The US entity of Silicon Valley Bank (SVB) collapsed in the USA last week, which left customers of its UK arm, Silicon Valley Bank UK, having a nervous weekend until it was rescued by HSBC on Monday morning. Now the banking world has taken another below, with Credit Suisse being forced to turn to the Swiss National Bank for support (reported to be £41bn) to ease it through a liquidity crisis. The knock-on effect is that the markets have reacted, as one would expected, negatively with the value of listed companies dropping sharply.
The similarities to the 2008 Financial Crisis seem very stark, which was in effect down to a liquidity crisis. Since the 2008 financial crisis, legislators have brought in several measures aimed at reducing the risk of a repeat of 2008. For example, the capital requirements and international regulatory framework for banks under what is now Basel III.
In the UK, we also now have a series of bespoke restructuring tools available should a bank face financial difficulty.
The Bank of England would most likely apply to place the bank into Bank Insolvency, which is commenced under the Banking Act 2009 (enacted during the financial crisis in 2008). This is a modified insolvency process suitable for banks and certain financial services providers.
As with typical UK insolvency processes, the liquidator of the bank will look to take control of its assets and business, so that they can maximise returns to creditors (including deposit holders).
A liquidation under the Banking Act 2009 sets out two statutory objectives:
The first objective is working with the Financial Services Compensation Scheme (FSCS) to get a payment to customers if their deposits are eligible for compensation under the compensation scheme. However, there is a limit on the amount the FSCS will pay, which is currently £85,000 for a sole account and £175,000 for a joint account. To the extent such payment is made by the FSCS, then it will have a subrogated claim in the liquidation of the failed bank.
As part of the first objective, the liquidator will look to distribute the assets of the bank to its creditors. The amount of such distribution will be dependent on what assets are available to realise and the amount of its creditors. Very often creditors will only receive a percentage of what they are owed from the bank.
The second objective, which sits behind the first one, is to simply wind up the affairs of the bank (i.e. realise its assets and end it operation) in order to get the best result for creditors.
The potential insolvency of a bank will affect its customers (including those who hold deposits with it, or use its banking facilities) and potentially those in the supply chain of those customers.
This is because customers will not be able to withdraw deposits held, nor will they be able to receive payments into their accounts. This has the potential to cause significant disruption to the ongoing business of the bank’s customers and in turn their supply chain, if the business of the customer is unable to operate for a period of time.
First of all, rest assured that the issues faced by SVB and Credit Suisse are not a clear indication of a global financial crisis, such as we faced in 2008. Given the legislation set out above, the regulators are in a much stronger position to mitigate and manage the risks.
In the unlikely event a UK bank does fail, then the customer will not be able to move funds out of their account.
The immediate steps to take for customers of the bank to take will be to: (i) submit a claim to the FSCS to receive payment under the compensation scheme if eligible; and (ii) submit a claim to the Bank Liquidator if and when it enters into Bank Liquidation.
The timing and (as set out above) amount customers will be repaid is uncertain, as there will be a significant number of steps for the Bank Liquidator to take before it is in a position to make payments.