SVB Financial's foreign clients face a "double squeeze" dilemma: deposits are gone, but loans still need to be paid!

After being acquired by First Citizens Bank, many foreign customers of Silicon Valley Bank were in trouble: their deposits were seized by the Federal Deposit Insurance Corporation (FDIC), but their outstanding loans still had to be repaid to First Citizens Bank.

When Silicon Valley Bank collapsed in March of this year, the FDIC intervened to protect all of the bank's American customers' deposits and arranged for the sale of Silicon Valley Bank's American customer accounts, branches, and loans to First Citizens Bank.

However, the bank's branch in the Cayman Islands was excluded from the deal. The branch's deposits mainly came from Silicon Valley Bank's Asian customers, including funds from venture capital and private equity firms registered in the Cayman Islands. These customers were shocked to find that their deposits were not protected in late March.

Several companies with deposits in Silicon Valley Bank's Cayman branch said they had received assurances from the US that they could fully use their own funds after the bank's collapse was announced. However, the bank statement at the end of March showed a zero balance in their accounts, and their funds had been transferred to the FDIC's account for "Silicon Valley Bank's receiver."

Some of these venture capital and private equity funds had previously used loan accounts associated with their Silicon Valley Bank deposit accounts. These customers said that their outstanding loans were one of the assets sold to First Citizens Bank.

Now, these overseas customers face pressure to repay short-term loans because their loan accounts are called "capital call credit facilities," which were originally used by many venture capital and private equity funds to obtain loans from Silicon Valley Bank when they set up deposit accounts.

Some of Silicon Valley Bank's customers said they had asked First Citizens Bank if their loans could be offset with funds from their Silicon Valley Bank Cayman branch accounts.

A spokesperson for First Citizens Bank said that it was "legally impossible" to offset loans with deposits originally held in Silicon Valley Bank because First Citizens Bank owns the loans, while the deposits in the Cayman Islands are held by Silicon Valley Bank's former holding company, Silicon Valley Bank Financial Group.

However, some customers said that First Citizens Bank had told some customers that they were willing to extend the time for repayment.

In addition, last month, some of Silicon Valley Bank's Asian customers were informed that First Citizens Bank would no longer approve requests for additional loans.

First Citizens Bank said:

We did not retain Silicon Valley Bank's business in Asia, which is the basis for no longer increasing related loan quotas.

According to a Silicon Valley Bank customer, the bank had earlier suggested that foreign investment companies with funds registered in the Cayman Islands open bank accounts in the Cayman Islands rather than in the United States.

The FDIC has informed depositors at Silicon Valley Bank's Cayman branch that they will be treated as general unsecured creditors, and customers must submit claims by July 10 of this year. Claims that are not submitted in a timely manner will not be accepted. According to FDIC regulations, the order of bankruptcy liquidation first protects insured depositors, followed by uninsured depositors, then creditors, and finally shareholders. The compensation result will be determined based on the FDIC's final asset liquidation situation. Former FDIC official Joseph Lynyak discussed Silicon Valley Bank's overseas clients:

They are being squeezed from both sides, losing deposits but still needing to repay loans.

Lynyak said that technically, the FDIC could retain customers' loans at First Citizen Bank and find a way to maintain their rights to transfer funds from deposit accounts to these loans at Silicon Valley Bank's Cayman account. He added that this would allow the FDIC to allow these customers to deposit money to repay their loans. He said:

This is a policy decision that the FDIC must make. In this case, they can be flexible and do what they think is appropriate.

However, according to a regulation passed by the FDIC in 2013, deposits in foreign branches of US banks are not considered deposits under the Federal Deposit Insurance Act, with only a few exceptions.

Neither the FDIC nor the Cayman Islands Monetary Authority has disclosed how much money was deposited in Silicon Valley Bank's Cayman branch when it collapsed. The bank's annual report last year stated that as of the end of 2022, Silicon Valley Bank's foreign deposits were $13.9 billion.

Earlier, the Cayman Islands Monetary Authority hired lawyers to evaluate its legal options, and a government official recently told some affected Asian depositors at Silicon Valley Bank that the agency is looking for ways to help them.

However, the Cayman Islands does not have an institution equivalent to the US FDIC, so it is difficult to effectively protect depositors' interests in the event of a bank failure.

Earlier, FDIC Chairman Martin Gruenberg told a Senate Banking Committee hearing that the FDIC has the authority to investigate and hold bank directors, executives, professional service providers, and other affiliated parties responsible for losses to the bank and their improper conduct in bank management. At the same time, the collapse will result in losses for shareholders and unsecured creditors. This means that overseas depositors who are considered "general unsecured creditors" may face the possibility of deposit losses.

Some US lawyers believe that the FDIC only protects the interests of domestic depositors, and foreign depositors will bear part of the losses caused by the bankruptcy of Silicon Valley Bank. Considering that the FDIC previously estimated that the collapse of Silicon Valley Bank would cause losses of about $20 billion to its Deposit Insurance Fund (DIF), it is clear that depositors will face pressure to shrink their deposits as they enter the liquidation phase.