First Citizens Bancshares Inc., one of the largest regional banks in the US, has acquired a significant portion of Silicon Valley Bank following its collapse. The Federal Deposit Insurance Corp. has confirmed that First Citizens will acquire all of the deposits, loans, and branches of the failed bank, with the purchase including $119 billion in deposits and about $72 billion of SVB’s loans at a discount of $16.5 billion.
Regulators took control of SVB on March 10th, sparking panic that led to the weekend failure of Signature Bank. The sale represents a milestone in regulatory efforts to clean up after two of the largest bank failures in history. First Citizens will now be ranked among the top 25 US banks in terms of assets. The FDIC has agreed to share any of First Citizens’ losses or potential gains on SVB’s commercial loans, with the failure of SVB estimated to cost a federal insurance fund about $20 billion. Investors will be watching First Citizens and other banks closely when US markets open on Monday.
On Friday, Deutsche Bank AG, a major German lender, experienced a significant drop in its shares, falling up to 15% before closing 8.5% lower in Frankfurt. Many of the largest European banks also experienced declines, but the reason for the selloff was unclear. Some investors believed that it reflected a lingering fear from the financial crisis, despite Deutsche Bank’s recent profitability and low risk profile.
Meanwhile, smaller US banks continue to experience outflows of deposits following a surge in inflows during the Covid-19 pandemic. The outflows are partially going to the largest US lenders, which are viewed as having implicit government backing, and are also due to higher rates offered by money-market funds and short-term Treasury debt. The Federal Reserve has sharply raised interest rates in an attempt to control high inflation.
Silicon Valley Bank (SVB) failed due to a continuing need for cash caused by its core business of banking venture-capital firms and their startups bleeding funds. The firm had invested heavily in long-term bonds, whose value was badly hurt by the Fed’s interest-rate increases over the past year, meaning they could only be sold at a loss. When SVB tried to raise cash, its depositors, largely business customers whose accounts were above the $250,000 FDIC insurance limit, fled. This caused uninsured depositors across the system to take notice, and several other similarly-situated midsize banks, such as Signature and First Republic, came under scrutiny.
SVB’s implosion is the biggest test to date of the post-financial-crisis regulatory architecture designed to force banks to curtail risk and monitor it more closely. Officials have sought to reassure investors that the system remains strong, with Neel Kashkari, president of the Federal Reserve Bank of Minneapolis, stating that “fundamentally, the banking system is sound.”
Risks to SVB’s financial condition were apparent for months before its failure, and regulators will likely spend months, if not years, investigating what happened and why its banking supervisors didn’t move quickly or decisively enough to prevent a crisis.
The Fed, FDIC, and Treasury Department limited the contagion by using emergency powers to guarantee uninsured deposits at SVB and Signature while setting up a new Fed lending program to allow banks to meet withdrawal requests. Fed Chair Jay Powell has initiated an internal Fed review of what went wrong, to be completed by May. Lawmakers plan to hold hearings beginning Tuesday.
The Fed is rethinking a number of its own rules related to midsize banks in response to the crisis, potentially extending restrictions that currently only apply to the largest Wall Street firms. A raft of tougher capital and liquidity requirements are under review, as well as steps to strengthen annual “stress tests” that assess banks’ ability to weather a hypothetical recession. The rules could target firms with between $100 billion to $250 billion in assets, which currently escape some of the toughest requirements. There are about two dozen banks within this range.