FDIC deals for failed SVB, Signature Bank included sweeteners

THE Federal Deposit Insurance Corporation (FDIC) stuck to its guns and didn’t offer bailouts to keep two lenders from collapsing. Instead, it struck deals that included millions of dollars of sweeteners to the acquiring banks.

In the case of Silicon Valley Bank (SVB), which collapsed earlier this month following a bank run, the FDIC offered First Citizens BancShares Inc. a US$70 billion credit line as part of its deal to buy the lender. The FDIC also agreed to cover First Citizens’ losses in excess of US$5 billion on commercial loans for the next five years and extended US$35 billion of borrowings to the bank in the form of a note.

When New York Community Bancorp (NYCB) took over Signature Bank’s deposits and some of its loans after the bank was seized by regulators, it scored a sweetheart deal, Wedbush analyst David Chiaverini said. The assets were “priced to move quickly”, he said, pointing to a 20 per cent earning-per-share boost from the deal.

The favourable terms underscore the urgency with which regulators sought to resolve two of the largest ever US bank failures, part of an effort to prevent the crisis spreading to other lenders. The government has taken extraordinary measures to shore up confidence in the financial system following their collapse, introducing a new backstop for banks that Federal Reserve officials said was big enough to protect the entire nation’s deposits.

“The main risks for a failed bank acquirer are being able to operate the failed bank’s assets profitably, and paying too much for the loan portfolio,” said Gregory Germain, a law professor at Syracuse University. “The loan portfolio was purchased at a substantial discount and with a government backstop, mitigating the risks to First Citizens. The stock market has recognised this as a very good deal for First Citizens.”

First Citizens didn’t immediately respond to a request for comment.

The US$70 billion credit line was aimed at providing First Citizens with liquidity as it integrates SVB over the next two years, according to a regulatory filing on Monday (Mar 27). It’s unclear if any other bank has received such terms in previous transactions for failed lenders. New York Community Bancorp didn’t mention an FDIC line of credit as it took over Signature’s deposits.

“This is not a typical deal term for an acquirer in these transactions to buy a failed bank,” Jerry Comizio, an American University professor and former Treasury Department official, said in an email. “It really highlights the FDIC’s desire to resolve this situation by providing a potential liquidity hedge against SVB’s high level of uninsured deposits.”

Authorities have sought to keep federal involvement in bank rescues to a minimum to avoid accusations of a bailout. A spokesperson for the FDIC said the transaction for SVB was done at the least cost to the deposit insurance fund, which was set up to provide deposit insurance and resolve failed banks. SVB shareholders and bondholders also haven’t received any money from the agreement, according to the spokesman.

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“If First Citizens — or any bank for that matter — did not come forward, we would have had to liquidate the bank, which would have been more costly to the insurance fund than the agreement with First Citizens,” the FDIC spokesperson said in the statement.

Deposit insurance

Dealing with the collapse of SVB and Signature Bank earlier this month hasn’t been entirely without a cost. The deposit insurance fund will suffer an estimated US$20 billion hit linked to SVB and a US$2.5 billion blow from Signature, according to the agency.

While selling a failed bank typically requires concessions to make it palatable to a buyer, the FDIC will get a piece of some gains attached to the deal. With each, it got equity appreciation rights. For First Citizens, they are worth as much as US$500 million and were already in the money as of Monday morning after the bank soared 53 per cent, the most in more than 30 years following news of the deal.

The FDIC reached a similar agreement with NYCB worth as much as US$300 million that would likewise turn a profit if the regulator exercised those rights as of Monday.

First Citizens also issued a US$35 billion note to the agency as payment for the transaction. The US$70 billion credit line is for five years, with the agency set to accrue interest equal to the Secured Overnight Financing Rate plus 25 basis points.

“The transaction is a 101 per cent boost to FDIC’s balance sheet, with an immediate positive benefit to tangible capital and earnings in exchange for collecting the SVB loans and integrating new deposit customers for the FDIC,” Janney Montgomery Scott analysts Christopher Marinac and Feddie Strickland said in a research note. BLOOMBERG