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The collapse of SIlicon Valley Bank has left depositors reeling, both in the Unites States of America as well as in Europe. As Silicon Valley Bank is also represented in Denmark, this legal update examines the legal position for depositors affected by the recent events.
As of 31 December 31 2022, Silicon Valley Bank (SVB) had approximately USD 209 billion in total assets and USD 175.4 billion in total deposits. Despite its relative size to other banks, SVB plays a major role in the financial ecosystem of start-ups and tech firms, as a major banking services provider for portfolio companies and their investors, particularly in the technology sector. On 10 March 2023, the California Department of Financial Protection and Innovation closed down the SVB and appointed the Federal Deposit Insurance Corporation (FIDIC) as receiver. To protect insured depositors, the FDIC created the Deposit Insurance National Bank of Santa Clara (DINB). A DINB is a temporary bank set up by FIDIC in the wake of a bank collapse to provide banking services to affected customers. The FDIC immediately transferred all insured deposits of SVB to the DINB. However, about 90% of the deposits were uninsured.
Shortly after the announced collapse of SVB, US-based SVB customers not covered by the FIDIC scheme have been facing a difficult liquidity situation to continue to pay salaries and operating expenses. As a result, a number of depositors have sought to sell off their claims to raise immediate cash. Initially, uninsured SVB deposits were being offered to special situation funds at various discounts by affected SVB customers. Given that the depositors mainly consist of large deposit customers such as venture capital firms and the start-ups and portfolio companies they have financed, the overwhelming majority of SVB deposits were not covered by a government-backed insurance scheme. SVB probably constitutes the fastest bank run in recent history. To contain the fallout from the SVB collapse, US authorities took extraordinary measures to shore up confidence in the financial system. As of Monday, the Governors of the Federal Reserve Bank announced that insured and uninsured depositors would be covered by FIDIC, excluding SVB shareholders and bondholders.
SVB UK AND DENMARK
Over the weekend, Clifford Chance advised HSBC Bank on the acquisition of Silicon Valley Bank UK Limited (SVB UK). SVB UK was the UK subisdiary of SVB. SVB UK had loans of around GBP 5.5 billion and deposits of around GBP 6.7 billion as of 10 March 2023.
In Denmark, SVB UK was represented by a representative office in Copenhagen. However, SVB UK is not licensed to undertake any regulated activity in Denmark, including banking business. The purpose of the SVB UK representative office has therefore solely been to liaise with Danish and Nordic companies and to introduce them to the SVB network globally.
The General Position of Depositors in the US, UK and Denmark
For depositors with accounts held by a bank in the US, UK or Denmark, the following tresholds apply in general:
For US-based bank accounts insured by FDIC, there is a general cover for up to USD 250,000 per depositor. The insurance scheme only covers deposits, but excludes stocks, bonds, mutual funds, money funds, insurances and annuities.
For US-based bank accounts not insured by FDIC, depositors are left as simple creditors in the insolvent estate. The same applies to items that are not covered by FIDIC.
For UK-based bank accounts, the Financial Services Compensation Scheme (FSCS) generally covers accounts, up to GBP 85,000.
In Denmark, the position for domestic accounts is that ordinary deposits are generally covered by the Danish Guarantee Fund for Depositors and Investors up to an amount of EUR 100,000 per depositor and EUR 20,000 for securities if the financial institution cannot return them.
The Road Ahead
For depositors with accounts at SVB UK, these are now held by HSBC, as HSBC emerged as a white knight at the eleventh hour. For depositors, HSBC constitutes a safe harbour, as the entirity of the assets of SVB UK would be a mere "rounding error" compared to the assets held by HSBC. In addition, HSBC pledged to immediately inject GBP 2 billion into SVB UK to help fund its holdings of long-dated assets and keep operations running while it integrated the business into HSBC. For UK depositors, that problem has now been resolved with the acquisition of the entire loan portfolio of SVB UK by HSBC. This would also apply to Danish depositors with accounts at SVB UK.
In recent days, the FDIC has also established two bridge banks to assume the deposits and obligations of both Silicon Valley Bridge Bank, N.A. (SVB Bridge) and also Signature Bridge Bank, N.A. All contracts entered into with SVB Bridge before it failed, and its counterparties were transferred into SVB Bridge by the FDIC as receiver. Accordingly, vendors and counterparties with contracts with SVB Bridge as the successor of SVB are legally obligated to continue to perform under the contracts, and SVB Bridge is both obliged and able to make timely payments to vendors and counterparties and otherwise perform its obligations under the contract. All obligations of SVB Bridge are backed by the FDIC and the full faith and credit of the U.S. government.
The issuance of a systemic risk approval by the Department of the Treasury, enabled the FIDIC to authorise the transfer all deposits - both insured and uninsured - and substantially all assets of SVB to SVB Bridge to protect all depositors of Silicon Valley Bank, both insured and uninsured.
Recommendations for Depositors and Counterparts
While the situation for depositors with SVB and SVB UK has now largely been resolved, the recent events highlight the counterparty risks in the financial system. We would therefore make the following general recommendations to our clients:
Current Depositors: For depositors with current funds at SVB and SVB UK, these are probably the safest banks in the world right now. SVB is backed by the US government and SVB UK is backed by HSBC.
Financing Review: It would be prudent to conduct a review of existing credit facilities to determine the risks related to funding, payments and most importantly counterparty risks for both borrowers and depositors in relation to their financing portfolio.
Counterparty Risk: For depositors, the most recent bank run has highlighted the risk in relation to both credit and time. Will a depositor receive its funds in whole and over what time frame? Depositors will therefore have to evaluate risks to its liquidity stemming from counterparty risks.
Deposit Diversification: For borrowers, it would be prudent to ensure that there is a deposit of two to three months' payroll and expenses held with another bank. As some lenders will insist on covenants in the loan agreements requiring a borrower to deposit all cash with the lending bank, this will be a contentious issue in credit facility negotiations.
Facility Agreements: Borrowers will need to not only ensure sufficient liquidity reserves to meet short-term working capital requirements in the event of a bank run, but also examine the effects in their facility agreements in relation to trapped cash or funding held by third parties in relation to MAC clauses and cross default provisions or any defaulting lender provisions that apply for syndicated credit facilities.
For venture capital funds and their portfolio companies, situations such as SVB pose a dilemma. If the VC thinks that something might be amiss with their bank services provider, should they transfer all of their liquid funds and instruct their portfolio companies to do the same, or should they weather the storm? The transfer may in aggregate exacerbate the problem and cause further losses as a consequence. A failure to act may on the other hand expose the VC and its funds to unnecessary losses. In relation to SVB, some VC funds decided to move some funds to preserve liquidity without transferring all deposits with SVB while other deciced that "if you panic, better panic first" and moved all liquid funds before the window of opportunity closed. Funds and corporates are not expected to be bank analyst and to scrutinise the positions of their bank services providers. On the other hand, there is a duty of care to mitigate resonably foreseaable or known losses. The final decisions will therefore have to be evaluated both carefully and swiftly and no two situations will be alike.
Further Information
If you have been affected by the collapse of SVB, SVB UK or Signature Bank or if you need a review of your banking & finance positions and risks, please contact Andreas Tamasauskas, or Michael Rosenberg at Carsted Rosenberg.
About Carsted Rosenberg
Carsted Rosenberg is a specialist international law firm with a focus on cross-border banking & finance, capital markets, mergers & acquisitions and corporate & commercial matters.
Carsted Rosenberg provides high-end legal counsel services in connection with large-scale cross-border transactions with a particular focus on the Danish market. Our clients rely on us for pragmatic advice and transactional excellence. We specialise in matters that require transactional expertise, considerable cross-border experience and a high degree of proficiency and efficiency.
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