Silicon Valley Bank UK Limited – successful rescue showcases the UK Special Resolution Regime in action

Summary

The Bank of England, as the resolution authority for failing banks in the United Kingdom, has taken the decision, in consultation with HM Treasury and the UK financial regulators (the PRA and FCA) to sell Silicon Valley Bank UK Limited (“SVBUK”) to a private sector purchaser.  The sale is pursuant to powers under the UK's statutory "special resolution regime" (“SRR”) for stabilising failing banks and made by the Bank of England under the transfer instrument¹. 

On 10 March, the Bank of England had issued a statement that it may apply to the court to place SVBUK in a bank insolvency procedure and that “in the interim SBVUK would stop making payments or accepting deposits”.  In its statement today, the Bank of England said that the decision to sell was taken following the emergence of a credible purchaser and to stabilise SVBUK, ensuring continuity of banking services, minimising disruption to the UK technology sector and supporting confidence in the financial system.  Consequently, for many tech businesses holding deposits with SVBUK, the bank should continue to operate as usual with the change of ownership unlikely to impact any day to day operations and ability to make business related payments.

To facilitate the sale to the private sector purchaser (which acquired SVBUK for £1) the Bank of England exercised its statutory powers under the SRR to:

1. write off all of SVBUK’s liabilities under its AT1 and Tier 2 capital instruments (£322 million perpetual subordinated notes and £33 million subordinated debt notes due 2032), which are reduced to zero; and
2. transfer all of the issued ordinary shares in the capital of SVBUK to the purchaser.

The effect of these actions has been to avoid a public, taxpayer funded bailout of SVBUK’s outstanding liabilities by imposing the bail-in of the liabilities owed to the subordinated noteholders and the existing shareholders who have each lost the entirety of their investments.

The Bank of England confirmed in its statement that “[c]ustomers can continue to contact SVBUK through the usual channels and borrowers should make any loan repayments to SVBUK as normal. SVBUK staff remain employed by SVBUK, and SVBUK continues to be a PRA/FCA authorised bank.” 

The action taken by the Bank of England only applies to SVBUK.  To the extent UK counterparties have transactions or other contractual arrangements with SVB’s US parent company, Silicon Valley Bank (US), these fall outside of the scope of the SRR. 

The Special Resolution Regime

The UK's SRR was introduced following the financial crisis by the Banking Act 2009 and related supplemental legislation.  The regime gives the Bank of England (in conjunction with other authorities) a number of tools for dealing with distressed banks, comprising:

• Stabilisation powers (transfer to a private sector purchaser; transfer to a bridge bank; transfer to an asset management vehicle; bail-in; temporary public ownership).
• A bank insolvency procedure to facilitate the rapid pay out by the Financial Services Compensation Scheme to eligible depositors (or transfer of deposits) and the orderly winding up of the bank.(Prior to the sale, this procedure had been contemplated for SVBUK).
• A bank administration procedure (to be used in conjunction with a partial transfer of the bank's business).

  In order for the stabilisation powers to be exercised, four "resolution conditions" must be met:

• Condition 1 - the bank is failing or likely to fail.
• Condition 2 - having regard to timing and other relevant circumstances, it is not reasonably likely that (ignoring the stabilisation powers) action will be taken by or in respect of the bank that will result in Condition 1 ceasing to be met.
• Condition 3 - the exercise of the power is necessary having regard to the public interest in the advancement of one or more of the special resolution objectives. 
• Condition 4 - one or more of the special resolution objectives would not be met to the same extent by the winding up of the bank. 

The special resolution objectives include (among others): ensuring continuity of banking services in the UK and of critical functions; protecting and enhancing the stability of the financial system of the UK; protecting depositors and investors covered by the UK's Financial Services Compensation Scheme; and protecting public funds.