Why First Citizens got a $16.5 billion discount for taking over Silicon Valley Bank [Video]

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Stocks of regional banks surged Monday after regulators announced a sale of Silicon Valley Bank’s deposits and loans, an agreement that demonstrates how much government assistance will be required to stoke new deals making during this banking crisis.

The buyer, First Citizens Bancshares (FCNCA), was up 47% at 11:15 am ET. The stock of another troubled regional lender, First Republic (FRC), was 15% higher 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 investor pressure following Silicon Valley Bank’s failure, were also up in early trading.

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

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

The FDIC said that such a loss-sharing agreement—a tactic that was also used frequently during the 2008 financial crisis when trying to find buyers for failed banks—will maximize recoveries on the assets by keeping them in the private sector.

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

The total hit to the FDIC’s deposit insurance fund, the backstop for protected depositors at all banks, will be $20 billion. The FDIC is also providing a line of credit to First Citizens for “contingent liquidity purposes,” the bank said. FDIC gets shares of First Citizens valued up to $500 million.

A First Citizens Bank sign is seen in Durham, North Carolina, on Monday, March 27, 2023. North Carolina-based First Citizens will buy Silicon Valley Bank, the tech industry-focused bank that collapsed earlier this month.  (AP Photo/Jonathan Drew)

A First Citizens Bank signs in Durham, NC (AP Photo/Jonathan Drew)

The FDIC made some similar concessions on March 19 when it found a buyer for parts of New York’s Signature Bank, which went down on March 12. It gave the new owner, Flagstar Bank, a discount of $12.7 billion on its purchase of $12.9 billion in loans and kept another $60 billion in loans Flagstar didn’t want.

The deal making by regulators is the latest example of how much government intervention has been required so far to get 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 free up more liquidity at the Federal Reserve so that banks could tap new financing if needed. Treasury Secretary Janet Yellen and Federal Reserve Chair Jerome Powell have agreed to consider additional steps if needed.

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

First Republic, which caters to wealthy customers on both coasts of the US, was among the banks that lost deposits during the initial tumble. In fact, 11 of the nation’s biggest banks decided to inject $30 billion in uninsured deposits to take that situation around. There have been discussions about government backing to make lenders more attractive to a buyer or potential investor, Bloomberg has reported.

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