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Bank deposit fund loses billions as buyer found for failed SVB’s assets

March 27, 2023 Updated Tue., March 28, 2023 at 7:56 a.m.

A Silicon Valley Bank branch in Santa Monica, Calif., on March 13.   (Lauren Justice/Bloomberg)
A Silicon Valley Bank branch in Santa Monica, Calif., on March 13.  (Lauren Justice/Bloomberg)
By Aaron Gregg and Bryan Pietsch Washington Post

Federal regulators expect the collapse of Silicon Valley Bank to cost the government’s deposit insurance fund an estimated $20 billion, a figure that analysts say makes it the most expensive bank failure in U.S. history.

The Federal Deposit Insurance Corporation also announced that most of the failed bank’s assets are being sold to Raleigh-based First Citizens bank.

The deal allows First Citizens to snap up SVB deposits and loans, as well as a large portion of its assets, valued at $72 billion, for a $16.5 billion discount, the Federal Deposit Insurance Corp. announced Sunday. It also specifies that First Citizens and the government will share in any loan losses as part of the transaction. About $90 billion in securities and other assets will remain under FDIC control, including First Citizens stock, which the regulator said has a potential value of up to $500 million.

All told, SVB’s failure is expected to cost the federal Deposit Insurance Fund about $20 billion, the FDIC said. The rescue of Signature Bank days later cost around $2.5 billion, according to prepared remarks that FDIC Chairman Martin Gruenberg plans to deliver before Congress on Tuesday.

That makes SVB the most costly bank failure in U.S. history, at least in terms of its cost to the Deposit Insurance Fund, says Paul Kupiec, a senior fellow at the American Enterprise Institute. By comparison, the 2008 failure of Washington Mutual – the largest bank failure in U.S. history – was completed at no cost to the insurance fund.

And there is some concern that the FDIC’s losses could grow beyond its initial estimate, as Gruenberg’s prepared remarks emphasize that those estimates could change significantly. Kupiec described the $20 billion figure as a “low estimate” by the FDIC. “I think the losses are going to be higher than that,” he said.

The Deposit Insurance Fund’s money comes from fees that the FDIC charges to banks. The law requires that losses to the fund be covered through one or more “special assessments” on insured banks, Gruenberg plans to tell Congress, meaning the cost of covering SVB’s deposits will be borne by the industry rather than by taxpayers, experts say.

“This is exactly what the Deposit Insurance Fund is for,” said Todd Phillips, a former FDIC attorney.

Phillips described the FDIC as “basically an insurance company,” which in this case stepped in to backstop SVB’s deposits and keep anxiety from spreading.

“It exists to stop bank runs, and because of its existence, the FDIC was able to step in, use its systemic risk exception, and stop bank runs from occurring in the rest of the banking system,” Phillips said.

All 17 of the former SVB branches will open Monday under the First Citizens banner, the FDIC said, and depositor accounts will automatically migrate to First Citizens.

First Citizens’s chairman and chief executive, Frank B. Holding Jr., said in a statement that the bank is “looking forward to building relationships” with its new customers and affirmed its “commitment to support the integrity of our nation’s banking system.”

SVB sent shock waves through the U.S. financial system when it imploded March 10, becoming the second-largest bank failure in U.S. history. The lender, which largely catered to startups and venture capitalists, was shut down by regulators and taken over by the federal government after depositors scrambled to withdraw their money following a surprise filing that said the bank had sold $21 billion in assets and was selling more of its own stock to shore up its balance sheet.

The disclosure sent SVB stock into free fall and spooked Wall Street, dragging down other bank shares.

The FDIC stepped in by announcing it would guarantee all deposits in the failed bank, tapping certain emergency-risk authorities under federal law that allowed agency to exceed the limit for federally-insured funds, which stands at $250,000. Its assets were transferred to a new entity called Silicon Valley Bridge Bank, National Association, which the FDIC marketed for sale.

SVB’s collapse fueled uncertainty for the financial sector as investors scoured the globe for other points of weakness.

New York’s Signature Bank, another tech-focused institution, also went under. Switzerland’s Credit Suisse merged with its larger rival UBS after identifying “material weakness” there.

And First Republic, another West Coast bank with a tech-heavy clientele, has been engaged in talks about a possible sale. It is one of several midsize banks whose stock price has been under pressure amid the crisis.

The deal for SVB assets sent First Citizens shares soaring nearly 54 percent Monday, closing at $895.61 and lifting other regional banks. First Republic Bank popped 11.8 percent and PacWest Bancorp climbed 3.5 percent. Large lenders also posted solid gains, with Citigroup adding 3.8 percent; Wells Fargo, 3.4 percent; and JPMorgan Chase, 2.9 percent.

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