Voice of Xicai Finance Scholars| Zhang Qiaoyun: Deposits in the Cayman Islands branch of Silicon Valley Bank - should they be paid?

Deposits at Silicon Valley Bank Cayman Islands Branch: Should I pay out?

Zhang Qiaoyun is a professor and doctoral supervisor at the School of Finance, Southwestern University of Finance and Economics

May 17, 2023

A news story on May 13, 2023, caused a global uproar, once again pushing Silicon Valley Bank to the forefront, but the protagonists were not the head office of Silicon Valley Bank, but the Federal Deposit Insurance Corporation (FDIC) and SVB Cayman Islands.

1. A brief review of the incident

On March 11, Silicon Valley Bank (SVB) was taken over by the FDIC, and on March 27, First–Citizens Bank & Trust Company announced that it had signed an agreement with the Federal Deposit Insurance Corporation (FDIC) to acquire deposits, loans, and other assets and liabilities formerly owned by Silicon Valley Bank. According to the transaction plan, First Citizen Bank acquires $110 billion of Silicon Valley Bank assets (of which $72 billion is loans), pays a consideration of $16.45 billion, and assumes $93.6 billion of Silicon Valley Bank liabilities (the $93.6 billion of liabilities assumed plus the consideration paid of $16.4 billion is balanced with the value of the acquired assets of $1100!). ）。 The remaining assets and liabilities are disposed of by the FDIC. According to the data of Silicon Valley Bank's 2022 annual report, about $101.793 billion of securities and other assets remaining in Silicon Valley Bank will remain in bankruptcy management, while another $101.898 billion of Silicon Valley Bank's liabilities in 1954.98 will enter bankruptcy proceedings.

In addition, on March 12, HSBC acquired the British subsidiary of Silicon Valley Bank for 1 pound. Thus, it seems that the Silicon Valley Bank incident has been "properly" resolved! Depositors at Silicon Valley banks are also effectively protected.

However, according to the Wall Street Journal, depositors' funds at SVB's Cayman Islands branch have been confiscated by the Federal Deposit Insurance Corporation (FDIC), and depositors' deposit balances at the Cayman Islands branch of Silicon Valley Bank have been cleared to zero. Silicon Valley Bank Cayman Islands Branch mainly serves the Asian market, so these depositors are also mainly Asian customers, and a significant number of deposits are rumored to belong to Chinese mainland investment companies.

Why does the FDIC not compensate SVB for deposits made at the Cayman Islands branch?

2. After the bank is insured, will all deposits be protected?

From the current point of view, countries or regions that have established deposit insurance systems basically adopt the method of partial insurance. It includes two meanings, one is to stipulate the maximum amount of compensation, such as 250,000 US dollars in the United States and 500,000 yuan in China. Second, some deposits will be protected, while others will not be covered by insurance.

Traditionally, unprotected deposits mainly include deposits in overseas branches of banks, interbank deposits of financial institutions and deposits of senior executives of financial institutions.

From the perspective of the deposit insurance system in the United States, the FDIC stipulates that federally registered national banks and state banks registered and participating in the Federal Reserve system must be compulsory to participate in the deposit insurance system; Non-Fed member banks and branches of foreign banks in the U.S. need to apply to the FDIC and be approved to be insured; Branches of U.S. banks abroad are not covered by FDIC deposit insurance. In 2013, the FDIC clarified that deposits at branches of U.S. banks located outside the U.S. are not covered by the Federal Deposit Insurance Corporation.

China's deposit insurance system has similar provisions. According to Article 2 of the mainland's Regulations on Deposit Insurance, deposit-taking banking financial institutions such as commercial banks, rural cooperative banks, and rural credit cooperatives established within the territory of the People's Republic of China shall take out deposit insurance in accordance with the provisions of these Regulations. However, it also stipulates that the branches established by the insured institution outside the territory of the People's Republic of China and the branches established by foreign banks within the territory of the People's Republic of China are not subject to the provisions of the preceding paragraph, such as deposits of the New York branch of China Construction Bank and deposits of the branches of Citibank in China are not subject to deposit insurance in China. Article 4 of the Regulations on Deposit Insurance stipulates that interbank deposits of mainland financial institutions, deposits of senior managers of insured institutions in their insured institutions, and other deposits not insured by deposit insurance fund management institutions are not protected by the Regulations on Deposit Insurance.

Therefore, when a bank is insured, it does not mean that all its depositors will be protected.

Why depositors at Silicon Valley Bank Cayman Islands Branch are not protected: A comparison of Silicon Valley Bank overseas institutions

SVB has banking subsidiaries in the UK and branches in Germany and Canada, but these two branches do not take deposits and only issue loans. As of March 10, it had $8.5 billion in deposits with institutions acquired by HSBC in the UK.

1. Is Silicon Valley Bank a branch or subsidiary in London?

Figuring out the nature of Silicon Valley Bank's overseas institutions is crucial to understanding why the FDIC does not compensate overseas depositors!

Silicon Valley Bank's problems on March 11 were followed by a significant loss of deposits at its London institution. On March 13, HSBC (UK) bought the London unit of Silicon Valley Bank for £1, and HSBC acquired all of its assets and assumed all of its debt.

In related news and websites, there are a number of different statements about Silicon Valley Bank's London facility, such as "SVBUK or SVBU.K." in the Silicon Valley Bank UK Limited is registered in England and Wales, and £1 in HSBC pays £1 to rescue UK arm of Silicon Valley Bank after All was reported as "SVB's U.K. branch", "Silicon Valley Bank (London Branch)" in the Silicon Valley Bank (Cayman Islands) - Bank Profile (thebanks.eu), and titled Bank of London submits rescue bid for UK arm of "UK arm of Silicon Valley Bank" in Sky News and UK | on SVBUK Silicon Valley Bank (svb.com) special note "Silicon Valley Bank UK Limited has been acquired by HSBC UK Bank Plc." becomes "Silicon Valley Bank UK Limited", on the website Board update | Silicon Valley Bank (svb.com) has a quote about the HSBC acquisition "In becoming part of the HSBC Group, SVB UK's Board will be expanding to accommodate three new Board members." " "SVB UK's Board" appeared, and so on. Based on the comprehensive analysis of the above statement, I believe that the London institution of Silicon Valley Bank should be a subsidiary with independent legal personality. This is also a prerequisite for HSBC to complete the acquisition quickly and achieve full protection for depositors in the London subsidiary of Silicon Valley Bank through the acquisition.

2. Is Silicon Valley Bank Cayman Islands a branch or subsidiary?

In related news statements, such as the May 13 report, it was mentioned that "It has been a vastly different story for customers of SVB's Cayman Islands branch, which was left out of the First Citizens deal and placed under FDIC receivership." The branch in the offshore tax haven was set up to primarily support the bank’s activities in Asia, according to SVB.” From the "SVB's Cayman Islands branch" and "The branch in the offshore tax haven", it can be seen that the institutional nature of Silicon Valley Bank in the Cayman Islands is a "branch". A branch means that the institution is not a separate legal person.

3. Whether depositors are compensated depends on whether a deposit insurance system has been established and banks have insured and paid deposit insurance premiums as required

Deposit insurance is a financial stability mechanism that protects bank depositors from losses if their bank is unable to perform its deposit contracts. Depositors are compensated only if a deposit insurance system is established and that banks contribute to the deposit insurance fund.

The Cayman Islands does not have a deposit insurance system and therefore its depositors are not compensated in the event of the closure of SVB's Cayman Islands branch.

The FDIC's handling of the Cayman Islands branch of Silicon Valley Bank was elaborate fraud and open predation

Deposits at the Cayman Islands branch of Silicon Valley Bank are about $13.9 billion, which is not a small amount, most of which are deposits from companies in Asian countries.

Looking back at the statements and practices of regulators such as the FDIC throughout the incident, it seems that they acted in accordance with the law and there is nothing wrong with it. But in fact, we found that the early statements of US financial regulators on deposit safety or the protection of depositors' interests were very clear, and then gradually became vague, until May 13, when it was announced that deposits from the Cayman Islands branch of Silicon Valley Bank would be included in the FDIC receiving framework, the consequences of which were basically equivalent to zero. As a result, the U.S. government's ingenuity and predation have been exposed.

On March 12, the U.S. Treasury Department, the Federal Reserve Bank and the FDIC issued a joint statement saying that starting March 13, depositors can withdraw all their funds and that any losses related to the bankruptcy of Silicon Valley Bank will not be borne by taxpayers. Secretary Yellen approved actions enabling the FDIC to complete its resolution of Silicon Valley Bank, Santa Clara, California, in a manner that fully protects all depositors.）。 The statement also stressed that "Shareholders and certain unsecured debtholders will not be protected." The joint statement did not say that deposits at the Cayman branch of Silicon Valley Bank were not covered.

On March 15, the Cayman Islands Monetary Authority (CIMA) announced that CIMA was actively assessing the situation and approaching the head of SVB's Cayman Islands branch. CIMA is also discussing future solutions with relevant U.S. regulators. According to a joint press release, the FDIC stated that depositors of SVB will be safeguarded.

On March 31, with the collapse of SVB and the designation of the FDIC as receiver, CIMA continued to liaise with the FDIC and related shareholders, as well as the Cayman branch of Silicon Valley Bank. CIMA understands that the FDIC will soon issue a notice to Silicon Valley Bank Cayman branch customers outlining the next steps. Only then did the FDIC formally notify depositors at SVB's Cayman Islands branch that they would not be protected by deposit insurance and would only act as "general unsecured creditors". The FDIC further states under the Federal Deposit Insurance Act that only deposits within the U.S. are protected. Why not make it clear on March 12? Because the US government must have feared that the announcement of zero deposits in overseas branches at that time would cause greater panic, it withheld it. So is this a false disclosure?

On May 13, the Wall Street Journal news reported that "SVB's Cayman Islands branch customers are completely different, they were excluded from First Citizens Bank's acquisition of Silicon Valley Bank and placed in the takeover of the FDIC." ”（it has been a vastly different story for customers of SVB’s Cayman Islands branch, which was left out of the First Citizens deal and placed under FDIC receivership.）。 What is the reason for this so-called difference? No convincing explanation was given either.

According to the FDIC's interpretation, uninsured depositors will decide how much to allocate based on the liquidation of assets in FDIC receiving status. However, assets liquidated by the FDIC are conventionally not recovered with sufficient cash to meet the needs of the creditor assets, which means that foreign depositors will receive little compensation and possibly even nothing.

To take 10,000 steps back, even if Silicon Valley Bank's institution in the Cayman Islands is a "branch" and does not have the status of an independent legal person, it cannot be "exempted" from its legal obligation to repay depositors' deposits! In fact, from an accounting and management perspective, all operations of the Cayman Islands branch are consolidated into its US head office (SVBGroup). After a bank has problems, only by actively paying compensation and conscientiously performing the duty of protecting the interests of creditors can it be worthy of the responsibility of a big bank! When it has rights, doesn't the United States often have to implement "long-arm jurisdiction", and why should it not have a "long-arm obligation" on the issue of deposit compensation at the Cayman Islands branch of Silicon Valley Bank when it has obligations! The US use of so-called "market rules" to "zero" deposits in overseas branches of Silicon Valley Bank is extremely irresponsible and disgraceful banditry!

V. Protection of Creditors' Interests: Further Discussion and Enlightenment

During the merger and disposition of the collapse of Silicon Valley Bank and Credit Suisse, two points need to be paid special attention to: first, the deposits of Silicon Valley Bank Cayman Islands branch are not protected, and second, Credit Suisse's US$17.2 billion additional Tier 1 capital bond (AT1) has been written off.

In the Silicon Valley Bank merger and acquisition, according to the relevant laws, the order of bankruptcy liquidation first protects insured depositors, followed by uninsured depositors, then general creditors, then write-down creditors, and finally shareholders. At present, depositors at the Cayman Islands branch of Silicon Valley Bank are treated as unsecured general creditors and will participate in the final bankruptcy liquidation together with shareholders and the FDIC (receiver), and the final outcome depends on the net recovery of the bank's assets and payment of the bank's liabilities. In this case, according to relevant data calculations, First Citizen Bank acquired $110 billion of assets of Silicon Valley Bank, leaving a total of $101.793 billion in securities and other assets in the FDIC, of which about $82 billion in bonds and the rest were mainly non-performing loans. Against the backdrop of rising interest rates, the value of these bonds has depreciated significantly, and the proportion of future depositors being able to repay is low.

In the Credit Suisse M&A, these debts were written down in accordance with Swiss regulators' requirements to declare the bonds of AT1 bondholders to zero, rather than participating in the liquidation and distribution of remaining property, which previously believed they would be better protected than shareholders. This is of great practical significance to the development of the mainland additional Tier 1 capital bond market and the additional Tier 1 capital bond of financial institutions investing abroad.

Source: School of Finance, Southwestern University of Finance and Economics