It was a busy weekend for regulators in the US and the UK as both countries worked hard to stem the contagion from the collapse of the Silicon Valley Bank (SVB) and Signature Bank, a New York-based lender with $110bn in assets which was shuttered by state authorities on Sunday and make whole all its depositors.
Here’s a quick summary of the events so far:
In the US, on Sunday, March 12th, a joint statement by America’s Treasury, the Federal Reserve, and the Federal Deposit Insurance Corporation (FDIC) outlined two major action points:
The first was to fully repay depositors in SVB and Signature Bank. Depositors in both banks will have full access to their money on Monday morning. However, equity holders and many bondholders in both banks will be wiped out; the FDIC’s deposit-insurance fund, into which all American banks pay, will bear any residual costs. Taxpayers will not have to foot the bill.
The second was to set up a new lending facility, called the bank term funding program, at the Fed. This will allow banks to pledge Treasuries, mortgage-backed securities, and other qualifying assets as collateral.
Banks will be eligible for loans equal to the face value of the securities they pledge. The borrowing rate on that cash will be fixed at the “one-year overnight index swap,” a market interest rate, plus 0.1% – generous terms.
There remains the question of whether anyone will buy SVB or Signature Bank. A deal for SVB or Signature is expected to come in the coming days or weeks. For another bank to make, a bid for SVB would require extensive due diligence, which is tough to complete over a single weekend.
In the UK, HSBC agreed to buy the British arm of SVB, for £1 ($1.21), in a deal facilitated by the British government and the Bank of England. The purchase could protect thousands of British tech startups and investors from significant losses.
This is welcome news for our clients and friends whose businesses could have been devastated by losing their cash resources. A question being raised is whether the moves by US regulators are tantamount to a government bail-out. The answer may be more complex. Depositors are being repaid by destroying equity and bondholders and by imposing fees on banks. This puts a burden on other banks and not taxpayers. It also expands the state’s role as a backstop, given the generous terms offered to banks to exchange high-quality assets for cash.
Silicon Valley Bank did business with almost half of all US VC-backed startups, which begs the question, why didn’t venture funds tell their portfolio companies to diversify from SVB?
There is much more to come, and we’ll stay on top of the developments. In the meantime, if you need help or have questions, please drop us a line at +1 212 545 8022 or visit our website – www.rooney.law.
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