Hi ZipLawyer! I'm Ludo Lugnani and this is ZipLaw: an independent newsletter covering unique news stories. We explain how each story impacts law firms and their clients so that you can stand out in interviews and applications and develop your Commercial Awareness!
Today's newsletter is an 8 min read:
- 📉 Off a Cliff: Why did SVB go bankrupt and what does it mean for law firms?
- ➕ Plus: Biden says US banking system is safe, Pfizer diversified and Xi Jinping to visit Putin.
📰 News Briefing
- 🇺🇸 Biden assured Americans their banking system is safe after the collapse of Silicon Valley Bank and Signature Bank. Regulators announced measures to repay depositors in both banks, leading to a sharp fall in two-year Treasury-bond yields as markets bet on SVB's bankruptcy slowing the Fed's monetary tightening.
- 🛢️ The Biden administration also approved ConocoPhillips' oil-drilling project, known as Willow, on federal land in Alaska. Despite environmentalist lobbying, Biden hopes to spur drilling as energy prices rise due to the war in Ukraine.
- 💊 Pfizer diversifies away from covid vaccines by purchasing American biotech company Seagen for $43bn, hoping to grow its expected revenues from $2.2bn in 2023 to $10bn by 2030.
- 🇨🇳🇷🇺 China's President Xi Jinping plans to visit Russia and meet with Vladimir Putin as soon as next week. Despite Russia's repeated requests for weapons to use in the war in Ukraine, China has so far declined. China and Russia declared their "no-limits" friendship in February 2022, just weeks before Russia's invasion began.
🤿 Deep Dive
Off a Cliff
- Silicon Valley Bank (SVB), a bank with around $200 billion in assets, has gone bankrupt. This news is a shock to the tech world, and it raises some important questions namely: How did SVB get into this situation? And are other banks at risk of following in its footsteps?
The Rise and Fall of Silicon Valley Bank
- SVB was a bank that catered to startups. It opened accounts and lent money to these companies when other banks wouldn't.
- As Silicon Valley boomed, so did SVB and its clients (full of cash) needed to store money more than borrow.
- As a result, SVB’s deposits more than quadrupled—from $44bn at the end of 2017 to $189bn at the end of 2021—while its loan book grew only from $23bn to $66bn.
Why is this a problem? Banks make money on the difference between the interest rate they pay on customer deposits and the rate they are paid by borrowers. Therefore, having a far larger deposit base than loan book is a problem. To fix this, SVB needed to buy other interest-bearing assets. By the end of 2021, the bank had made $128bn of investments, mostly into mortgage bonds and Treasuries.
SVB thought all was good but then things took a turn for the worse.
Interest rates rose as central banks tried to limit inflation, and the bond market plummeted. This was bad news for SVB because it had invested in bonds at their peak price. As a result, SVB had to sell off its bond portfolio at a loss. These losses left a hole in the bank's balance sheet, which it tried to fill by raising $2.5 billion.
The panic surrounding Silicon Valley Bank’s weak balance sheet rushed through the tech industry. Starting with venture capital investors and spreading to the many tech startups that work with the bank. All this was turbo-charged by the power of Twitter and social media.
On Thursday, customers tried to take $42 billion out of the bank.
This was the final blow and ultimately what caused it to fail. On Friday, the bank was taken over by the FDIC, which means that deposits up to $250,000 are protected. However, many of the bank's customers have more money at risk. At the end of last year, the bank had around $175 billion in deposits.
In comes the Fed
On Sunday 13 March, the US Treasury, Federal Reserve (Fed), and Federal Deposit Insurance Corporation (FDIC) responded to the crisis.
They fully repaid depositors in SVB and another failed bank called Signature Bank. The authorities closed Signature Bank to protect consumers and the financial system "in light of market events."
The authorities also set up a new lending facility, called the bank term funding programme, at the Fed. This will allow banks to pledge Treasuries, mortgage-backed securities (MBS) and other qualifying assets as collateral. Banks will be eligible for loans that are equal in value 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% (these are generous terms).
What Happens Next?
The big question now is whether anyone will buy SVB or Signature Bank. It's unlikely that another bank will make a bid for SVB immediately because of the extensive due diligence required (although HSBC did rapidly scoop up SVB's UK arm). A deal could come in the coming days or weeks.
Additionally, there are rumours that SVB's collapse will prompt the Fed to halt its interest-rate increases aimed at cooling inflation, amid growing signs of financial stress linked to rapid increases in borrowing costs over the past year. Meanwhile, US president Joe Biden vowed to protect bank deposits and to do "whatever is needed" to prevent further contagion.
- On Hold: Goldman Sachs said the Fed would probably keep rates on hold at the current level of 4.5% to 4.75%, after previously expecting another rise. The Bank of England had been given an almost 100% probability by traders in financial markets of raising rates by 0.25 percentage points at its next meeting on 23 March. However, that has since fallen to a 71% chance as traders assess the consequences of SVB’s failure.
How does this Impact Law Firms and their Clients?
Note: In this section, we consider how law firms' clients may be affected by the story we discussed. We then explain how law firms can help, and which particular legal departments could see an increase in work and why.
💼 What does this mean for law firm's clients?
- Startups: This news would have a negative impact on startups that had deposits or loans with Silicon Valley Bank. Fortunately for them, the Fed and FDIC intervened to provide some support and in the UK, HSBC bought up SVB's operations. securing the deposits of thousands of British tech firms that hold money at the lender. Had a buyer not been found, SVB UK would have been placed into insolvency by the Bank of England. Insolvency would have left customers with only deposits worth up to £85,000 — or £170,000 for joint accounts — guaranteed.
- Investors: Investors who had invested in Silicon Valley Bank would be negatively impacted. Silicon Valley Bank invested in bonds at their peak price, but when interest rates rose, and the bond market plummeted, Silicon Valley Bank had to sell off its bond portfolio at a loss. This would have significant implications for investors who had invested in these bonds, and they would need to look for ways to recover their losses.
- Banks: Other banks may also be negatively impacted if they have similar business models to Silicon Valley Bank. Banks that have a similar business model to Silicon Valley Bank would need to assess their loan book and ensure that they have invested in other interest-bearing assets to mitigate the risk.
- Government and regulatory agencies: In short, SVB's collapse was not supposed to happen and it doesn't look great for regulators (especially US ones). There should be adequate and strict regulations, particularly in the banking sector, to prevent these failures from happening. We can expect the SVB collapse to prompt tighter scrutiny of the banking industry together with some renewed reform in the US to avoid a more widespread contagion.
⚖ Which legal departments would this impact?
Law Firms advising on this: In the UK, teams from Clifford Chance, Slaughter and May, Ashurst, Hogan Lovells and Freshfields Bruckhaus Deringer were called in to advise on the fate of SVB’s smaller UK unit, which culminated in its sale to HSBC, advised by Clifford Chance. In the US SVB was reportedly advised by US law firms Cooley, Holland & Knight and Sullivan & Cromwell.
Banking and Finance
- Advising Depositors: The banking and finance legal department could advise depositors of Silicon Valley Bank on their legal rights and options after the bank's collapse. They could provide advice on the legal implications of the deposit insurance coverage provided by the Federal Deposit Insurance Corporation (FDIC) and help depositors file claims for their insured deposits. They could also advise depositors on any potential legal claims they may have against the bank or its officers for any misconduct or negligence that contributed to the bank's failure.
- Advising on new banking reforms: The banking departments may be required to advise banks on how to comply with the new banking reforms that may be brought in by the US government to prevent a similar situation to that of SVB's collapse. Additionally, the department may advise banks on their obligations to report and disclose financial information to regulatory authorities to ensure transparency and accountability.
- Advising Startups: The corporate legal department would advise the startups that had accounts or loans with Silicon Valley Bank on their legal options and risks. For example, they might advise the startups to withdraw their deposits and transfer them to another bank, negotiate a repayment plan for their loans, or pursue legal action against Silicon Valley Bank for any breach of contract or negligence. Corporate lawyers may also assist the startups in recovering their intellectual property, confidential information, and other assets that were held by Silicon Valley Bank as collateral. Additionally, the legal department would provide guidance on how to manage the impact of the bank's collapse on its business operations, financing, and reputation.
- Advising potential buyers: Corporate lawyers would advise the buyers on the legal and regulatory requirements for acquiring a failed bank. They would also advise the buyers on the potential liabilities and contingencies associated with the acquisition, such as the claims of depositors, bondholders, and other creditors, unresolved legal disputes, and regulatory compliance issues. The legal department would also assist the buyers in negotiating the terms and conditions of the acquisition, including the purchase price, the asset and liability transfers, the warranties and representations, and the indemnification provisions. Additionally, the legal department would provide guidance on how to integrate Silicon Valley Bank into the buyer's existing business and operations, and how to mitigate any legal or reputational risks that may arise from the acquisition.
Restructuring and Insolvency
- Advising depositors and creditors on their legal rights and remedies: The Restructuring and Insolvency legal department would advise depositors and creditors of SVB on their legal rights and remedies following the bank's collapse or potential rescue deal. Many of the bank's clients will be hoping for a similar rescue deal by a healthy bank as in the UK with HSBC. If that doesn't happen, this department would advise them on how to file claims against the bank, how to protect their rights during restructuring and insolvency proceedings, and how to pursue legal action against the bank's management for any wrongdoing or negligence that led to the bank's collapse.
- Advising SVB on their legal obligations and options: The Restructuring and Insolvency legal department could also advise SVB on their legal obligations and options under restructuring and insolvency law. This would include advising them on how to comply with the requirements of the court, how to protect their assets and interests during restructuring and insolvency proceedings, and how to negotiate with creditors and other parties to reach a favourable resolution.
- Advising the FDIC on the liquidation of SVB: When a bank fails, the FDIC will arrange the sale of the bank's customer assets to a healthy bank, or, less commonly, it will pay back the bank deposits. The regulatory legal department would advise the FDIC on how to handle the SVB situation from a legal perspective.
- Advising other banks on regulatory compliance and risk management: The regulatory legal department would advise other banks, especially those that have similar business models or exposure to market risks, on their legal rights and obligations regarding regulatory compliance and risk management. This would include reviewing their lending and investment practices, capital adequacy, liquidity management, and stress testing. They will liasie closely with banking colleagues in regards to any banking reforms from the US government impacting their clients' operations.