Why First Citizens got a $16.5 billion discount for acquiring Silicon Valley Bank

Shares of regional banks rose Monday after regulators announced a sale of Silicon Valley Bank’s deposits and loans, a deal that shows how much government support will be needed to close new deals during this banking crisis.

The buyer, First Citizens Bancshares (FCNCA), was up 47% by 11:15 a.m. ET. Shares of another troubled regional lender, First Republic (FRC), were up 15% as that San Francisco lender considers a number of options to stabilize its situation. PacWest Bancorp (PACW) and Western Alliance Bancorp (WAL), two other California lenders that came under pressure from investors following the bankruptcy of Silicon Valley Bank, also rose in early trading.

The bankruptcies of Silicon Valley Bank and New York’s Signature Bank earlier this month will be publicly investigated Tuesday at a Senate Banking Committee hearing in Washington. Witnesses include Federal Deposit Insurance Corporation president Martin Gruenberg.

The chairman may receive questions about how his agency handled the Silicon Valley Bank auction. It took Mr. Gruenberg’s office about two weeks to find a buyer for parts of the bank, and the FDIC agreed to give First Citizens of Raleigh, N.C., a $16.5 billion rebate on $ 72 billion in loans and a promise to share any losses (or gains). ) on those loans in the future.

The FDIC said such a loss-sharing deal — a tactic also commonly used during the 2008 financial crisis when looking for buyers for failed banks — will maximize asset recovery by keeping them in the private sector.

First Citizens also decided not to take on an additional $90 billion in securities that the FDIC will now have to sell itself. Silicon Valley Bank plunged into bonds that are now worth much less as the Federal Reserve raises interest rates. A big question during the sale process was whether the bank’s investment portfolio would go for “pennies on the dollar or if it is unsaleable,” said a person familiar with the process.

The total blow to the FDIC’s Deposit Insurance Fund, the backstop for protected depositors at all banks, will be $20 billion. The FDIC is also extending a line of credit to First Citizens for “contingent liquidity purposes,” the bank said. FDIC will receive shares of First Citizens worth up to $500 million.

A sign from the First Citizens Bank in Durham, NC (AP Photo/Jonathan Drew)

FDIC made a number of similar concessions on March 19 when it found a buyer for portions of New York’s Signature Bank, which filed for bankruptcy on March 12. It gave the new owner, Flagstar Bank, a $12.7 billion discount off the purchase of $12.9 billion in loans. and kept another $60 billion in loans that Flagstar didn’t want.

Regulatory deal-making is the latest example of how much government intervention has been needed to date to bring the current banking crisis under control. Federal officials initially agreed to cover all depositors at Silicon Valley Bank and New York’s Signature Bank and release more liquidity at the Federal Reserve so banks could tap new funding if needed. Treasury Secretary Janet Yellen and Federal Reserve Chair Jerome Powell have agreed to consider additional steps if necessary.

Their aim was to contain panic and slow down the withdrawal of deposits from vulnerable regional banks. In the week ending March 15, small banks lost $120 billion in deposits, according to new data from the Federal Reserve. The top 25 banks gained $67 billion in deposits during the same period. Powell said last week that deposit flows had stabilized.

First Republic, which targets wealthy clients on both coasts of the US, was one of the banks that lost deposits during the initial uproar. In fact, 11 of the country’s largest banks decided to inject $30 billion in uninsured deposits to remedy that situation. There have been discussions about government support to make the lender more attractive to a buyer or potential investor, Bloomberg reports.

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