The Special Resolution Regime and the use of its stabilisation powers to rescue Silicon Valley Bank UK Limited

Monday 20th March, 2023

On 10 March 2023, banking regulators in California closed SVB Financial Group (“SVB Group”), trading as Silicon Valley Bank, and appointed the Federal Deposit Insurance Corporation as receiver for later distribution of its assets. At the time of publication of this article, regulators in the United States have guaranteed that all deposits will be protected but have not yet been able to find a purchaser for SVB Group.

On the same day, the Bank of England (“BoE”) announced that, absent any meaningful further information, it intended to apply to court to place Silicon Valley Bank UK Limited (“SVB UK”), the UK-based subsidiary of SVB Group, into a bank insolvency procedure (“Bank Insolvency Procedure”) pursuant to the Special Resolution Regime (the “SRR”) under the Banking Act 2009 (the “Act”). The SRR is a bespoke pre-insolvency regime applicable to failing UK banks and other systemically important firms which has, as yet, been rarely used since its introduction.

In the case of SVB UK, the purpose of using the Bank Insolvency Procedure would have been primarily to achieve either a transfer of eligible deposits to another bank or the repayment of up to £85,000 per depositor (being the current level of protection for bank deposit holders under the Financial Services Compensation Scheme), while in parallel protecting creditors as a whole.

However, despite this initial messaging and following a weekend of turmoil for participants in the UK tech community (and elsewhere), especially those startups and others with deposits lodged with SVB UK, the BoE announced before the markets opened on 13 March 2023 the sale of SVB UK to HSBC UK Bank Plc (“HSBC”) for £1. The sale was implemented pursuant to the pre-insolvency stabilisation options and powers available to the BoE under the SRR. The use of taxpayer funds was avoided and all deposits held have been protected. As such, deposit holders have been advised that they can continue to bank as normal, removing the significant uncertainty caused over the weekend by SVB UK’s very sudden failure.

The objective of the SRR is to provide a tool for resolving failing firms that would only be used in situations where failure is imminent and where other powers of the relevant UK authorities (specifically HM Treasury, the BoE, the Prudential Regulation Authority (“PRA”) and the Financial Conduct Authority) to address the situation are considered to be insufficient. The specific objectives of the SRR include the protection of public funds, the protection of client assets and the protection and enhancement of the stability of the UK’s financial system.

In respect of banks, the SRR consists of:

  • five pre-insolvency stabilisation options:
    • transfer to a private sector purchaser;
    • transfer to a bridge bank;
    • transfer to an asset management vehicle;
    • the bail-in option; and
    • transfer to temporary public sector ownership;
  • the Bank Insolvency Procedure; and
  • the bank administration procedure.

The authorities may use the pre-insolvency stabilisation powers only after it has been determined by the BoE and the PRA that the four conditions specified in section 7 of the Act have all been met, namely that:

  1. the bank is failing, or is likely to fail;
  2. it is not reasonably likely that action will be taken by, or in respect of, the bank (other than potentially through the SRR) that will result in the bank no longer failing or being likely to fail;
  3. if the write down and/or conversion of regulatory capital instruments has not prevented the failure or likely failure of the bank, the BoE considers that the use of one or more stabilisation powers is necessary, having regard to the public interest in the advancement of one or more of the SRR objectives; and
  4. the BoE considers that one or more of the SRR objectives would not be met to the same extent by the winding up of the bank.

In the case of SVB UK, it was considered by the PRA and the BoE that these conditions were met and therefore the pre-insolvency stabilisation powers could and should be used through (i) the write off all of SVB UK’s liabilities under its Additional Tier 1 instruments and Tier 2 instruments (being £322 million perpetual subordinated notes and £33 million subordinated debt notes due 2032), which were reduced to zero, and (ii) the exercise of the share transfer powers to transfer all the ordinary shares in SVB UK to HSBC for £1 pursuant to the Silicon Valley Bank UK Limited Mandatory Reduction and Share Transfer Instrument 2023.

The sale of SVB UK to HSBC using the SRR has served to ensure the continuity of banking services by SVB UK, minimised disruption to the UK technology sector and supported confidence in the financial system after a difficult few days. It has been particularly welcomed by customers, especially tech startups which in many cases held all, or the majority, of their cash reserves with SVB UK as well as by tech investors (many of whom had provided much of those deposits in the form of their investments).

In circumstances where the use of a Bank Insolvency Procedure would have had very adverse consequences for SVB UK customers and the broader UK technology sector as a whole, an outcome involving a sale to HSBC (one of Europe’s largest and best capitalised banks) is a very reassuring and welcome one. The BoE’s announcement at the time that the wider UK banking system remains safe, sound and well capitalised with no other banks affected by these actions should also hopefully bring some wider relief and stability after a decidedly rocky few days, although there are less confidence-inspiring rumblings elsewhere in the international bank markets.

Should you have any questions or require any advice in relation to a restructuring matter, please contact Brett Israel or Eleanor Mill of our Business Restructuring Group.