A group of Silicon Valley Bank customers have filed a petition to wind up the moribund institution’s Cayman branch in an effort to recover some US$38 million in funds.
While the bank’s American customers were bailed out by the US government, international clients lost their deposits when the bank collapsed earlier this year.
In an unfortunate double-whammy for those clients, the Wall Street Journal reported that they had “lost their money but kept their debts” as a consequence of a deal to sell the bank’s loan book to North Carolina’s First Citizens Bank & Trust.
Now those investors – understood to be led by venture capital funds in Hong Kong and China – are fighting back in the Cayman Islands courts.
A petition was filed on 13 June by Campbell’s law firm with the Financial Services Division of the Grand Court, indicating that the bank’s Cayman branch was “unable to pay its debts” and “ought to be wound up”.
The petition requests that liquidators are appointed in an effort to retrieve the lost funds, which it indicates amount to an aggregate of just under US$38 million.
“At the date of this Petition, the Branch has neither paid the outstanding sums, nor provided security to the satisfaction of the Petitioners,” the court document states.
The depositors saw their accounts wiped to zero when the US Federal Deposit Insurance Corporation took control of all Silicon Valley Bank’s assets following its collapse in March.
Though US deposit insurance only guarantees funds up to $250,000, customers were bailed out to the full amount of their deposits amid fears of a wider panic in the financial system. Neither the insurance nor the bailout terms applied to investors with the Cayman branch, however.
According to the Wall Street Journal, the Cayman depositors were informed they would be treated as ‘unsecured creditors’ meaning there was no guarantee they would get any of their money back.
The collapse of Silicon Valley Bank and the fate of its depositors has put international focus on the absence of deposit insurance or any bail out mechanisms in the Cayman Islands.
“The recent collapse of SVB has put a spotlight on the vulnerability within the Cayman Islands banking system,” Mitchell Mansfield, a restructuring managing director at Kroll said in the Wall Street Journal article.
“Without such a program, depositors in the Cayman Islands are exposed to heightened risk, as their deposits are not backed by a government guarantee.”
Compass columnist Simon Cawdery raised a similar issue in his analysis of the California bank’s collapse.
“In Cayman, if a bank fails, your money isn’t guaranteed, by anybody,” he wrote.
However, he told the Compass, it would not make sense for the Cayman Islands to use local taxpayer funds to create deposit insurance for overseas hedge funds. Any bailout mechanisms, in Cayman, would need to be for local depositors, perhaps restricted to Class A banks, he said.
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