Silicon Valley Bank collapse leaves actions for banks and tech companies

On Friday, SVB Financial Group, a California-based lender that focused on supporting technology start-ups, became the largest bank to fail since the 2008 financial crisis.

SVB customers have spent the weekend working out how they will assess their exposure, understanding risks to their businesses, and preparing for the possibility of operating their businesses without immediate access to bank accounts and other banking services. As in 2008, merger talks have been going on over the weekend.

Action taken by financial regulators in the US, UK and Germany was announced on Monday morning.

US regulators have set up a new facility to give banks access to emergency funds, and the Federal Reserve have made it easier for banks to borrow from it, in an attempt to shore up the wider financial system.

In the UK, the Bank of England announced that it had taken the decision to sell the UK subsidiary of SVB, Silicon Valley Bank UK Limited (SVBUK), to HSBC UK Bank Plc. In a statement the Bank of England confirmed that “all depositors’ money with SVB UK is safe and secure” as a result of the sale, which followed weekend discussions with the Prudential Regulation Authority, the UK Treasury and the Financial Conduct Authority.

The move was designed to stabilise SVBUK, ensuring the continuity of banking services and minimising disruption to the UK technology sector – around 3,000 UK technology companies are estimated to have financing arrangements with SVBUK. The Bank of England said that SVBUK customers should not notice any changes to their services and that no other UK banks had been "materially affected" by its collapse. It added that the wider banking system remained "safe, sound, and well capitalised". 

Banking and financing expert John Maciver of Pinsent Masons said: “There is still work to do for businesses affected by the collapse of Silicon Valley Bank in the US, notwithstanding the sale of the UK arm to HSBC. For instance, borrowers with a loan commitment from Silicon Valley Bank in the US will need to find a replacement lender, and liaise with other banks in loan syndicates regarding any non-lender roles currently performed by SVB US, such as agent or security trustee.”

“There are potential implications too for technology sector financing in the long-term – in the UK, businesses will be eager to understand whether SVBUK will, under HSBC’s ownership, continue to take the same commercial approach or whether credit decisioning or risk appetite will change,” he said.

The collapse of SVB in the US also prompted a response from German federal financial services regulator BaFin. SVB has a branch in Germany where it has operated since 2018 as a small lender.

BaFin imposed a moratorium on customer transactions at the German branch. The regulator said, however, that the German branch’s plight poses no threat to financial stability. SVB's Frankfurt branch had assets of €789 million as at the end of last year.

Munich-based Mark Leonard of Pinsent Masons, who specialises in financing arrangements, said: “Silicon Valley Bank was a major source of funding for technology companies in the US and a significant player in the UK, but in Germany its impact was more limited.”

Restructuring expert Nick Gavin-Brown of Pinsent Masons said news of SVB’s collapse on Friday had raised the potential prospect of bank insolvency proceedings being triggered in the UK, until news of SVBUK’s sale to HSBC emerged.

He said: “It was a stressful weekend for many technology firms holding deposits with SVB, before the sale to HSBC was announced. The Bank of England indicated on Friday 10 March that SVBUK would be placed into bank insolvency under the Banking Act 2009 in the absence of any meaningful further information by Sunday night.”   

“The bank insolvency process has been rarely used since its inception under the Banking Act 2009 and is only used where the relevant bank is not deemed to be of systemic risk to the UK banking system and no buyer is likely. It provides for the winding-up of the bank with a few modifications to insolvency law, including a primary objective of returning deposits protected by the FSCS to deposit holders as quickly as possible. The Bank of England did not apparently consider that it was appropriate to use the ‘bail-in’ provisions in the circumstances, which provide for the write-down of claims in return for equity to provide a solvent outcome,” he said.

“Deposit holders that held balances in excess of the £85,000 guaranteed by the FSCS, or those that fell outside of the eligibility criteria for micro, small or medium-sized businesses, would have been left waiting for a significant period of time for the wind-down to progress to a stage where distributions could be made for the balance of their claim. Although the bank insolvency process provides a preferential claim for the balance due to depositors eligible under FSCS – after fixed charge holders, liquidators fees and expenses the protected FSCS claim and certain employee and tax claims – there was a real risk that they would not recover in full and the delay in recovery would produce knock-on effects for the solvency of deposit holders and the wider technology sector,” he said.

“The comfort provided by regulators in the US is also of importance to many businesses in the UK that may still have had dealings with the US parent, given that the former UK branch of the US parent was only converted to a subsidiary last year,” Gavin-Brown said.

UK chancellor, Jeremy Hunt, said there was "never a systemic risk to our financial stability in the UK" from the collapse of SVB, but said the sale of SVBUK to HSBC was necessary to minimise the disruption to major UK technology firms.

"Some of them only had bank accounts with SVBUK and so for that reason we were faced with a situation where could have seen some of our most important companies, our most strategic companies, wiped out and that would have been extremely dangerous," Hunt said.