NEW YORK (AP) – First Citizens Bank is buying much of Silicon Valley Bank (SVB), the tech-focussed financial institution whose failure this month set off a chain reaction that helped rattle faith in banks around the world.
The Federal Deposit Insurance Corp (FDIC) and other regulators had already taken extraordinary steps to head off a wider crisis by guaranteeing all depositors in SVB and another failed institution, Signature Bank, could get their money, even if they had more than the USD250,000 limit insured by the FDIC.
The First Citizens deal announced late on Sunday, at least initially, seemed to achieve what regulators have sought: a shoring up of trust in other regional banks across the country.
Stock prices strengthened for First Republic, PacWest Bancorp and other banks that investors have spotlighted as most at risk for a sudden exodus of nervous customers, similar to the run that caused SVB’s failure.
The sale underscores that SVB’s assets do have value and helps to rebuild some faith in the banking sector, investors and experts said. But they also said it doesn’t by itself provide an immediate all-clear for other banks following the second- and third-largest United States (US) failures in history. Restoring trust and figuring out exactly what pain other banks may ultimately feel will take more time.
“The financial system is like a boat,” said senior fellow at the Brookings Institution and former official at the Treasury Department Aaron Klein. “SVB’s collapse has rocked the boat, but the ship is righting itself.”
“The news today is good, it’s a positive step forward to digging out of the hole of the collapse that SVB put us in,” he said. “But losses are substantial: USD20 billion is real money, even in Washington.”
That USD20 billion is referring to the loss the FDIC said its deposit insurance fund could take because of SVB’s failure. As part of the deal with First Citizens, the FDIC agreed to share in potential losses or gains coming out of some of the loans purchased from SVB.
The USD20 billion wouldn’t come from taxpayers. It would instead come from an FDIC fund that banks pay into.
But banks could ultimately charge slightly more in fees or pay less in interest to their customers to help make up for it, Klein said.
First Citizens agreed to buy about USD72 billion of SVB’s assets at a discount of USD16.5 billion. About USD90 billion in assets remain in FDIC’s receivership. The FDIC also received rights related to First Citizen BancShares stock that could be worth up to USD500 million.
Since the banking crisis began in mid-March, officials from the Treasury Department to the Federal Reserve have said they still see the system as sound and secure.
Fellow at the Roosevelt Institute and former attorney at the FDIC Todd Phillips said extraordinary actions by regulators back up those statements.
Besides guaranteeing deposits at SVB and Signature Bank, regulators also announced a programme to allow other banks to raise cash more easily. That has the overall banking system on more stable footing in his mind, even if investors are sending some bank stocks on wild runs.
“What DC is thinking and what New York is thinking about everything that’s going on is very different,” Phillips said.
“New York appears to be very concerned that there are more banks that may fail and that shareholders will be wiped out, whereas DC is much more concerned about the health and safety of the financial system.”
He said his general message to people is: “Your deposits will be fine. You will be fine. This really is a crisis of large institutional shareholders of banks that are worried” about losing their money.
Phillips said the next big step will be to see if Congress does anything to broaden deposit protections for customers at banks.
Chief investment officer of PNC Asset Management Group Amanda Agati looked at the banking industry’s struggles through the eyes of an investor, and saw more pain coming. She just doesn’t know how much and from where.
Interest rates have leaped over the last year as the Fed tries to get high inflation under control, and that’s squeezing the system and causing weak links to crack.
“It’s highlighting increased stress in the system,” she said, and it could lead banks to lend less, which would put more pressure on the economy.
The Federal Reserve just raised interest rates again last week, and Agati said what it does going forward will likely have a greater impact on markets and the economy than which bank could be next to see its stock drop.
As for the First Citizens-SVB deal, she said: “I don’t think it moves the needle at all in terms of the market overall.”
SVB, based in Santa Clara, California, collapsed on March 10 in a bank run after customers rushed to withdraw money due to fears over the bank’s solvency.
It was the second-largest bank collapse in US history after the 2008 failure of Washington Mutual. Two days later, New York’s Signature Bank was seized by regulators in the third-largest bank failure in the US.
First Citizens Bank, which was founded in 1898, saw its shares surge following the deal’s announcement. They were up a little more than 55 per cent in late-day trading.
