The immediate crisis caused by the collapse of Silicon Valley Bank (‘SVB’) in the US has been averted with US regulators stepping in to help customers there, and HSBC buying SVB’s UK subsidiary (‘SVB UK’).
But the collapse of Silvergate Capital, SVB and Signature Bank in quick succession has somewhat sharpened focus on the potential risks in the finance industry (notwithstanding the increase in regulation, particularly over recent years).
Here we look at the potential position of businesses if their bank gets in to trouble.
Where do I stand if my bank gets in to trouble?
Deposits
The Financial Services Compensation Scheme (‘FSCS’) protects some business deposits if the bank / building society holding them is regulated by the Prudential Regulation Authority (‘PRA’). Broadly, £85,000 is guaranteed to be returned to you, per business, per bank (or £170,000 if a joint account). You do not need to opt in – the protection is automatic, but it does not cover deposits by e.g. financial institutions or investment firms*.
You cannot get extra protection by using multiple accounts with one bank. Additional protection can only be gained by holding deposits across different (PRA regulated) banks. Some financing arrangements restrict borrowers using bank accounts other than those held with the finance provider / security agent, so this isn’t always possible. Equally opening a bank account tends to take some time so it isn’t an immediate fix.
Withdrawals
These will inevitably be stopped unless / until a buyer is found.
At the end of last week there was a panic with customers seeking to withdraw deposits from SVB UK – many needing monies to be immediately deployed to fund transactions or working capital needs – but not all entities had second bank accounts to transfer monies to. This is where lawyers and accountants may be able to assist in terms of where (and on what basis) monies can be transferred – which will very much depend on each set of circumstances. Note that lawyers are prevented under the SRA regulations from acting as banks and therefore won’t be able to hold monies for clients, unless required in relation to an underlying transaction that they are already advising on.
If a bank is bought out by another, the FSCS won’t kick in and the accounts should continue to operate as normal, albeit with a potential hiatus whilst a deal is reached. In the case of SVB UK, the weekend bought precious time to strike a deal - along with a nervous wait.
Term Loans
Term loans already advanced will continue to be repayable by the borrower, along with interest and fees. In the case of a buy out by another bank, one way or another they would step into the shoes of your current lender and the terms of the original financing should continue to apply (unless the lender has a unilateral right to amend the terms – which is the case in some bilateral loan documentation).
Undrawn term loans are unlikely to be available unless a deal is agreed with another bank. If committed, it may be worth cancelling any undrawn commitment to ensure fees aren’t charged (some documentation will do this automatically).
Revolving credit
Revolving credit facilities are more complicated because they are (notionally) repayable at the end of each interest period – in reality they can then typically “roll” into the next interest period (subject to no default / acceleration of the loan). Borrowers will ideally continue to rollover any revolving facilities (subject to their loan terms) as cash repaid is unlikely to be available for redrawing.
Any clean down requirements will need to be reviewed, and compliance with those carefully considered versus potential implications of the cash not being available for redrawing.
If the lender is part of a syndicate, the loan documentation is likely to cater for one of the syndicate becoming impaired / insolvent. Available options will depend on what was negotiated at the outset but may include conversion of any revolving facility participation into a term loan, an ability to replace that lender (although this will also take time) as well as restrictions on that lender’s involvement in decision making. We would be happy to advise you on your current or future financing terms.
Cashflow
Clearly the impact of the above can have an immediate catastrophic impact on cashflow – as was widely reported in the press over the weekend. It is crucial in this situation that directors continue to act in accordance with their duties in the decisions that they make – our specialist teams are lined up advise on this.
What is the Bank Insolvency Procedure?
Due to the nature of their business, and their reach, banks are treated differently from other companies in an insolvency scenario. Part 2 of the Banking Act 2009 (‘BA09’) – introduced off the back of the 2008 financial crisis - establishes a special resolution regime specifically for UK banks in financial difficulties. This regime includes pre-insolvency stabilisation options which allow for the relevant authorities to step in and rescue a failing UK bank (by transferring all or part of its business to a bridge bank or a private sector purchaser), a bank administration procedure and a bank insolvency procedure.
The primary reason for a distinct insolvency process for banks is to ensure that depositors who are eligible for payment under the FSCS receive their payment promptly or are transferred to another bank so that there is minimal impact on business. The weekend’s events showcased the BA09 in action.
Looking ahead
The downfall of SVB is the result of a specific set of circumstances and a collapse of confidence in a tight knit market in the US; unfortunately the UK branch was affected by that too. Whilst we’re also facing rising interest rates and inflation this side of the pond, there are also signs of hope. Any recession we do face is now expected to be less severe than first anticipated, employment levels have held up and today’s budget – confirming a cut to inflation forecasts amongst other things - should give the market confidence.
Our government is keen to ensure the UK remains an attractive and safe place to do business, particularly for tech companies. Investment in tech hubs has been confirmed in today’s budget and our legislation supports this too - regulators have an extremely robust set of protections (such as capital adequacy requirements) and rights (such as those that came in to play when SVB UK got in to trouble) to swiftly deal with any future problems that do arise.
For now, business as usual.
*The PRA Rulebook details which deposits are included and excluded.
