The recent collapse of banks in the US such as Silicon Valley Bank and Signature Bank – and the forced acquisition by UBS of ailing Credit Suisse – has rocked the financial world. Although Asia has been less affected, the crisis has also prompted a spate of lawsuits and created a range of legal ramifications that could last for years. George W Russell reports
The first class-action suits have rolled in over the recent banking turmoil in North America and Europe, and law firms say they are preparing for what could be years of litigation over the collapse of Silicon Valley Bank (SVB) and Signature Bank in the US, and the enforced merger of Credit Suisse with UBS in Switzerland.
The potential legal actions are wide-ranging – covering securities regulation and international treaties as well as insurance regimes, and contractual and statutory issues. Banks are also likely to engage law firms to ensure their adherence to compliance and regulatory mandates.
One of the biggest triggers has been the enforced write-down of USD17 billion in Credit Suisse’s Additional Tier-1 (AT1) notes. An AT1 is a capital instrument designed to absorb losses if a bank goes into the red, collapses, or has to be rescued by the state. These bonds can be converted into equity or written down to zero.
Several legal suits have been filed on behalf of the AT1 bondholders, which law firms say have attracted enthusiasm from potential plaintiffs.
“The response from interested parties has been immense,” says Thomas Werlen, managing partner for Switzerland at Quinn Emanuel Urquhart & Sullivan in Zurich, which is representing a group of AT1 bondholders.
“Quinn Emanuel’s teams have been working around the clock to answer questions from investors and to organise the formation of a group of plaintiffs willing to take legal action against the write-down, from small investors to some of the largest institutional and fund investors,” says Werlen.
He says the firm is looking at several actions, including “challenging the legality of the 19 March order” by the Swiss Financial Market Supervisory Authority, known as Finma. That day, Switzerland’s Federal Council enacted the Emergency Ordinance on Additional Liquidity Assistance Loans and the Granting of Federal Default Guarantees for Liquidity Assistance Loans by the Swiss National Bank to Systemically Important Banks.
The ordinance authorised Finma to order Credit Suisse to write down the AT1 capital. Other firms have also filed suit against the AT1 decision and the moves spooked markets, as investors feared the same could happen to AT1 debt in other banks, which is globally worth more than USD275 billion, according to Bloomberg data. New York-based Bragar Eagle and Squire alleged in a suit that Credit Suisse executives made “materially false and misleading statements regarding the company’s business, operations and compliance policies”. The Rosen Law Firm in New York and two Los Angeles-based firms, Glancy Prongay & Murray and Schall Law, have also instituted Credit Suisse-related actions.
The US bank collapses have also triggered lawsuits. Robbins Geller Rudman & Dowd in San Diego is suing on behalf of Signature Bank investors, arguing the bank’s statements on “the stability of its business model, diversified deposit mix and high level of capital” were “false”.
But some investors have told Reuters they were reluctant to join a court case that could take years, and the owner of one Hong Kong-based distressed debt fund says he has been approached by US law firms but is not interested.
Many lawyers have been supportive of the Swiss merger. “The UBS-Credit Suisse deal was vital and imperative to rescue Credit Suisse, without which its collapse would likely trigger a domino effect and destabilise global banks,” says Pan Tsang, a partner at Robertsons in Hong Kong.
One reason to save Credit Suisse was its importance outside Switzerland and the EU. “Credit Suisse was an important player in certain non-EU countries, including the US,” says Kevin Petrasic, a partner at Davis Wright Tremaine in Washington. “Thus the UBS-Credit Suisse deal helped avoid destabilising EU banks, while also helping to alleviate some of the destabilising pressures, and the cumulative effect and fallout from SVB and Signature on the global banking system generally.”
While the fallout from the banking crisis has so far avoided Asia, regulators, bankers, investors and lawyers are keeping a close eye on the region’s financial stability. The Asia-Pacific impact, while manageable, has been enough to send regulators scrambling for messages of support.
The Monetary Authority of Singapore and the Hong Kong Monetary Authority both issued statements saying Credit Suisse operations would continue as normal. Banks have also played down any knock-on effects. Asked whether US banking collapses would hit investors or customers in Hong Kong, HSBC chairman Mark Tucker said there was “no immediate impact”.
The Swiss write-down, however, has “weakened the attractiveness of AT1 bonds generally to investors”, says Tsang. Major banks in Japan, Singapore and Hong Kong are placing new AT1 bond deals on hold, according to a Financial Times report on 22 March. The write-down also hit regional bank shares across the region.
“Banks based in Asia, but with a global presence or rumoured to have large AT1 holdings, also suffered,” notes Alicia García Herrero, chief Asia-Pacific economist at Natixis Corporate and Investment Banking in Hong Kong, adding that Asia does not have “extreme cases with high reliance on AT1 bonds”.
Monetary policy could also be affected. Economists have said that with the US Federal Reserve slowing its pace of tightening following the domestic bank failures, Asian central banks are more likely to pursue their own policy based on local factors. “China’s economy and banking system are largely insulated from recent banking stress in developed market countries,” says Jacqueline Rong, chief China economist at BNP Paribas in Beijing. “The spill-over of global credit stress to China’s banking system currently looks limited.”
Law firms agreed that fallout would be minimal, with Tsang saying that serious repercussions in China, including Hong Kong, were unlikely, adding that the banking crises might produce regional benefits. “Investors may seek to diversify their portfolios and reduce their exposures in North America and Europe.”
Asian investors might also join the Credit Suisse litigation launched in the US. “We have heard from a handful of Asian institutional investors who have purchased Credit Suisse shares on the New York Stock Exchange,” says Lewis Kahn, managing partner of Kahn Swick & Foti in New Orleans.
“The largest concern we are hearing generally is about recoverability for shareholder losses, since Credit Suisse will no longer exist,” says Kahn. “Additional concerns revolve around the conversion of Credit Suisse equity into UBS equity and the impact on American depositary shares.”
Werlen, at Quinn Emanuel Urquhart & Sullivan, says the firm has also been approached by several Asia-based investors who suffered losses as a result of the AT1 write-down and the UBS-Credit Suisse merger. “Interested parties range from small to large investors such as sovereign wealth funds,” he says. “As a global law firm with offices inter alia in Asia, Switzerland and the US, we are able to assist these investors to pursue their claims.”
One contentious issue is the possibility of layoffs. While the US banks have little or no Asia presence, UBS and Credit Suisse employ about 23,400 people in the region, according to UBS’s latest annual report and figures from Credit Suisse’s website. About 120,000 people work at the combined group globally, and tens of thousands of job cuts are expected.
“We are likely to see a period of more conservative approaches to hiring in financial services in Asia, as the banking industry waits to see the scale of restructuring and downsizings that may flow from the recent turmoil,” says Helen Colquhoun, a partner and head of the Asia employment practice at DLA Piper in Hong Kong.
Crisis and collapse
It was perhaps ironic that SVB, an institution that lent money to cutting-edge technology startups, should fall victim in part to a centuries-old phenomenon – the bank run. But the current turmoil among financial institutions has a complex background and law firms warn that ramifications could last for years.
For several weeks this year, a banking crisis threatened to unravel the global financial system. On 10 March, the US-based SVB went under, becoming the second-biggest bank failure in the country’s history. Its liquidity had diminished to the point where it could not fund withdrawals.
Confidence in the USD212 billion SVB had deteriorated as the bank had put the billions of dollars invested via tech venture capital into long-term US Treasury bonds. But when interest rates began to rise after years, and depositors demanded higher returns, the bank was forced to sell the bonds at a loss. That caused panic among investors, who took out an estimated USD42 billion.
Two days after SVB collapsed, the USD110 billion Signature Bank was closed by the New York State Department of Financial Services, and the Federal Deposit Insurance Corporation (FDIC) was named its receiver. First Citizens Bank, based in Raleigh, North Carolina, acquired most of Signature Bank’s assets, while its New York state assets were later sold, under FDIC supervision, to a New York Community Bankcorp subsidiary.
Petrasic, at Davis Wright Tremaine, says the New York state action was significant for several reasons. “First, US banking law provides that an institution is systemically significant if it has assets of greater than USD250 billion. Prior to the appointment of the FDIC as receiver for Signature, total assets in receivership from SVB equalled approximately USD209 billion, which of course is not systemically significant.”
Thus, he adds, “there was significant hesitancy” by regulators to conclude that the systemic risk exception was available for a bank not deemed systemically significant. “However, when Signature was put into receivership, which appeared to be a direct result of the fallout from SVB, the total assets of the two institutions combined was comfortably over USD300 billion,” he notes.
“The First Citizens-Signature deal happened first, even though Signature was put into receivership several days after SVB, and was important because it gave the FDIC an option for a resolution that did not involve one of the large US banks, which the FDIC was trying to avoid for policy reasons. As a result, the Signature deal facilitated a much quicker, cleaner – both practically and politically – and efficient resolution of both banks.”
The crisis was such that US President Joe Biden held an urgent media conference in the White House on 13 March. “Americans can have confidence that the banking system is safe,” he said. “Your deposits will be there when you need them.” But the immediate aftermath of the two crashes was falling regional bank share prices, knock-on effects such as the rescue of San Francisco-based First Republic Bank, and hundreds of billions of dollars moved from banks to US government-backed money market funds.
Across the Atlantic, the biggest shock was yet to come. On 20 March, the 167-year-old Credit Suisse was swallowed by rival UBS in a takeover brokered by the Swiss government and regulators. Credit Suisse investors, spooked in part by the events in the US, were withdrawing up to USD10 billion a day. The deal ended years of speculation about the Swiss bank’s future, especially after a disastrous 2021 in which it lost USD10 billion of investments in the bankrupt Greensill Capital, and another USD5 billion from the collapse of Bill Hwang’s Archegos Capital Management.
“Credit Suisse found itself in something of a death spiral, which it was unable to get out of,” says Mark Dowding, chief investment officer at RBC BlueBay Asset Management in London. “Its fate was then sealed, in the absence of any support from its shareholder base, and following a rather lukewarm offer of liquidity support from the Swiss authorities.”
What the future holds
For many law firms, the Credit Suisse takeover was a boon. Freshfields Bruckhaus Deringer advised UBS on its acquisition. Cleary Gottlieb Steen & Hamilton advised Credit Suisse, a long-standing client, while Sullivan & Cromwell advised on the sale of some of Credit Suisse’s securitised products just before the takeover.
In the US, Davis Polk & Wardwell advised SVB on its sale to First Citizens, as well as advising 11 banks that recapitalised First Republic in an effort to rescue the regional lender. Slaughter and May, meanwhile, advised Silicon Valley Bank UK, the assets of which were acquired by HSBC.
Law firms are expected to hold a key role in calming markets and investors since the crisis, the long-term ramifications of which are difficult to ascertain at this stage. Tech companies quickly felt aftershocks, say lawyers. “The FDIC receiverships of SVB and Signature Bank have caused certain early-stage companies to face potentially crippling near-term liquidity issues,” Morrison & Foerster New York and Chicago-based partners Seth Kleinman, Jennifer Marines and Lorenzo Marinuzzi wrote in a client note. “These liquidity issues may result in a company becoming insolvent.”
As well as the securities-related litigation brought by Quinn Emanuel Urquhart & Sullivan and other firms, lawyers say other claims could be pending. “Although the long-term impacts are yet to be seen, there is always a risk of the FDIC bringing claims against former directors and officers, or shareholders of publicly traded banks bringing securities class action claims,” Reynolds Porter Chamberlain (RPC) London professional and financial risks group partner James Wickes and his colleagues wrote in a recent advisory.
One sector facing concern is insurance. “Among other signs of potential trouble ahead, we expect financial institutions and directors’ and officers’ insurers will be closely following the cost of insuring against bond defaults for their financial institution clients,” RPC said.
Will Reddie, a partner with Holman Fenwick Willan in London, says insurance technology companies (insurtechs) have been left vulnerable by the SVB collapse. “There could be direct effects – for example, a number of insurtechs banked with SVB,” says Reddie. “While we understand that a large proportion of SVB deposits were uninsured, it appears that all deposits will be protected. This should mitigate the long-term direct effect on these insurtechs, but might not prevent short-term cashflow issues.”
He expects there will be less appetite to lend to insurtechs, many of which are already struggling to secure new rounds of funding. “This in turn could lead to failures of insurtechs, or to a surge in mergers and acquisitions activity, as insurtechs struggling for funds are purchased at a reduced price by opportunistic buyers.”
A move towards any consolidation in the financial sector is likely to benefit bigger players, say lawyers. “I anticipate that the biggest banks are going to get bigger as depositors and fund managers relocate deposits to manage their risk exposures,” says Tsang, at Robertsons. “Local and regional banks with smaller balance sheets may experience large outflows and financial difficulties, which could lead to a greater number of mergers and takeovers of distressed banks.”
In general, the Asian banking sector appears to be in good health. “Banks in the region are also well capitalised and non-performing loan ratios are low. But that is not to say all is clear,” says Gareth Leather, senior Asia economist at Capital Economics in Singapore. “In particular, loan-loss-absorption capacity in some big banks in India, Taiwan and South Korea is relatively low. And we will be keeping a close eye on risks from the property sector. Korea and Vietnam look the most exposed.”
While lawyers do not think that the current situation rises to the level of a financial crisis, they say there are certainly lessons to be learned from recent events. “One area of intense focus is likely to be the impact of social media on the banking system and, particularly, the potential to create digital or online banking runs,” says Petrasic, at Davis Wright Tremaine.
But law firms caution there is only so much they can do to help ensure stability. “We regularly advise our bank clients about their respective obligations,” says Joseph Lynyak III, a partner at Dorsey & Whitney in Washington. “Judgmental determinations about the adequacy of compliance, however, are business decisions that are the province of bank management, audit and accounting functions, and the subjective judgment by bank regulators.”