Monday 27 March 2023

U.S. backstops Silicon Valley Bank's sale to First Citizens

U.S. backstops Silicon Valley Bank's sale to First Citizens

U.S. backstops Silicon Valley Bank's sale to First Citizens




First Citizens BancShares and SVB (Silicon Valley Bank) logos are seen in this illustration taken March 19, 2023. REUTERS/Dado Ruvic/Illustration/File Photo






U.S. regulators said on Monday they would backstop a deal for regional lender First Citizens BancShares (FCNCA.O) to acquire failed Silicon Valley Bank, triggering an estimated $20 billion hit to a government insurance fund.







The deal comes after the Federal Deposit Insurance Corporation (FDIC) took over Silicon Valley Bank on March 10 after deposits fled, amid a bank run that also brought down Signature Bank (SBNY.O) and wiped out more than half the market value of several other U.S. regional lenders.


The FDIC is hoping the transaction with First Citizens will minimize the hit to a deposit insurance fund it runs to fund rescues of banks. The fund does not take U.S. taxpayer money and is instead replenished by a levy on the entire banking sector.


The sale will cost the FDIC's deposit insurance fund roughly $20 billion, the agency said. That is on top of the $2.5 billion loss to the fund the FDIC incurred when it sold Signature Bank to New York Community Bancorp (NYCB.N) one week ago.


First Citizens will not pay cash upfront for the deal. Instead, it said it granted equity appreciation rights in its stock to the FDIC that could be worth up to $500 million -- a fraction of what Silicon Valley Bank was worth before it failed.


The FDIC will be able to exercise these rights between March 27 and April 14. How much cash it receives will depend on the value of First Citizen's stock. First Citizens shares jumped 50% in pre-market trading on Monday $874.75.


First Citizens said that as part of the deal it will assume Silicon Valley Bank assets of $110 billion, deposits of $56 billion and loans of $72 billion.







First Citizens will also receive a line of credit from the FDIC for contingent liquidity purposes and will have an agreement with the regulator to share some losses on commercial loans to provide further downside protection against potential credit losses.


Analysts said the move was positive for financial stability and the venture capital industry but only up to a point.






"I think First Citizens Bank’s acquisition of the SVB loan book and deposits does not add much to solve the number one issue that the U.S. banking system is now facing: deposits leaving smaller banks for larger banks or money market funds," said Redmond Wong, Greater China market strategist at Saxo Markets.


Based in Santa Clara, Silicon Valley Bank was the 16th biggest lender in the U.S. at the end of last year, with about $209 billion in assets.


Worries about the banking sector globally continue to grip investors with shares in European lenders having fallen sharply on Friday, led by Germany's Deutsche Bank (DBKGn.DE), while authorities are also worried about the potential for a credit crunch.



VENTURE CAPITAL BUSINESS



From Monday, Silicon Valley Bank's 17 former branches will begin operating as Silicon Valley Bank, a division of First Citizens Bank and SVB customers will continue to be able to access their accounts through websites, mobile apps and branches, First Citizens said.


It added that the deal would accelerate its expansion in California and give it wealth management capabilities in the northeast of the United States.








"We are committed to building on and preserving the strong relationships that legacy SVB's global fund banking business has with private equity and venture capital firms," said First Citizens Chief Executive Frank Holding Junior said in the statement.


First Citizens has around $109 billion in assets and total deposits of $89.4 billion.


The FDIC said First Citizen's purchase of about $72 billion of SVB's assets came at a discount of $16.5 billion.


"The FDIC estimates the cost of the failure of Silicon Valley Bank to its Deposit Insurance Fund (DIF) to be approximately $20 billion. The exact cost will be determined when the FDIC terminates the receivership," it said.


Approximately $90 billion in securities and other assets from SVB will remain in receivership for disposal, the regulator added.
















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