Introduction: what are the facts?

The Bank of England (BoE) has a number of resolution tools at its disposal which are provided for in legislation following the 2008 global financial crisis. These tools are designed to protect and enhance UK financial stability, protect public funds and ensure the continuity of banking services. These tools have been put to the test as regards Silicon Valley Bank UK Limited (SVBUK).

The BoE reported that at the point of failure, SVBUK had a total balance sheet size of approximately £8.8bn, and a deposit base of approximately £6.7bn. However, the scale of the deterioration of liquidity and confidence meant that the BoE and Prudential Regulation Authority (PRA) felt that the position was not recoverable and considered that the resolution conditions for exercising stabilisation powers under the Banking Act 2009 (Banking Act) were met.  In light of this the BoE decided to use one of its five stabilisation powers (transfer to a private sector purchaser) provided for under the Special Resolution Regime set out under the Banking Act. The other stabilisation powers are transfer to a bridge bank, transfer to an asset management vehicle, bail-in and temporary public ownership.  

The transfer did not require the consent of SVBUK or its shareholders, customers or counterparties. So that the sale could proceed, HM Treasury also used its powers under the Banking Act to provide an exemption for the purchaser (HSBC UK Bank plc) to certain ring-fencing requirements. The exemption is reported to be permanent. There was no formal bank insolvency procedure in respect of SVBUK.

Regulatory and legislative announcements

On 13 March 2023, the BoE issued a press statement in which it announced that:

• SVBUK was being sold to HSBC UK Bank Plc. Such action was taken to stabilise SVBUK, ensuring continuity of banking services, minimising disruption to the UK technology sector and supporting confidence in the financial system.
• All depositors’ money with SVBUK was safe and secure as a result of the transaction. SVBUK’s business would continue to be operated normally by SVBUK. All services would continue to operate as normal and customers should not notice any changes.
• The £322 million perpetual subordinated notes (Additional Tier T1 instruments) and the £33 million subordinated debt notes due 2032 (Tier 2 instruments), each issued by SVBUK, were reduced to zero and liabilities under those instruments were cancelled.
• No taxpayer money was involved.
• No other UK banks were directly materially affected by these actions, or by the resolution of SVBUK’s US parent bank.

On 14 March 2023, there was published on the legislation.gov.uk website The Amendments of the Law (Resolution of Silicon Valley Bank UK Limited) Order 2023. The purpose of the Order was to make certain amendments to the law, in order to enable powers under Part 1 of the Banking Act to be used effectively in connection with the sale of SVBUK to HSBC UK Bank plc.

On 19 March 2023, the Swiss authorities announced a wide range of actions to support financial stability including the Swiss Financial Market Supervisory Authority (FINMA) approving the takeover of Credit Suisse by UBS. The announcement from the Swiss authorities mentioned among other things that the deal would trigger a complete write-down of the nominal value of all Additional Tier 1 debt in the amount of around CHF 16 billion. On the same day the Financial Conduct Authority (FCA) issued an announcement indicating that it was minded to approve the actions in relation to the entities which fell under its regulatory and supervisory remit.

On 20 March 2023, the BoE issued a further statement on UK creditor hierarchy. The statement provided that:

• The UK’s bank resolution framework has a clear statutory order in which shareholders and creditors would bear losses in a resolution or insolvency scenario. This was the approach used for the recent resolution of SVBUK, in which all of SVBUK’s Additional Tier 1 instruments and Tier 2 instruments were written down in full and the whole of the firm’s equity was transferred for a nominal sum of £1.
• Additional Tier 1 instruments rank ahead of Common Equity Tier 1 and behind Tier 2 in the hierarchy. Holders of such instruments should expect to be exposed to losses in resolution or insolvency in the order of their positions in this hierarchy.
• The BoE welcomed the comprehensive set of actions taken by the Swiss authorities in order to ensure financial stability.

On 23 March 2023, FINMA issued a further statement providing information about the basis for writing down Additional Tier 1 capital instruments. In particular, the statement refers to the contractual basis of the write down and the Federal Council’s emergency ordinance.  FINMA’s decision was not based on its usual resolution powers but rather the emergency ordinance.

What might this mean for UK banks going forwards?

The events surrounding SVBUK are likely to renew the focus of the PRA on prudential requirements and recovery and resolution planning at UK banks. The House of Commons’ Treasury Select Committee has also asked, in its letter to the Governor of the BoE a number of questions including:

• Can you describe the nature of the BoE’s supervision of SVBUK, including the resource allocated to it?
• What subsequently led the BoE to judge that the use of stabilisation powers was warranted?
• Can you summarise the nature of the interactions with HM Treasury over the period of the intervention? Did any of the actions of or requests made by HM Treasury seem unusual given SVBUK was not systemically important?
• The approach of the BoE and HM Treasury to this resolution appears to have been driven by the  specific customer base of SVBUK. What does this mean for the BoE’s approach to the regulation  and resolution of other specialist banks, including those that have customers from strategically important sectors?
• What wider lessons, if any, has the BoE learnt from this episode regarding prudential regulation or financial stability?

On 23 March 2023, the BoE and HM Treasury responded to the questions that the Treasury Committee had raised.

From a policy perspective the narrative around financial services may now move from “growth” and “taking advantage of post-Brexit freedoms” to “financial stability”. How events impact some of the Edinburgh reforms like the review of ring-fencing and proprietary trading and the review of the senior managers’ regime remains to the seen. The same may be said for the PRA’s proposed “strong and simple prudential framework”. Also, the FCA may also need to think about whether its current approach to regulating high-tech firms needs recalibrating in light of worsening economic conditions. In some respects the regulator has already taken steps to look into this by expanding its Early and High Growth Oversight.

From a supervisory perspective the BoE is repeating its resolvability assessment of the major UK firms in 2023-24 to assess the progress that has been made by these firms since the last assessment and to monitor their progress in maintaining and enhancing their ability to achieve certain resolvability outcomes including being able to continue to do business through resolution and restructuring. The BoE has been clear in its communications on the assessment that boards and senior management are responsible for ensuring that they can achieve the resolvability outcomes on an ongoing basis. It would be prudent for UK banks to prepare for supervisory action from the PRA in relation to recovery and resolution planning in the short term.

From a day to day perspective the developments have raised a number of questions. For example, in the derivatives and securities financing transactions space firms have been looking at their trading documentation particularly those clauses dealing with events of default, termination events and contractual transfer restrictions. Parties have also been reviewing whether there has been adherence to the ISDA Bank Recovery and Resolution Directive protocol and what this means in terms of the possibility of closing out any existing contracts. Furthermore, parties have been asking whether the transfer triggers any further reporting requirements under the European Market Infrastructure Regulation or Securities Financing Transaction Regulation. In addition, firms may also be thinking about how the events have impacted their recovery planning and whether they should revisit their operational resilience analysis.

In relation to Credit Suisse, Additional Tier 1 holders will be reviewing the terms of their instruments and FINMA’s communications regarding the sale.

In response to the approach adopted by FINMA both the BoE and the EU Single Resolution Board (SRB) moved quickly by issuing statements confirming that Additional Tier 1 instrument holders should expect to be senior to shareholders as per the case under the BRRD and SRM. The SRB  statement provided that:

“In particular, common equity instruments are the first ones to absorb losses, and only after their full use would Additional Tier 1 be required to be written down. This approach has been consistently applied in past cases and will continue to guide the actions of the SRB and ECB banking supervision in crisis interventions. 

Additional Tier 1 is and will remain an important component of the capital structure of European banks.”

On the morning of 22 March 2023,  in an interview with the FT, the SRB’s chair gave an interview pledging not to wrong foot investors by upending bank creditor hierarchies. We will be monitoring developments very carefully over the coming days.

The market volatility that has surrounded events also raises issues that companies need to be wary of. For example, where companies are operating in a volatile environment significant decisions like those regarding capital raising may be more susceptible to challenge. Audit committees that manage major financial risk exposures may come under closer scrutiny. Public disclosures may also become more problematic, the regulators will be keeping a close eye out for market misconduct. In all these instances boards need to ensure that they are sufficiently informed about, and are appropriately analysing, their company’s position and documenting the basis or reasoning for any decision making.