Silicon Valley Bank UK Limited

What has happened?

·????????Withdrawals of deposits together with a decline in the value of investments have caused Silicon Valley Bank in California to enter into US insolvency proceedings.?The UK subsidiary, Silicon Valley Bank UK Limited (“SVBUK”), which among other things provides deposit and lending facilities to venture capital investors and investee companies, has similarly had withdrawals of deposits together with the sudden unavailability of funding facilities from its US parent.

·????????On 10 March 2023, the Bank of England announced that, absent any meaningful further information, it intends to apply to the Court to place SVBUK into a Bank Insolvency Procedure, and that “SVBUK has a limited presence in the UK and no critical functions supporting the financial system” and that in the interim, the firm will stop making payments or accepting deposits.

·????????SVBUK has announced on its website that, following conversations with the Prudential Regulation Authority there is an intention, barring any intervening event, to put Silicon Valley Bank UK Limited into insolvency from Sunday evening.

·????????HM Treasury made a statement on 12 March 2023 that the UK government recognises that, given the importance of SVBUK to its customers, its failure could have a significant impact on the liquidity of the tech ecosystem and that it is working at pace on a solution to avoid or minimise damage to growth companies in the UK and will bring forward immediate plans to ensure the short term operational and cashflow needs of SVBUK customers are able to be met.

·????????At present, there is no suggestion of any kind of government bail-out or assistance for SVBUK itself.

What is a Bank Insolvency Procedure?

The Banking Act 2009 sets out a Special Resolution Regime (“SRR”) for UK banks.?The SRR sets out several options for the orderly resolution of insolvent banks and gives various powers to the Bank of England, HM Treasury, the PRA and the FCA to enable and effect such resolution mechanisms.?In summary, the measures available under the SRR are:

·????????Five pre-insolvency stabilisation options (including transfer to a private sector purchaser, transfer to a bridge bank, transfer to an asset management vehicle, bail-in option and transfer to temporary public sector ownership);

·????????The Bank Insolvency Procedure (“BIP”); and

·????????The Bank Administration Procedure (“BAP”).

In the case of SVBUK, the Bank of England has stated its intention to go straight to a BIP and to apply for a Court order for this.?A BIP provides special procedures for the winding-up of a failed bank. The BIP enables quick compensation payments to be made to depositors under the Financial Services Compensation Scheme (“FSCS”), without giving them a preference over other bank creditors.?As a result, the BIP can only be used where a banking institution has depositors who are eligible for compensation under the FSCS. The compensation under the FSCS is up to ￡85,000 per eligible person, per bank (or ￡170,000 for joint accounts).

Under the Bank of England’s policy guidance, the BIP is the default option unless public interest considerations weigh in favour of an exercise of a stabilisation option. Resolution through the BIP may be the option that best meets the special resolution objectives where the most appropriate outcome would be the winding up of the failed institution's affairs in the interests of creditors as a whole and prompt FSCS payouts to eligible depositors or the bulk transfer of their accounts to another institution.

Apart from the FSCS payouts mechanism, the BIP largely follows the insolvency mechanisms set out in the Insolvency Act 1986. Those with deposits at SVBUK above the FSCS level will clearly want to know how long it will take for those monies to be paid, and indeed the extent of recovery that is possible. This all depends on the complexity of the insolvency and whether any part of the business gets sold as a going concern or the deposits get taken on by another bank.

What should SVBUK customers do now?

Aside from contingency planning in relation to the areas of their business affected by this, they should look to see whether and when a liquidator is appointed and look out for details as to where creditor claims should be submitted. They should then submit the claim in the format requested.?Advice should be sought on interest and damages claims that may arise as well.?