By guest author Andrew Ackerman from the Wall Street Journal.
First Citizens Bancshares Inc., FCNCB 0.75%increase; green up pointing triangle one of the nation’s largest regional banks, is buying large pieces of Silicon Valley Bank more than two weeks after the lender’s collapse sent tremors through the banking system.
The Federal Deposit Insurance Corp. said First Citizens is acquiring all of Silicon Valley Bank’s deposits, loans and branches, which will open Monday morning under the new ownership.
The purchase includes USD 56.5 billion in deposits and about USD 72 billion of SVB’s loans at a discount of USD 16.5 billion. Some USD 90 billion of SVB’s securities will remain in receivership.
Regulators took control of Santa Clara, Calif.-based SVB on March 10. The collapse sparked a panic that led to the weekend failure of Signature Bank and a dramatic intervention by financial regulators aimed at easing fears that depositors would flee smaller lenders.
The sale represents a milestone in regulatory efforts to clean up after two of the largest bank failures in history, at a time when investors are on edge about the health of the global financial system.
Shares of First Citizens surged more than 40% shortly after the opening of trading Monday. Shares of other regional banks including First Republic Bank, PacWest Bancorp and Western Alliance Bancorp were also higher.
First Citizens, based in Raleigh, N.C., was the 30th-largest U.S. bank as of Dec. 31, 2022, with USD 109 billion in assets, according to the Federal Reserve. Monday’s deal would put the lender in the top 25 U.S. banks in terms of assets.
The FDIC agreed to share any of First Citizens’ losses or potential gains on SVB’s commercial loans. Overall, the FDIC estimated the failure of SVB will cost a federal insurance fund it oversees about USD 20 billion, or roughly 10% of the bank’s assets before its failure.
“We look forward to building relationships with our new customers and positioning our company for continued success as we affirm our commitment to support the integrity of our nation’s banking system,” First Citizens Chief Executive Frank Holding Jr. said in a news release.
On top of the loss-sharing agreement, the FDIC will help finance the deal with a five-year, USD 35 billion loan. The agency also is providing a USD 70 billion line of credit to help cover potential deposit flight.
“It looks to me like a pretty substantial support network around this transaction,” said Alexander Rolfe, a former FDIC official who is now a consultant. That could set a precedent for future deals, he said.
The worries about American banks have centered on regional lenders that are perceived to be subject to the threat of deposit flight. Both SVB and Signature had large amounts of uninsured deposits—or customers with more than the standard insurance cap of USD 250,000 per depositor.
First Republic Bank, a San Francisco lender that also has a large uninsured deposit base, has been in the crosshairs despite multiple efforts to bolster its health. The bank has hired advisers to consider its options, but its bonds continue to trade at distressed levels.
Officials both in the U.S. and in Europe have taken several steps to attempt to shore up confidence in the global financial system. The U.S. moved to back uninsured depositors of Signature and Silicon Valley Bank following their failure, in a bid to ease the anxieties of similar depositors at other banks. The FDIC last week sold “substantially all” of the deposits and some of the loans of Signature Bank to a unit of New York Community Bancorp Inc.
Swiss officials a week ago engineered a takeover of troubled Credit Suisse Group AG by its rival UBS Group AG, following a period of intense customer flight from Credit Suisse that raised concerns about the entire Swiss economy. Afterward, officials said they believed banks were safe and sound.
On Friday, shares of German lender Deutsche Bank AG tumbled as much as 15% before closing 8.5% lower in Frankfurt, ending a day of declines for many of the largest European banks. The reason for the selloff wasn’t entirely clear, numerous investors said, given Deutsche Bank’s strong recent profitability and relatively low risk profile. Some said the declines reflected a mentality left over from the financial crisis.
At the same time, deposits continued to depart smaller U.S. banks following a surge in inflows during the Covid-19 pandemic. The outflows have gone in part to the largest U.S. lenders, many of which are viewed as enjoying implicit government backing. The outflows also reflect, in part, the higher rates offered by money-market funds and short-term Treasury debt as the Federal Reserve has sharply raised interest rates in a bid to quell high inflation.
Silicon Valley Bank failed because its core business of banking venture-capital firms and their startups was bleeding funds, creating a continuing cash need. The bank had invested heavily in long-term bonds whose value was badly hurt by the Fed’s interest-rate increases over the past year, meaning it could sell them only at a loss.
When SVB tried to raise cash anyway, its depositors, largely business customers whose accounts were well above the standard USD 250,000 FDIC insurance limit, fled. Uninsured depositors across the system took notice and several other similarly situated midsize banks such as Signature and First Republic, came under scrutiny.
SVB’s implosion marks the biggest test to date of the post-financial-crisis regulatory architecture designed to force banks to curtail risk and monitor it more closely. Officials have sought to reassure investors that the system remains strong.
“Fundamentally, the banking system is sound,” said Neel Kashkari, president of the Federal Reserve Bank of Minneapolis, speaking on CBS’ “Face the Nation” on Sunday. “The banking system has a lot of capital to be able to withstand these pressures.”
Risks to SVB’s financial condition were apparent months before its failure. The bank’s parent company disclosed that the market value of its held-to-maturity bonds was USD 15.9 billion less than their balance-sheet value at the end of September 2022. That gap was slightly more than SVB’s USD 15.8 billion of total equity at the time, a measure of the bank’s net worth.
Regulators will likely spend months, if not years, getting to the bottom of what happened at SVB and why its banking supervisors didn’t move quickly or decisively enough to stop its problems from snowballing into a crisis.
The Fed, FDIC and Treasury Department appear to have limited the contagion by moving on March 12 to use emergency powers to guarantee uninsured deposits at SVB and Signature, while also setting up a new Fed lending program to allow banks to meet withdrawal requests.
Fed Chair Jerome Powell has unveiled an internal Fed review of what went wrong, to be completed by May. Lawmakers plan to hold hearings beginning Tuesday.
Already, the Fed is rethinking a number of its own rules related to midsize banks in response to the tumult, potentially extending restrictions that currently only apply to the biggest Wall Street firms. A raft of tougher capital and liquidity requirements are under review, as well as steps to beef up annual “stress tests” that assess banks’ ability to weather a hypothetical recession, The Wall Street Journal reported earlier this month.
The rules could target companies with between USD 100 billion and USD 250 billion in assets, which at present escape some of the toughest requirements. There are about two dozen banks within the range.
The Fed was already conducting a review of a number of its regulations, led by Michael Barr, the central bank’s point person on banking supervision. But this month’s banking crisis has caused officials to re-evaluate parts of their review and to refocus their efforts on smaller institutions.
Corrections & Amplifications
First Citizens will assume USD 56.5 billion in deposits from Silicon Valley Bank. An earlier version of this article incorrectly said First Citizens was assuming USD 119 billion in deposits. (Corrected on March 27)