Lambert here: A good test of my theory that financial institutions with “First” in their names are like restaurants named “Mom’s.
By Wolf Richter, editor of Wolf Street. Originally published at Wolf Street.
The FDIC is a liquidation machine. And so it announced on Sunday night that it has made a purchase and assumption deal with First-Citizens Bank in Raleigh, North Carolina. First-Citizens will buy a big portion of the assets of Silicon Valley Bridge Bank and assume all its deposits (a liability).
The FDIC had created the bridge bank to take on the assets and liabilities, including all deposits, of Silicon Valley Bank, which collapsed on March 10.
On Monday morning, March 27, the 17 branches of Silicon Valley Bridge Bank will open as First-Citizens Bank. Depositors of Silicon Valley Bridge Bank will automatically become depositors of First-Citizens Bank. All transferred deposits will be insured by the FDIC “up to the insurance limit,” the FDIC said.
Customers of Silicon Valley Bridge Bank should continue to use their current branch until First-Citizens Bank tells them that conversions of the banking systems have been completed to allow full-service banking at all of Citizen Bank’s other branch locations. the FDIC said.
Here’s What Was Included in the Deal.
On the day that Silicon Valley Bank collapsed and the FDIC became its receiver – March 10, 2023 – it had $167 billion in assets and $119 billion in deposits, along with some other liabilities. This is what the FDIC took over.
Today’s deal between the FDIC and First-Citizens includes:
- First-Citizens assumes all deposits (a liability).
- First-Citizens gets $72 billion in assets at a discount of $16.5 billion.
- The FDIC gets equity appreciation rights in First Citizens BancShares, Inc. common stock “with a potential value of up to $500 million.”
- A loss-share transaction on the commercial loans that First-Citizens purchased from the bridge bank; both parties will share in the losses and potential recoveries of the loans in the deal.
- First-Citizens will assume all loan-related financial contracts.
A $20 Billion Loss to the FDIC’s Deposit Insurance Fund.
The FDIC will sell the remaining $90 billion in securities and other assets over time.
The FDIC estimated that the total cost of the SVB collapse to the Deposit Insurance Fund will be $20 billion, after selling the remaining $90 billion in securities and other assets. This includes the additional costs of covering all deposits, even those that are above the FDIC limits.
Signature Bank’s Cost to the Deposit Insurance Fund Is Only $2.5 Billion.
On March 20, the FDIC announced that it had sold a big loan portfolio of the collapsed Signature Bank to New York Community Bancorp, which also assumed nearly all of the deposits – except $4 billion of deposits by crypto customers that the FDIC provided directly to those customers. The 40 branches of Signature Bank opened on Monday, March 20, as branches of New York Community Bancorp’s Flagstar Bank.
The FDIC said at the time that the total cost to the Deposit Insurance Fund will amount to only $2.5 billion.
When the FDIC Takes Over a Bank, It Gets All the Assets.
Banks, even collapsed banks, have a lot of assets, such as loans and securities. At the most basic level, banks collapse and are taken over by the FDIC because those assets are no longer enough to cover the liabilities while at the same time, depositors are trying to yank their cash out, and a liquidity crisis (depositors yanking their cash out that the bank has trouble coming up with on the spot) is then followed by a solvency crisis (assets not enough to cover liabilities).
The cost to the FDIC’s Deposit Insurance Fund isn’t that total amount of deposits, but the shortage after all assets have been sold.
Total estimated cost to the FDIC Deposit Insurance Fund of the collapses of Silicon Valley Bank and Signature Bank combined of $22.5 billion comes out of the Deposit Insurance Fund that had a balance of $128.7 billion on December 31, 2022. The Fund is funded by the banks that are insured by the FDIC.
And the Fed will get the money back that it advanced to the two bridge banks when the deals close and as the remaining assets are sold.
Something doesn’t add up here if this ended up costing $20B.
Perhaps that $20B figure is understated somewhat for public consumption. After all bailouts of any sort are highly unpopular. But remember that SVB’s $167B in assets (loans and securities) are not worthless and could have significant value. Just guessing here, but 50-80¢ on the dollar?
Moreover, First Citizen’s Bank will be able to dump—and will be sure to do so—the really bad stuff onto the Fed’s balance sheet at par. Here’s the Federal Reserve Board press release from March 12/2023 announcing another shiny new bank lending program:
“The additional funding will be made available through the creation of a new Bank Term Funding Program (BTFP), offering loans of up to one year in length to banks, savings associations, credit unions, and other eligible depository institutions pledging U.S. Treasuries, agency debt and mortgage-backed securities, and other qualifying assets as collateral. These assets will be valued at par.”
The bank had $16 billion in capital and unrealized losses on bonds of roughly the same amount (as of 12/31). They had $74B in loans, so if selling the loans cost $20 billion, that is a 30% haircut. https://www.sec.gov/ix?doc=/Archives/edgar/data/719739/000071973923000021/sivb-20221231.htm#ibb4dd73a1d3f4bff944b5d35fd2c5e2a_184
So I agree… It doesn’t add up. Or those were some sorry ass loans.
FWIW, the run itself destroyed a lot of deposit value. They had a lot of non interest bearing deposits.
FWIW, my money is on sorry arse loans.
The country is all-in on promise sorry notes…
Brace for impact!
Are you suggesting that we defenestrate Yellen and Powell from the repo window? They’ll be really lucky if there is just a minor “shortfall.”
…I was under the impression the deal would go down at the Fed discount window
I’m somewhat surprised by the low number of comments here and on other recent posts related to the banking crisis.
I’m no expert, but it appears by my reading of Richter that the bulk of the assets that will remain with the FDIC are the long-dated Treasuries and MBSs:
“after selling the remaining $90 billion in securities and other assets.”
While the loan portfolio is part of the deal for First Citizens:
“A loss-share transaction on the commercial loans that First-Citizens purchased from the bridge bank; both parties will share in the losses and potential recoveries of the loans in the deal.
First-Citizens will assume all loan-related financial contracts.”
In addition, the problem with SIVB was not a credit risk issue with dodgy loans.
They didn’t manage their interest rate risk in a rapidly rising interest rate environment.
And they had a enormous amount of uninsured deposits from a very concentrated deposit base.
Sorry, my last two replies should have been replies to the other replies… I hadn’t had a coffee yet this morning!
As far as this not adding up, many of those assets were not marked to market and “along with some other liabilities” may be doing a lot of work here (could be repurchase agreements, fed funds purchased or some other short term borrowing.)
Looks like SVB’s loan book might have problems as well.
The assets of a bank are its loans and its securities portfolio. SVB went into crisis when its securities portfolio (mostly long maturity treasury and agency bonds) lost value in a rising interest rate environment. According to Barrons:
“These bonds were showing big losses at the end of 2022, with some $91 billion of the bond portfolio, classified as “held-to-maturity” securities for accounting purposes, worth just $76 billion.”
That implied a $15 billion unrealized loss in its security portfolio that was much larger than SVB’s $11.5 billion in total equity at the time. First-Citizens Bank is now buying $72 billion in Silicon Valley Bank loans at a 23% or $16.5 billion discount, which is even larger than the unrealized loss in its securities portfolio. And the FDIC agreed to an eight-year loss-sharing deal on these discounted commercial loans that First Citizens is buying.
Looks like the editorial staff agrees with the possibility that these loans are dodgy after all (contra my post above.)
First Citizens is from my neck of the woods, and if memory serves is (typically anyway) fairly consistent on being risk averse…so they had roughly two full weeks to sift through the information provided from the FDIC and have detailed discussions with the regulatory agencies. Making a few suppositions in this regard, but First Citizens maybe took the opposite tactic of hurry up and bid.
Looks like a potential win for the acquiring bank. This deal being immediately accretive (in accounting terms anyway) and then combining the phrase “bank acquisition” are rarely to never used in the same sentence, unless it is a farce. Goodwill is usually the cost of paying too high a price on a target acquisition’s assumed or intrinsic value. In this scenario, goodwill left about early March as we well know.
If we want or desire middle tier regional banks to continue, thrive and compete with the biggest banks on the block, then this is legitimate and possibly good deal.
“Deposit Insurance Fund that had a balance of $128.7 billion on December 31, 2022. The Fund is funded by the banks that are insured by the FDIC.”
Make that $108B now. One bank wipes out a fifth of the FDIC insurance stock? It will be very clarifying if FDIC premiums change or stay the same.