Report under section 79A of the Banking Act 2009 on the transfer of Silicon Valley Bank UK to HSBC UK

Background and timeline of events

SVB UK was a subsidiary of the US parent bank Silicon Valley Bank (SVB). SVB UK was focused on commercial banking in the innovation sector – primarily technology, life sciences and healthcare. It had operated in the UK since 2012, first as a Prudential Regulation Authority (PRA) and Financial Conduct Authority (FCA) dual-regulated branch, and then, since July 2022, as a subsidiary. Consistent with the PRA’s published approach to branch and subsidiary supervision of international banks,^{footnote [2]} the PRA assessed in 2020 that SVB UK’s business plans would have it reaching the PRA’s threshold for becoming a subsidiary by 2022. As such, SVB was asked to transfer its UK operations from a branch of a US entity to a separate UK subsidiary with its own separate capital and liquidity requirements.

In the period prior to SVB’s failure, higher interest rates had led to large falls in the value of a large portfolio of long-dated bonds that the parent in the US was holding. The parent had not hedged these bond holdings for falls in value if interest rates were to rise.^{footnote [3]} Given that these bonds had high-quality issuers, if SVB had held them to maturity they would have been unlikely to experience any cash losses on either the coupons or the repayment of the principal at maturity. But a rapid and very large increase in depositor withdrawals in the US, exacerbated by instant electronic access to funds and social media speculation, led to a need to sell assets quickly to pay depositors. This then led to losses greater than the parent’s capital could absorb as a result of the low market value of their bond holdings. Following challenges in raising additional capital, depositor withdrawals accelerated and this led to the failure of the US parent.

The failure of its US parent triggered the failure of SVB UK. Despite the UK subsidiary being able to meet all demands for withdrawals on Friday 10 March 2023, it was not clear that the firm would be able to continue meeting liquidity outflows beyond that day. More significantly, and particularly when business models are closely linked as was the case with SVB, it was unlikely that the UK banking subsidiary could independently withstand the bankruptcy of its parent. In SVB UK’s case, the firm would not have been a viable stand-alone entity because of its reliance on its US parent for technology and systems, including payment infrastructure.

Throughout Friday, the Bank, in co-ordination with the Federal Deposit Insurance Corporation (FDIC) and other US authorities, began preparing for the failure of SVB UK. This included preparations for placing the firm into a Bank Insolvency Procedure, including preparing to appoint an insolvency practitioner in waiting. In considering the use of stabilisation powers or the Bank Insolvency Procedure, the Bank is required to have regard to the special resolution objectives established in section 4 of the Act, which include the continuity of banking services, protection of public funds, and enhancing public confidence in the stability of the UK’s financial system.

At around 5pm UK time on 10 March, the FDIC announced that SVB had been closed and the FDIC had been named receiver. At 11pm UK time, the Bank announced that, absent any meaningful further information, it intended to apply to the UK Courts to place SVB UK into a Bank Insolvency Procedure.^{footnote [4]} At the time of this statement, insolvency was judged to be the solution that best promoted the public interest with respect to the special resolution objectives. Other resolution options at this time would likely have been less effective at promoting these objectives given the then absence of an immediately available purchaser, the potential public funds implications, and the uncertainty surrounding continuity of services given the failure and placing into bankruptcy of the US parent.

Following this announcement, a number of parties expressed a potential interest in purchasing all or part of the failed UK bank. The Bank judged that it was important for any potential sale to be executed urgently before SVB UK’s opening time on Monday 13 March in order to further the special resolution objectives. Any sale that was implemented would need to involve the acquirer having credible arrangements for the continuity of banking services and capacity to provide any necessary liquidity. Implementing the sale before opening of business would provide continuity of access to SVB UK’s customers.

Among a small number of expressions of interest, HSBC emerged as the only credible bidder. HSBC would be able to implement the sale in time while providing the necessary liquidity and arrangements for the continuity of banking services. HSBC’s bid was the only proposal that did not require financial support or guarantees from public authorities, and their level of capital and liquidity resources greatly reduced the risks to public funds, stability, and confidence, and therefore to the Bank’s special resolution objectives. The Bank therefore determined that it would be in the public interest with respect to the special resolution objectives to execute a ‘Private Sector Purchaser’ resolution. The selection of HSBC as the preferred bidder followed consultation with the PRA, FCA and HM Treasury (HMT), as required by the Act.

Relative to the Bank Insolvency Procedure, the sale of SVB UK better supported the achievement of the special resolution objectives including the protection of depositors, ensuring continuity of banking services, and in particular protecting and enhancing public confidence in the stability of the UK financial system. By ensuring that all of SVB UK’s customers, many of whom had a critical dependency on the firm, could continue to access their bank accounts and other facilities without disruption, the Bank ensured the continuity of banking services and the protection of depositors covered by the Financial Services Compensation Scheme (FSCS). By ensuring that all deposits, including those not covered by the FSCS, remained safe, secure, and accessible, the Bank maintained public confidence in the stability of the UK financial system, reducing the risk of potential contagion from the US into the UK. It required no use of UK public funds.

As such, at 7am on 13 March 2023 the Bank announced that, in consultation with the PRA, HMT, and the FCA, it had taken the decision to exercise its transfer powers under the Special Resolution Regime to transfer the shares of SVB UK to HSBC. This transfer was achieved by the Silicon Valley Bank UK Limited Mandatory Reduction and Share Transfer Instrument.

SVB UK’s Additional Tier 1 and Tier 2 regulatory capital instruments, of £322 million and £33 million respectively, were mandatorily written down as required by section 6 of the Act and the whole of SVB UK’s equity was transferred to HSBC at 7am on 13 March, generating a total book value of equity of £1.4 billion. The consideration paid by HSBC for SVB UK was £1. As such, for SVB US, the sole shareholder and the holder of all of SVB UK’s regulatory capital instruments, its interests in SVB UK were extinguished following the execution of the resolution.

To ensure that continuity of banking services was maintained following the transfer, the Bank as Resolution Authority and the PRA as prudential supervisor engaged in continued supervisory work with SVB UK, HSBC and other market participants. This ensured that liquidity could be provided to SVB UK and that SVB UK was itself able to process payments and meet its wider obligations to customers and counterparties. The Bank was also in close co-ordination with the FDIC throughout this period to ensure that the firm would have access to the systems and operations necessary to ensure continuity to customers.

Valuation and compensation

Where the Bank considers that the urgency of the case makes it appropriate to exercise a stabilisation power before an independent valuer can be appointed, the Act provides that the Bank may carry out a provisional valuation of the failing firm to inform its decisions before a resolution. As such, during the resolution weekend of 11 and 12 March 2023, the Bank undertook a provisional valuation of SVB UK. The Bank also arranged for independent advice regarding the sales process, assumptions and outcomes contained within the provisional valuation.

Given the material uncertainty around the firm’s valuation at the resolution weekend, the provisional valuation analysis estimated a range of outcomes, including the write-down of the firm’s Additional Tier 1 and Tier 2 being necessary to return the firm to regulatory capital requirements in a transfer. The valuation also included analysis of the extent to which the firm’s creditors would have incurred losses in the event that SVB UK had entered insolvency. Given the payout of depositors covered by the FSCS under a Bank Insolvency Procedure, these creditors would have included the FSCS. The provisional valuation estimated that no creditor affected by the resolution action was likely to be made worse off than they would have been in a counterfactual insolvency of the firm across the range of outcomes considered. The analysis estimated that Additional Tier 1 and Tier 2 holders would have received no recoveries in an insolvency on account of the material discounts required to facilitate a liquidation of the firm’s assets.

As required by the Act, the Bank subsequently organised an independent ‘replacement’ valuation. This confirmed the finding of the Bank’s provisional valuation that Additional Tier 1 and Tier 2 holders would have received no recoveries in insolvency. Outcomes for general creditors in an insolvency were assessed to be worse in the replacement valuation than under provisional estimates.

Both the provisional and independent valuation suggested that the FSCS would have recovered 100% of their claim in a counterfactual insolvency. This was based on the balance sheet solvency of SVB at the time of its failure, the relatively small proportion of covered depositors at the firm, and the FSCS being a preferred creditor when it is used to facilitate the payout of covered depositors. There were a number of risks to recoveries in an insolvency of SVB UK given the firm’s lending commitments included many customers who also held covered and uncovered deposits with the firm. During insolvency these customers would not have retained access to their deposited funds. This may have had a negative impact on their ability to meet ongoing loan repayments to SVB UK and may have had a corresponding negative impact on creditors’ recoveries.

Ring-fencing exemptions

The UK resolution framework anticipates that HMT may need to amend the law where necessary for the purpose of resolution powers being used effectively. On ring-fencing, existing legislation provides a four-year carve out in respect of the determination of the core deposit threshold for acquisitions by a ring-fenced bank in the case of a transfer under the Act.

The Government used its powers under the Act to make changes, among others, to facilitate HSBC providing liquidity support to SVB UK and subsequently to extend the ring-fencing carve out provided for in legislation indefinitely beyond the existing four-year period. This exemption was judged to be in the public interest because it was a necessary condition of HSBC’s offer to buy SVB UK, ensuring that SVB UK, whose business model includes activity both within and outside the UK ring-fence, can be a commercially viable and stand-alone business as part of the HSBC group. The wider HSBC group remains subject to the ring-fencing regime.

To ensure the ring-fencing regime was not exploited via the terms of the transaction, the section 75 order^{footnote [5]} included safeguards to ensure SVB UK would not be able to hold core deposits above the existing thresholds in the ring-fencing regime, that HSBC did not transfer part of its existing business to SVB UK, and that SVB UK would itself not acquire or undertake ownership of any new businesses.

Fees

In undertaking a resolution, it is necessary for the Bank to receive professional advice. The Bank paid professional fees of £411k in aggregate.^{footnote [6]} These fees included appointments to support the transfer of SVB UK to HSBC, including sales process advice, legal advice, and the independent Replacement Valuation. Appointments made to support preparations for the Bank Insolvency Procedure included legal advice and an insolvency practitioner in waiting.

Consistent with its obligations under the Act, the Bank also arranged for the Transfer Instrument to be published in two newspapers.

The annex to this report contains financial information for SVB UK in the lead up to its failure and resolution.

Annex: SVB UK financial information