First Citizens Bank is buying much of Silicon Valley Bank, the tech-focused 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. 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 $250,000 limit insured by the FDIC.
The First Citizens deal announced late 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 Silicon Valley Bank’s failure.
The sale underscores that Silicon Valley Bank’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 U.S. 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 Aaron Klein, a senior fellow at the Brookings Institution and a former official at the Treasury Department. “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: $20 billion is real money, even in Washington.”
That $20 billion is referring to the loss the FDIC says its deposit insurance fund could take because of Silicon Valley Bank’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 Silicon Valley Bank.
The $20 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.
“The question is who should bear those losses?” he said. “Should seniors get a few less interest points on their bank deposits, or should” big depositors with more than $250,000 at Silicon Valley Bank be willing to lose some of their cash?
First Citizens agreed to buy about $72 billion of Silicon Valley Bank’s assets at a discount of $16.5 billion. About $90 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 $500 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.
Todd Phillips, a fellow at the Roosevelt Institute and a former attorney at the FDIC, said extraordinary actions by regulators back up those statements. Besides guaranteeing deposits at Silicon Valley Bank and Signature Bank, regulators also announced a program 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 D.C. 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 D.C. 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.
Amanda Agati, chief investment officer of PNC Asset Management Group, looks at the banking industry’s struggles through the eyes of an investor, and she sees more pain coming. She just doesn’t know exactly 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-Silicon Valley Bank deal, she said: “I don’t think it moves the needle at all in terms of the market overall.”
Silicon Valley Bank, based in Santa Clara, California, collapsed 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 U.S. 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 U.S.
Customers of Silicon Valley Bank will automatically become customers of First Citizens, which is headquartered in Raleigh, North Carolina. The 17 former branches of SVB will open as First Citizens branches Monday, the FDIC said.
New York Community Bank agreed to buy a significant chunk of Signature Bank in a $2.7 billion deal a week ago, but the search for a buyer for SVB took longer.
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% in late-day trading.
