find a buyer.
In the evening of 12 March, US government officials confirmed that all deposits (both insured and uninsured) will be fully protected. The following day, an FDIC press release confirmed that all deposits, substantially all of SVB US' assets and all qualified financial contracts had been transferred to SVBB NA, such that depositors should have full access to their money and normal bank services.
What is the FDIC?
The FDIC is an independent US federal agency and bank regulator, created by the US Congress to maintain stability and public confidence in the US financial system. The FDIC insures deposits (of up to US$250,000), examines and supervises insured depositary institutions for safety, soundness and consumer protection issues, and manages receiverships of failed or failing institutions.
What does this mean for SVB US' customers and counterparties?
Depositors: US government officials have stated that all depositors will be fully protected. As of Monday, deposit accounts held with SVB US should be accessible as normal through SVBB NA.
Contractual termination rights: save for qualified financial contracts (see below), no counterparty may terminate, accelerate or declare defaults under a contract with SVB US without the FDIC's consent. This stay runs for a 90-day period from 10 March. Aside from this stay, the FDIC may also enforce contracts with SVB US notwithstanding any provision that allows for termination, default, acceleration, or exercise of rights upon (or solely by reason of) SVB US' insolvency or the appointment or exercise of rights or powers by the FDIC. The FDIC further has the power to disaffirm or repudiate SVB US' obligations under a contract if the FDIC determines that (i) the contract is burdensome and (ii) the disaffirmance or repudiation will promote the orderly administration of SVB's affairs. We wait to see whether the FDIC will exercise any such powers in the course of the receivership.
Close-out rights under derivative contracts: any close-out or termination rights in qualified financial contracts1 (QFCs) triggered solely by the financial collapse of SVB US or the appointment of FDIC as receiver were permanently stayed upon the transfer of these contracts to SVBB NA. Going forward, any new triggers (such as failure to perform or non-payment) remain enforceable subject to the terms of the contract (including any grace periods and notice requirements). With that in mind, counterparties to QFCs should continue to monitor SVBB NA's ongoing compliance with its obligations under its contracts, for example payment obligations or margin call obligations.
Credit lines made available by SVB US as lender: FDIC/SVBB NA will continue to service SVB US' credit lines going forward, until such point that the loan book is sold. The FDIC has announced that loan customers should continue making loan payments as usual. As for future drawdowns under existing loans (for example, under a revolving credit facility), we note the FDIC's power to disaffirm or repudiate contracts (as described above) and "get out" of SVB's obligation to fund. Having said that, we would expect this to be a method of last resort given the interest in selling the loan book and the general policy is to honor commitments to creditworthy customers. We would suggest borrowers reach out to their SVB relationship contact or the FDIC itself to discuss the status of their loan.
Other claims: certain unsecured creditors and shareholders of SVB US are not fully protected in the receivership. Unsecured claims are generally subordinate to both the administrative expenses of the FDIC and deposit liabilities, but senior to subordinated obligations and shareholder claims. The FDIC has the power to make determinations as to whether to allow or disallow claims in the receivership and make distributions. The timeline for recoveries (if any) remains to be seen, as outcomes are dependent on the FDIC's recovery efforts and sales process. Please consult the FDIC claims process for further information.
SVB in the UK: the sale to HSBC
What is the status of SVB UK today?
SVB UK has been sold to HSBC UK Bank Plc pursuant to the UK bank special resolution regime. SVB UK therefore continues to exist as a legal entity, as a subsidiary of HSBC.
What happened to SVB UK in the days after the collapse?
On 10 March, against the backdrop of the failure of the US parent bank, SVB UK stated that it was a "standalone independent banking institution". Despite that statement, later that evening the Bank of England announced that, absent any meaningful further information, it intended to apply to court to place SVB UK into the UK Bank Insolvency Procedure. The Bank Insolvency Procedure would have seen the orderly wind-down and liquidation of SVB UK. The Bank of England stressed that SVB UK had a limited presence in the UK and no critical functions supporting the UK financial system.
Over the weekend, the UK tech industry reportedly organized to express the importance of SVB UK to the sector and the UK government took steps to assure the tech sector that support would be provided.
By the early morning of Monday 13 March, apparently in response to the tech sector's outcry, the Bank of England's position had dramatically changed. The Bank of England announced that it had used certain bank special resolution powers to sell SVB UK to HSBC. The sale would ensure "the continuity of banking services, minimizing disruption to the UK technology sector and supporting confidence in the financial system". With the sale, SVB UK could continue operating and avoid insolvency.
What is the UK bank special resolution regime?
The UK government introduced the bank special resolution regime in 2009, following the global financial crisis and the collapse of Lehman Brothers International Europe into insolvency in the UK. The regime gives UK regulators a variety of resolution and stabilisation powers to deal with failing banks (as well as certain other financial institutions) as an alternative to insolvency, provided certain entry conditions are met. Those conditions include that the resolution is "… necessary having regard to the public interest …".
What does the sale mean for SVB UK's customers and counterparties?
Business as usual: SVB UK continues as a legal entity, with HSBC UK as its new parent company. The working assumption is that whatever dealings a counterparty or depositor had with SVB UK before the collapse, business should continue as normal.
Contractual termination and close-out rights: the UK legislation in respect of the resolution regime automatically "switches off" (on a permanent basis) any termination rights that would otherwise have been triggered by the exercise of the resolution powers, including any such termination rights in derivatives contracts. The Bank of England has the power to exercise additional and broad temporary stays in conjunction with the stabilisation measures, but there is no indication of any such action at this stage. Any future default triggers that are unrelated to the stabilisation measures, such as failure to perform or non-payment, will be enforceable subject to the terms of the contract (including any grace periods and notice requirements). With that in mind, counterparties should continue to monitor SVB UK's ongoing compliance with its obligations under its contracts.
Counterparties to SVB UK with the benefit of guarantees from SVB US: there is no indication in the transfer order that HSBC has taken on any guarantee liabilities incurred by SVB US for SVB UK's obligations. As a result, the working assumption at this time is that any such guarantee liabilities have remained with SVB US.
Credit lines made available by SVB UK as lender: borrowers that have contracted with SVB UK on LMA (or similar) terms may query whether the stabilisation of SVB UK has triggered any "defaulting lender" provisions, on the basis that such stabilisation is an "Insolvency Event" of SVB UK as lender. While we are giving this question further thought, it appears that (as a matter of English law) the Banking Act would disapply any modification of rights that might otherwise occur as a result of SVB UK becoming a "defaulting lender" as a result of the stabilisation measure.
Existing shareholders and holders of the written-down capital instruments prior to the sale to HSBC: the Bank of England issued a mandatory reduction and share transfer instrument, which gave effect to two resolution measures: (i) the reduction to zero of certain capital instruments issued by SVB UK and (ii) the transfer of all ordinary shares in SVB UK to HSBC.
The Banking Act regime contains a number of powers to override any restrictions in legislation or contract in order to allow this reduction and share transfer to take effect. As such, the transfer of shares to HSBC UK and write-down of certain capital instruments is final. The Banking Act requires that the written-down creditors and shareholders are no worse off than they would have been had the bank been placed into insolvency. HM Treasury will make a compensation order in the coming days based on valuation evidence, though the timing and outcome of that exercise remains unclear.
Looking forward
What next for the tech ecosystem and its investors?
The collapse of SVB at the heart of the global tech ecosystem was a surprise to many in the industry. It highlighted the concentration of banking functions within the tech sector, and gave tech companies little time to work out their contingency plans in the event of a liquidity crunch following an insolvent collapse of their primary banking provider.
Following regulator action to stabilise SVB in both the US and UK, now is the time for reflection. Tech companies and their investors should consider how to prepare for any future risk of a similar collapse including by, for example, asking themselves the following questions.
- Can the business diversify its banking relationships, to reduce the risk of being over-reliant on one banking partner for their cash deposits and access to credit?
- Does the business have an emergency liquidity "Plan B" in place, in the event its banking or credit provider fails? For example:
- Does management have a strategy as to how they will react? Which advisers will they engage to help navigate the crisis?
- How might the business source emergency liquidity to plug any funding gap? Consider any contractual restrictions on incurring emergency liquidity, understand what consents the business will need, and build a picture of what sort of debt or equity instrument might be the best way of getting emergency liquidity into the business and capital structure at short notice.
- Is an emergency funding provision within the company's constitutional documents necessary or desirable? If so, what consents are required to make that change?
- Is the business able to articulate its risk strategy convincingly for future fundraising exercises? We expect banking arrangements to have renewed focus in due diligence questionnaires.
- When considering new investors, will they be willing to support the company should a crisis arise?
We also expect the collapse of SVB to have a long-term impact on fundraising terms and the oversight that investors will demand when it comes to the cash that is invested in tech companies. In particular, it is possible that covenants will be included in subscription documents that require that cash is held in a designated list of well-capitalised banks.
One of the attractions of SVB as a banking partner for emerging companies was the preferential terms it offered to businesses, which other banking institutions would have rejected for having the wrong risk-profile. These included lower interest rates and fees (often supported by warrants) and personal banking arrangements for founders. It remains to be seen whether such terms will remain available and, if they do not, how tech companies will adapt. Less flexible and more expensive financing may lead to shorter runways and a greater need for cash from investors.
Future regulator interest?
We expect the shockwaves caused by SVB's collapse will sharpen regulatory interest in the tech industry's banking arrangements and systemic risk in that ecosystem. That is particularly the case for regulated fintechs such as, in the UK and EU, electronic money institutions and payment institutions. They may be dependent on banks for a variety of purposes, including for example for holding of regulatory capital, access to payment systems and safeguarding of funds received from the fintech's customers, as well as for the fintech's everyday operational needs.
We expect that regulators, as well as fintechs themselves, will increasingly focus on the robustness of regulated fintechs' wind down plans, and the importance of diversifying banking arrangements and monitoring credit risk exposure to banks. Tech and fintech players may be encouraged to avoid holding all of their deposits and credit lines with one banking partner. Historically, diversification has sometimes been a challenge for some in the industry, with access to bank accounts already being a point under consideration by the UK government as part of a broader payments regime review consultation. Another related area where we expect there may be imminent regulatory change in the UK is changes to PRA Rules to ensure that depositor protection (the "financial services compensation scheme") extends to a regulated fintech's customers if the fintech's safeguarding bank becomes insolvent.
We may also see regulators globally place greater scrutiny on risk management and investment governance by investors in the tech industry (at both the VC level and the LP level).
In the US, it is unclear how other regulators will react to banking arrangements having transferred to a (new) bridge bank. Now that customers and counterparties are facing a new banking entity, the market awaits further information on implications in areas such as KYC and reporting on derivative transactions.
Impact for cryptocurrency?
SVB was seen as a crypto-friendly bank. Its collapse continues what has been a difficult period for cryptocurrency, raising further questions around market stability and concern that the collapse will see reduced banking diversity for crypto companies. In particular, the collapse saw a period of panic in Circle's USDC stablecoin. Circle held $3.3bn of its over $40bn reserves with SVB, and that exposure to SVB was enough to cause a shadow run on USDC at the time of the run on SVB. While the market in USDC has since stabilised, it is another reminder of the risk and volatility in DeFi markets.
Immediate steps for SVB's counterparties?
In many respects, the situation in both the US and UK should have stabilised. However, counterparties to SVB should continue to review their documents. For example:
- SVB US and SVB UK are separate legal entities, in different procedures and with different outcomes. It is therefore vital that counterparties identify which SVB entity they have a relationship with. This will be a case of reviewing relevant documentation. If the relationship was with the UK branch of SVB prior to August 2022, the working assumption should be that that relationship transferred to SVB UK.
- Start collating your documentation (including bank statements, contracts etc), particularly so that you can make a claim in the FDIC receivership (the process for doing so can be found here).
- Keep an eye on SVB's performance of its ongoing obligations under your contracts with SVB, and consult with your advisers in the event of any failure by SVB to perform.
Footnotes
1. Qualified financial contracts are defined, briefly, as securities contracts, commodity contracts and repurchase agreements.
