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The U.K. government said Sunday it was working on a lifeline for companies that had deposits locked up at Silicon Valley Bank’s British arm following the collapse of its U.S. parent.
In a statement, the U.K. Treasury said that it wanted to “avoid or minimize damage to some of our most promising companies,” adding the plan would ensure their short-term operational and cash flow needs were covered.
Silicon Valley Bank collapsed Friday in the second-biggest bank failure in U.S. history after a run on deposits doomed the tech-focused lender. Later that day, the Bank of England said it planned to place its U.K. subsidiary into insolvency procedure on Sunday barring any developments.
Under the U.K.’s insolvency procedure, deposits up to £85,000 in individual accounts, equivalent to around $102,000, and up to £170,000 in joint accounts will be returned to customers, the Bank of England said. Other assets and liabilities of the bank will be managed by bank liquidators and recoveries will be distributed to creditors.
But many of Silicon Valley Bank’s customers were companies with much higher cash balances than protected by insurance. The bank, like many of its peers, often required its loan customers to also keep a deposit account at the bank.
The decision by the U.K. government to help customers of the failed bank could provide a template for U.S. authorities. Tech executives and some on Wall Street lobbied Federal Reserve officials over the weekend to find a way to cushion the impact from the bank’s collapse and to prevent the bank-run from spreading to other institutions.
But authorities face an age-old problem of moral hazard when it comes to failing banks. Not letting institutions fail can encourage imprudent risk-taking when customers and banks believe there is always a government backstop in the case of trouble.
Regulators must decide whether Silicon Valley Bank, the 16th largest lender in the U.S., is large enough and integrated in key parts of the economy, that allowing an unfettered failure will unleash a cascade of other failures.
The London building housing Silicon Valley Bank’s arm in the U.K., where it has a niche presence.
Photo:
Vuk Valcic/Zuma Press
In the U.K., where Silicon Valley Bank has a niche presence, the decision appears to be, barring a last minute private-sector buyer, to let the local unit fail and ameliorate the impacts on customers.
“The government recognises that, given the importance of Silicon Valley Bank to its customers, its failure could have a significant impact on the liquidity of the tech ecosystem,” the U.K. Treasury said in the statement.
The Bank of England, which operates independently from the Treasury, said the Silicon Valley Bank unit had a limited presence in the U.K. and no critical function in the country’s financial system. But U.K. technology companies and investors said
SVB
SIVB -60.41%
is critical to the vibrant startup scene in the country, the most active in Europe.
Several investors posted a joint statement on Twitter saying SVB’s U.K. arm “plays a pivotal role in supporting and financing Britain’s startups,” and they would support their companies to resume their banking relationship with the lender if it were to survive through a sale or capitalization.
The Coalition for a Digital Economy, a nonprofit entity that campaigns for policies to support digital startups in the U.K., said late Saturday that the clock was ticking, and that the key concern was immediate liquidity for companies and functional access to banking services on Monday.
Silicon Valley Bank’s branch in the U.K. became a separate bank subsidiary requiring its own capital and more intensive local regulation in August last after it reached £100 million of insured small business deposits, according to the parent company’s 2022 annual report.
It couldn’t be learned the exact size of the U.K. arm or the number of customers it serves. The U.K. arm was set to publish its first set of accounts in the coming months.
Silicon Valley Bank has banking branches in Germany, Canada and the Cayman Islands, according to the annual report. Most of its Europe-based employees are in the U.K., where it employs 650 people.
The bank’s international business, which also includes other parts of Europe, Israel, Asia and Canada, had 18% of the bank’s total deposits or almost $31 billion at the end of 2022, according to a company presentation. International loans were almost $10 billion on average in 2022, or 14% of total loans.
Write to Patricia Kowsmann at patricia.kowsmann@wsj.com
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