Silicon Valley Bank customers whose deposits were seized by U.S. authorities after the lender’s collapse are fighting back.
Customers who held money in the bank’s Cayman Islands branch found their accounts wiped down to zero after SVB collapsed in March, because a U.S. move to guarantee deposits didn’t apply to them. Their pain was compounded when they found out First Citizens BancShares had acquired their loans from SVB—meaning they had lost their money, but kept their debts.
Several firms including venture-capital funds in Hong Kong and mainland China have pushed back, filing a petition in a Cayman Islands court last week to initiate a windup procedure of the former U.S. bank’s branch there. The depositors held around $38 million in their Caymans SVB accounts, according to the petition.
The depositors hope the move will increase their chances of getting their money back from the Federal Deposit Insurance Corp., which seized their funds, according to people familiar with the matter.
The petition, filed by law firm Campbells to the Cayman court on June 13, argues that it is “just and equitable” for SVB’s Cayman Islands branch to be wound up, since the branch was unable to pay debt.
The petition also asks the court to approve the appointment of official liquidators to help find ways to retrieve the funds. The liquidators will be able to investigate and keep depositors informed and to ensure they are treated fairly, said Paul Kennedy, a partner at Campbells.
A court hearing on the petition will be held on June 29, the document said.
The Cayman Islands Monetary Authority, the islands’ main financial regulator, is also considering its legal options, The Wall Street Journal previously reported. André Ebanks, the Caymans’ minister of financial services and commerce, met depositors in Hong Kong last month and told them he was working on it, people attending the meeting said.
When the FDIC took the deposits of the failed lender’s Cayman Islands branch, it informed the account holders they would be treated as general unsecured creditors in SVB’s receiverships, the depositors said. Foreign deposits weren’t covered by U.S. deposit insurance, the FDIC said, adding that they could seek compensation by filing claims by July 10.
A spokeswoman at First Citizens previously told the Journal it wasn’t legally possible for First Citizens to set off the debts SVB’s Cayman customers held against their deposits, since the bank doesn’t hold those deposits. But First Citizens has told some of these customers that it is open to giving them more time to repay the debt, the customers said.
The Cayman Islands doesn’t have an equivalent to U.S. federal deposit insurance, which officially covers up to $250,000 per bank account.
“The recent collapse of SVB has put a spotlight on the vulnerability within the Cayman Islands banking system,” said Mitchell Mansfield, a restructuring managing director at Kroll. “Without such a program, depositors in the Cayman Islands are exposed to heightened risk, as their deposits are not backed by a government guarantee.”
To minimize the risk of losing access to deposits in a bank failure, Mansfield said diversifying funds across different banks and jurisdictions, choosing a reputable bank and paying close attention to financial statements and credit ratings of banks could help.
SVB had branches in Germany and Canada that only made loans and didn’t take deposits. It also had a bank subsidiary in the U.K., which was taken over by HSBC and had the equivalent of about $8.5 billion in deposits on March 10 of this year.