Author: Zhou Ailin
On March 10, U.S. time, the California Department of Financial Protection and Innovation decided to close Silicon Valley Bank (SVB), and on the same day designated the U.S. deposit insurance institution, the Federal Deposit Insurance Corporation (FDIC), as the receiver of SVB.
The subsequent disposal of SVB has attracted the attention of the global market, especially its spillover effect and systemic impact.
As far as its Chinese clients are concerned, according to what the reporter learned from several lawyers, most of them choose to open accounts with SVB, mainly US dollar VC funds with Chinese backgrounds.
What to do after being taken over
According to the US Federal Deposit Insurance Act (Deposit Insurance Act), the takeover of SVB will trigger a series of legal consequences.
For example, the FDIC will be responsible for taking over and disposing of SVB's assets, and distributing the funds recovered from asset sales and claims disposals to SVB creditors (including secured creditors, unsecured creditors, subordinated debt holders, shareholders, uninvested depositors and deposit insurance funds).
At the same time, the FDIC has established the Santa Clara Deposit Insurance National Bank as a bridge depository institution to receive SVB's insured deposits.
In terms of specific steps, according to the official website of the FDIC, in the case of bank bankruptcy, the FDIC will usually deal with it from two aspects: to pay deposit insurance to all insured depositors’ accounts of each ownership category within a total amount of 250,000 US dollars; as a bankruptcy A receiver of a bank, responsible for the sale, repossession of assets of the bankrupt bank and discharge of the bank's liabilities, including unsecured deposits.
The scope of the aforementioned deposit insurance only includes deposits in checking accounts (checking), transferable payment orders (NOW), savings accounts (savings accounts), money market deposit accounts (money market deposit accounts) or time deposits (time deposits) such as deposits certificates of deposits, excluding funds invested in stocks, bonds, mutual funds, life insurance policies, annuities, or municipal securities.
According to a memorandum issued by Han Kun Law Firm to clients obtained by the reporter, insured depositors will be reimbursed within the limit of US$250,000 for the insured part of the funds before March 13, but for the uninsured part of the funds , will get the advance payment within a week from March 13, and will get a collection certificate for the remaining uninsured funds, and the remaining funds that can be paid by the insured depositors will be determined according to the FDIC's disposal of SVB assets total, but the overall disposal process can take years.
The lawyer suggested that the manager and the USD Fund’s account opened in SVB can take appropriate actions. The actions that the manager/general partner (GP) can consider include:
1. Although the FDIC will issue a Receivership Certificate to each depositor based on SVB’s internal records, the manager itself should also independently record the funds in the SVB account of itself and the US dollar funds it manages and check, and ready to explain to the investors of the US dollar fund;
2. If the US dollar fund has borrowed a loan from SVB, it should be noted that the SVB’s takeover by the FDIC will not affect the US dollar fund’s obligation to continue repaying on schedule according to the loan contract;
3. Pay special attention to the fact that criminals may take advantage of the SVB bankruptcy event to commit fraud in the near future, such as obtaining account information including account numbers and social security numbers;
4. If you have more questions, you can consult the administrator's contact person at SVB or call the FDIC (+1 866 799 0959), or log on to the official website of the FDIC to view FAQs on bank failures.
Due to the large number of funds involved this time, some law firm partners also told reporters that after a bank risk event occurs, the manager/general partner is obliged to take measures to maintain the normal operation of the US dollar fund, including:
1. Take measures as much as possible to ensure the safety of the funds of the US dollar fund, such as whether it is possible to disperse funds to other accounts of the US dollar fund. There are some domestic banks that can carry out debit operations without an account);
2. Open other accounts for USD funds, including other bank accounts (as far as we know, specific Chinese-funded banks can open onshore FTN accounts), brokerage accounts;
3. If the US dollar fund has a payment arrangement in the near future, it is necessary to explain the fund security measures and the purpose of the fund to the investor in advance and in detail;
4. Investigate the recent payment arrangements of the USD Fund, including the payment of investment funds and payment fees. On the one hand, confirm the status of the receiver’s bank account and fund protection measures; And formulate a response plan (such as whether to borrow money, require fund investors to pay the next contribution in advance).
The vast majority of depositors' funds in SVB are well over $250,000.
At the end of last year, SVB had more than $175 billion in deposits and $209 billion in total assets, but most of it was bonds and Treasuries that had lost value as the Fed raised interest rates.
Bond prices have plummeted on rate hikes, exacerbating SVB's risk.
According to reports, the FDIC will return some of SVB's uninsured deposits to depositors as soon as Monday, and the ratio will be around 30% to 50%, and may even be higher.
That amount will depend in part on the FDIC's progress in liquidating the assets by Sunday evening.
Hedge fund tycoon Bill Ackman also tweeted that he has a credible source confirming that depositors will get about 50% of their deposits next Monday or Tuesday, with the rest to be paid over the next 3 to 6 months.
In this light, next week's progress becomes particularly critical.
who will take over
The more critical issue is the follow-up disposal, and whether any organization will take over SVB?
Feng Lei (Mitch), a senior business director of a Wall Street investment bank, told the China Business News reporter that in the context of the Fed’s aggressive interest rate hikes, cracks have already appeared.
At present, it is difficult for large banks to take on SVB without risking "moral hazard" because the regulatory standards are now higher than before the global financial crisis, and the Dodd-Frank Act (Dodd Frank Act) designed higher standard.
"Even if it were possible to take over, it would be private investors. But even then, these people are not 'saints', they are there to make money, not to rescue investors, so the price may be greatly discounted."
According to foreign media reports, hedge funds and banks are pouring in, trying to obtain the start-up deposits held by SVB at a deep discount.
The media Semafor quoted people familiar with the matter as saying that Oaktree Capital (Oaktree) was one of the hedge funds that offered to buy these deposits, and the bids ranged from 60 cents to 80 cents (corresponding to 1 dollar deposit).
Separately, the source said, traders from investment bank Jefferies were contacting startup founders and offering to buy their deposit claims.
One source mentions bids of at least 70 cents per dollar.
There are also foreign media reports that the FDIC and the Federal Reserve are considering creating a fund that would allow regulators to support more deposit support for banks that are also in trouble after the SVB.
The new special tool, which the regulator discussed in conversations with bank executives, hopes it will reassure savers and help stem the panic.
But this news has not been officially confirmed.
Earlier, people from all walks of life had foreseen that there would be "accidents" in the financial system under the sharp increase in interest rates, but they didn't know when and which link would go wrong-of course, the answer is now available.
Due to the interconnectedness of the banking system, SVB must be rescued after its collapse. The key is how to save it.
A number of people in the industry told reporters that due to the relatively small size of SVB, the best solution at present is for the private sector to invest in "acquisition" to hold the first domino and prevent it from falling. There is no need to "inject water" when you come to the Fed.
But judging from the current development trend, the Federal Reserve seems to be losing this option-the First Republic Bank (RCI) also fell 51% within a day on Friday, and suspended trading due to excessive stock price volatility.
The question that everyone is worried about is whether other small banks will have problems one after another because of this. At that time, it will not be a question of whether private capital can take over, but the Fed needs to take action.
However, the Fed is currently under attack, with high inflation tying its hands.
"There is indeed a feeling that the financial crisis 2.0 is coming. It started with the liquidation of British pension funds, and now it is a regional bank run. It is all related to the surge in national bond yields under the aggressive interest rate hike." Feng Lei told reporters, although SVB The scale is small, and the big banks are relatively safe under strict supervision after the crisis, but the risks of the shadow banking system are hard to ignore, and what is even more worrying is that the probability of inflation will remain high this time, and the Fed’s loose threshold is abnormal high.
He added: "Don't forget that the global financial crisis started with the US subprime mortgage crisis in 2006, and in 2007 a small UK mortgage bank called Northern Rock also collapsed due to a run. Similar to SVB is , the bank’s corporate loans accounted for a relatively high proportion, and the proportion of retail deposits and retail loans actually issued fell from 62.7% in 1997 to 22.4% at the end of 2006. Once this financing strategy encounters insufficient liquidity, it will be exposed. run-on risk.”