On Monday March 13, 2023, the Bank of England announced that Silicon Valley Bank UK Limited has been sold to HSBC UK Bank Plc. The situation remains fluid, and the following Q&A reflects our understanding as of Monday morning, March 13.
Announcement of sale to HSBC
On March 13, 2023, the Bank of England (BoE) announced that Sillicon Valley Bank UK Limited (SVB UK) has been sold to HSBC UK Bank Plc (HSBC) for £1. This means that rather than the BoE placing SVB UK into insolvency, as the BoE indicated it would in its statement of Friday March 10, 2023, the BoE has exercised one of its stabilisation powers to effect a private transfer of the bank:
"The Bank of England (Bank), in consultation with the Prudential Regulation Authority (PRA), HM Treasury (HMT) and the Financial Conduct Authority (FCA), has taken the decision to sell Silicon Valley Bank UK Limited (‘SVBUK'), the UK subsidiary of the US bank, to HSBC UK Bank Plc (HSBC). HSBC is authorised and supervised by the PRA and the FCA. This action has been taken to stabilise SVBUK, ensuring the continuity of banking services, minimising disruption to the UK technology sector and supporting confidence in the financial system."
What is the impact on clients of SVB UK?
In its March 13 announcement, the BoE indicated that all depositors' money with SVB UK is "safe and secure" as a result of this sale. The UK Government also noted that "customers of SVB UK will be able to access their deposits and banking services as normal from [March 13, 2023]", with the private sale ensuring that "customer deposits are protected".
In terms of immediate client impacts:
- If your business has outstanding loans with SVB UK, you should continue to service these loans as normal.
- SVB UK depositors continue to be "protected" by the Financial Services Compensation Scheme (FSCS), which means that, in the event of an insolvency, eligible deposit holders will receive compensation up to the prescribed limit (£85,000 in total per eligible person and £170,000 in the case of jointly held accounts). We understand the UK Government's reference to customer deposits being "protected" to have the more general meaning that SBV UK will no longer be entering into insolvency.
- There is therefore no additional protection under a separate government or regulatory scheme; rather, SVB UK's operations will continue ‘as normal', albeit supported by HSBC's balance sheet.
Do I need to take any action?
The UK Government and BoE are seeking to emphasise that SVB UK is now operating on a ‘business as usual' basis. In particular, the BoE's March 13 announcement noted that:
- SVB UK's business will continue to be operated normally by SVB UK, with all services expected to operate as normal and customers should not notice any changes.
- Customers can continue to contact SVB UK through the usual channels.
- SVB UK staff remain employed by SVB UK, and SVB UK remains a PRA/FCA authorised bank.
Announcements from both the BoE and UK Government emphasise that "no other UK banks are directly materially affected by these actions", with the wider UK banking system described as "safe, sound, and well capitalised".
How has the Bank of England effected the sale?
The BoE has powers under the Special Resolution Regime, created by the Banking Act 2009 (BA 2009), which may be exercised where a bank is failing or is likely to fail and certain statutory objectives set out in section 4 of the BA 2009 are satisfied (e.g., to protect continuity of banking services, financial stability, public confidence, public funds and investors/depositors in the UK).
Such powers permitted the BoE to transfer SVB UK to a private sector purchaser by way of a share transfer instrument (Transfer Instrument) under section 11 of the BA 2009. Accordingly, the BoE made a Transfer Instrument providing for all issued ordinary shares in SVB UK to be transferred to HSBC at 7.00 a.m. on March 13, 2023. The Transfer Instrument may be read in full here.
Furthermore, under the terms of the Transfer Instrument, the BoE has made provision for a mandatory reduction of capital instruments in accordance with sections 6A(2) and 6B of the BA 2009. Consistent with principles of loss absorbency, these sections of the BA 2009 set out occasions where, if it is to exercise its stabilisation powers, the BoE must cancel, transfer, dilute, reduce or convert certain own funds instruments as necessary to achieve the resolution objective regarding the ongoing viability of the bank in question. The Transfer Instrument writes down all ‘Additional Tier 1' capital instruments (£322 million of perpetual subordinated notes) and ‘Tier 2' capital instruments (£33 million subordinated debt notes due 2032) issued by SVB UK to zero.
What is the impact on bond holders?
All liabilities owed by SVB UK in respect of the designated AT1 and Tier 2 capital instruments, including accrued interest, have been cancelled; further, any rights of the holders or beneficial owners of the capital instruments have been extinguished. Had the insolvency of SVB UK proceeded, we anticipate that the loss absorbency characteristics of these instruments would also have manifested under that process. It is difficult to determine at this stage whether these instruments were held externally or internally to the SVB group, although we have not seen any public information to the effect they were issued externally. We will continue to monitor this aspect.
AT1 and T2 instruments absorb lower probability, higher impact losses which would typically cause a bank to breach a regulatory capital requirement or become insolvent. Holders of AT1 instruments generally expect that they may ultimately suffer loss of principal (i.e., amount borrowed or invested) in the event that the issuing bank fails. Claims of AT1 holders rank above ordinary shareholders but are subordinated to claims of (amongst others) T2 holders.
T2 capital also suffers a loss of principal in the event of the bank failure. On a winding-up scenario, claims of T2 holders rank above claims of AT1 holders.
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