By Lawrence White, Sinead Cruise, Pablo Mayo Cerqueiro and Stefania Spezzati
LONDON (Reuters) - The swift collapse of Silicon Valley Bank in the United States, the nation's biggest bank failure since the financial crisis, initially caught Britain's regulators off guard. But within hours on Friday evening it was clear the window to rescue SVB's UK arm was tight.
Conversations with eight people involved in the discussions reveal the frantic nature of SVB UK's final hours, with at least half a dozen banks looking over the lender's numbers.
On Monday, HSBC, Europe's largest bank with a balance sheet of almost $3 trillion, announced it was buying SVB UK for less than the price of a cup of coffee, emerging as a last-minute white knight after less than 24 hours spent scrutinising its books.
With assets of around 5.5 billion pounds and deposits of around 6.7 billion pounds, SVB UK is a minnow compared to HSBC. But concerns that SVB's potential failure could reverberate throughout the UK's start-up industry resulted in a hasty deal, sealed by deep pockets.
"Whether HSBC's acquisition proves to be successful will largely come down to the asset quality of the loan book, which cannot be assumed to be good, given the early-stage nature of many of the borrowers," said Jerry del Missier, former Chief Operating Officer at Barclays, and now Chief Investment Officer at Copper Street Capital.
While at least one bidder submitted a price above the symbolic one pound ($1.21) that HSBC offered, according to a source, HSBC was preferred because its size and resources meant it would be a more stable owner.
After a run on deposits, the Bank of England kick-started a scramble to salvage SVB UK while seeking insolvency in the event it could not find a buyer.
That complicated the rescue because NatWest, which operated as SVB UK's clearing bank in Britain, had stopped processing its transactions, a source with knowledge of the matter said.
The situation was urgent because SVB UK had lost almost half of its deposits in the 48 hours leading up to its rescue, the source said.
The U.S. Federal Deposit Insurance Corporation had also shut off access to the parent company's technology platform, the source said, meaning the potential bidders and treasury officials called both the FDIC and NatWest over the weekend to get SVB UK running again.
The FDIC did not respond to a request for comment, while NatWest declined to comment.
By late on Saturday afternoon, officials had contacted potential bidders to look more closely at SVB UK, giving them access to secure online vaults containing the lenders' financials, five sources with knowledge of the matter said.
As the crisis deepened, on Sunday morning finance minister Jeremy Hunt sought to reassure Silicon Valley Bank's customers in Britain that the government was working on a solution.
Banks including Lloyds Banking Group, NatWest Group, Bank of London and OakNorth examined the books to see if an emergency deal could be reached, sources told Reuters.
At least one British bank was put off by some of the lending to the riskier startup sector which the U.S.-owned lender offered, an executive at the bank told Reuters.
For another bank, 75% of the book consisting of loans to private equity and venture capital funds was considered high quality, representing an opportunity.
Still, Treasury officials also continued to work on a "Plan B" in case a sale fell through, which could have seen Silicon Valley Bank UK broken up if no single buyer emerged, multiple sources involved with the talks said.
30 MINUTE DEADLINE
British Prime Minister Rishi Sunak battled inconsistent WiFi to remain in contact with Bank of England Governor Andrew Bailey and finance minister Jeremy Hunt during a more than 15 hour flight to San Diego as the talks wore on. HSBC's team including CEO Noel Quinn and UK CEO Ian Stuart began closer scrutiny of SVB UK that afternoon, a source familiar with the matter said.
Boutique investment bank Robey Warshaw - which has previously advised HSBC in its defence against a break-up call by its biggest shareholder - was drafted in an adviser by the bank over the weekend to help them on the SVB UK deal, a source with knowledge of the matter said.
By early evening on Sunday officials from the Treasury gave potential bidders a final 30 minutes to submit their offers, one of the sources directly involved in one of the bids said.
Officials from the Bank of England and Treasury along with board members from SVB UK were then locked in talks.
Meanwhile, in the U.S., regulators moved to protect SVB depositors, as well as implementing wider measures to shore up confidence in the banking system.
RISKS AND LEAKS
HSBC's CEO Quinn was attracted by the potential to bring on at a stroke some 3,000 high-growth technology and startup clients, a source familiar with his thinking told Reuters.
The purely nominal purchase price and SVB UK's underlying health meant the deal also made financial sense, the source said.
Still, HSBC could struggle to accurately value and run those loans due to their niche nature, said Xavier Van Hove, managing director of Nighthawk Partners, a specialist venture debt lender. HSBC also plans to inject 2 billion pounds of liquidity into SVB UK, a spokesperson for HSBC said.
Final preparations continued through Sunday night as the deal needed an exemption to Britain's ringfencing rules. Some of SVB UK's business customers are outside the UK while HSBC's UK ring-fenced business is meant to handle only British-based customers up to a certain size.
A spokesperson for the UK Cabinet Office referred comment to the Treasury Department. The Bank of England declined to comment. Advisory firm Rothschild, which advised SVB UK according to sources, also declined to comment.
The takeover and the US measures did little to assuage investors on Monday that the worst is over.
European bank shares saw their biggest rout since the start of Russia's invasion of Ukraine, with the STOXX index of 600 lenders falling nearly 6%.
($1 = 0.8296 pounds)
(Reporting By Lawrence White, Sinead Cruise, Amy-Jo Crowley, Stefania Spezzati, Iain Withers, Pablo Mayo Cerqueiro, additional reporting by Elizabeth Piper in San Diego; Editing by Anna Driver)