Draft Silicon Valley Bank UK Limited Compensation Scheme Order 2024

Emma Reynolds Excerpts

Monday 20th January 2025 General Committees

[The Economic Secretary to the Treasury (Emma Reynolds)]

I beg to move,

That the Committee has considered the draft Silicon Valley Bank UK Limited Compensation Scheme Order 2024.

It is a pleasure to serve under your chairmanship, Mrs Harris.

The draft order relates to the 2023 resolution of Silicon Valley Bank UK. It confirms that the former shareholder of SVB UK, which was the Silicon Valley Bank US parent entity, is not entitled to compensation following the transfer of the bank’s shares to HSBC UK Bank plc. The order has already been approved in the House of Lords.

In early March 2023, SVB UK experienced severe financial distress, resulting in rapid deposit outflows. That crisis, originating from its US parent entity, quickly spread to its UK subsidiary. By Friday 10 March, the Bank of England, acting as the resolution authority, declared its intention to place SVB UK into a bank insolvency procedure, absent any meaningful new information. Over the subsequent weekend, a private sector purchaser was identified. On Monday 13 March, the Bank of England exercised its power under the Banking Act 2009 to transfer the shares of SVB UK to HSBC UK Bank plc. The action was taken following consultation, with the Prudential Regulation Authority, the Financial Conduct Authority, His Majesty’s Treasury and the Bank of England reaching the judgment that the resolution conditions set out in the Banking Act had been met.

The Banking Act requires HM Treasury to make a compensation scheme order when the private sector purchaser power is exercised. This order is a mechanism to establish in law what compensation, if any, is due to former shareholders of the resolved firm. The Bank of England undertook a provisional valuation when placing SVB UK into resolution. That valuation found that SVB UK’s shareholder would not have made any recoveries had the firm been placed into a bank insolvency procedure. The shares had no value at the point that the firm was transferred and therefore no compensation is due to SVB UK’s former shareholder. The Bank of England then commissioned an independent valuation of SVB UK, which confirmed that no compensation is due to the previous shareholder of SVB UK. The order before us today confirms in law the findings of those valuations: that the former shareholder of SVB UK is not due any compensation.

I thank all staff of the PRA and the Bank of England’s resolution directorate for the swift and effective action they took regarding SVB UK, and indeed officials and Ministers at HM Treasury at the time. They worked tirelessly over the course of that weekend to deliver a solution that protected financial stability and achieved the objectives of the special resolution regime. The resolution of SVB UK shows that the UK’s resolution regime works well, as well as the importance of the UK having the necessary tools to handle bank failures effectively. The transfer of the firm to HSBC UK was a good result for SVB UK’s customers, who retained access to their money and the banking services they relied on; for taxpayers, with the firm being stabilised without any use of taxpayer support; and indeed for the UK economy, with the UK’s vibrant technology and innovation sector protected from severe disruption.

The compensation scheme order for SVB UK is a necessary step to formalise and conclude the resolution process, and to confirm that no compensation is due to the former shareholder. This decision is based on thorough valuations and adheres to the legal framework established by the Banking Act 2009. I thank the Committee for its attention and welcome any questions that the shadow Minister or other hon. Members may have regarding this matter.

--- Later in debate ---

[Emma Reynolds]

I thank the shadow Minister, the hon. Member for Wyre Forest, for his kind words—we will be spending a lot of time together this week. I also thank him for what he said about shareholders and the principle of risk and return. We know that there is a correlation between the risk taken and the return due, but that does not always work out. Proportionate regulation encourages considered risk-taking, which we are in favour of; we want to see entrepreneurship in our economy. Maybe this is a more philosophical debate that we could have on another occasion, but I agree with a lot of what he said about shareholders providing scrutiny. We certainly should not criticise them for being shareholders, because we need good shareholders for the functioning of the economy.

Let me turn to the remarks of the right hon. Member for North West Hampshire and attempt to answer all of his questions. Obviously, I was not in the Treasury that weekend—one of his colleagues was—so if he wants a very detailed description of those events, he probably should speak to the shadow Business Secretary, the hon. Member for Arundel and South Downs (Andrew Griffith). That is my first recommendation.

Secondly, there is certainly no litigation in this case. It is for the Bank of England, as the independent regulator, to weigh up and balance the different trade-offs involved in this sort of decision making. I cannot speak for the Bank of England, but I point out to him that only 14% of deposits would have been covered by the financial services compensation scheme. He might think that that would have been a better eventuality.

[Kit Malthouse]

That is not what I am implying at all. In this instance, I think that resolution was the right thing to do. What I am saying is that the Bank of England’s first decision, on the Friday, was to go for an insolvency and only pay out 14% of the deposits. It was only after pressure was brought to bear on a supposedly independent bank over the weekend that the strategy was changed to a resolution and the bank was transferred to HSBC. In fact, the Bank of England issued a press release to the effect that it was putting the bank into the insolvency procedure, and then over the weekend changed its mind. I am asking about the integrity and quality of the Bank of England’s decision-making procedure, given that it initially proposed to do exactly what the Minister says should not have happened.

[Emma Reynolds]

I cannot speak for the independent Bank of England, so I gently suggest to the right hon. Gentleman that if he has questions or concerns about the timing of the issuing of a press release on the Friday in March 2023, he should convey them to the Bank of England.

I will take up the right hon. Gentleman’s recommendation to look into the issue more closely, but I also gently say to him that—due to the work of officials in the PRA, the Bank of England and indeed the Treasury—overall we had a good outcome, because by the Monday morning, before the markets opened, we had a smooth transfer from SVB UK into HSBC. My point is that in the end depositors were in a much better position on the Monday morning than they had been on the Friday; regardless of the choreography, we got to the right outcome in the end.

I think that there has been consideration of the resolution process, although not necessarily of the timing of the events mentioned by the right hon. Gentleman. Indeed, on Wednesday, myself, the shadow Minister—the hon. Member for Wyre Forest—and other hon. Members here present will debate the Bank Resolution (Recapitalisation) Bill on Second Reading. That Bill has already been through the Lords. It seeks to ensure that in cases such as this one, we are protecting taxpayers. Indeed, what was good about this case was that SVB UK was in a relatively good economic position, but I could envisage a situation where that was not the case, and we will discuss such issues on Wednesday.

I commend the order to the Committee.

Question put and agreed to.