First Citizens is set to secure ownership of Silicon Valley Bridge Bank’s assets in a $55.5 billion acquisition. The embattled bank’s $72 billion assets are up for grabs following Federal Deposit Insurance Corp. (FDIC) approval of a $16.5 billion discount.
Acquisition of Silver Valley Bank Assets Expedited
FDIC’s Sunday, March 26 statement confirmed the conclusion of the $55.5 billion deal allowing First Citizens to acquire the salvage of Silicon Valley Bank (SVB). The conclusion of the deal is timely to allow the Raleigh-based First Citizens Bank to exercise ownership rights over the loans and deposits of the collapsed Silicon Valley Bank.
News of the conclusion of the deal acquisition by the North Carolina-headquartered bank appeared in a Bloomberg report that the deposit and savings insurer for American commercial banks and savings banks (FDIC) was nearing completion.
The conclusion of the acquisition talks led the FDIC leadership led by Martin J. Gruenberg announced that First Citizens Bank & Trust Company would take over all Silicon Valley Bridge Bank depositors. The statement conveyed to the media indicated that FDIC established the bridge bank following the collapse of SVB in early March 2023.
FDIC to Exercise Receivership Rights to $90 Billion-Dollar Securities
The government’s corporation assured that it would retain insurance of the deposits assumed by First Citizens to the regulated cap.FDIC had on March 10 estimated Silicon Valley Bridge Bank was carrying $167 billion in assets. Its total deposits are estimated at $119 billion. However, the recent statement clarified that the transaction with First Citizens featured acquiring $72 billion in assets. Excluded from the $16.5 billion discount are $90 billion assets held in securities that would remain under receivership till their disposition by FDIC.
The Gruenberg-led government corporation confirms acquiring $500 million equity appreciation rights within the First Citizens BancShares. The acquisition of rights would grant FDIC rights over the common stock of the parent entity of First Citizens Bank.
Cost Incurred by FDIC and Retained Customers Uncertain
Preliminary estimates released by FDIC indicated the Silicon Valley Bank collapse would impose a $20 billion cost to the Deposit Insurance Fund. However, FDIC promised to issue an accurate cost upon the conclusion of the receivership process.
Meanwhile, the number of clients First Citizens would retain from the Silicon Valley Bank customers after the $55.5 billion acquisition is uncertain.
It is inevitable for First Citizens to lose a portion of the clients given the move by fintech neo banks and established banks, including First Republic and Citi, to poach the clients.
The onslaught on the collapsed Silicon Valley Bank’s clients was bound to occur during the chaotic days following the bank run.
Fragility of US Banking Sector
The sudden demise of Silicon Valley Bank alongside Signature Bank and Silvergate Capital Corp. affirms the risk of unrealized losses. While the banks are not at risk unless when selling assets during customer withdrawals, bank runs could force the majority to replicate Silicon Valley Bank’s failure.
SVB carried over 92.05% of uninsured deposits by FDIC, a common trend across the banking sector. Scrutiny of the US banks indicated that they carry $9 trillion in uninsured bank deposits. While banks have readily committed the uninsured deposits in bond investment, their value is vulnerable to erosion as interest increases. A review of the 2022 deposits indicated that US banks had over $600 billion in unrealized losses.
Further examination revealed that 42% of 4000 banks committed investments in normal MBSs, with another 24% embracing commercial mortgage-backed security (MBS), including bonds, real-estate loans, and asset-backed securities (ABS).
The FDIC caps insurance to $250000 per account, most of the deposits were uninsured. Consequently, the bank run was inevitable as uninsured depositors learned it had unrealized losses. It triggered the speculation that SVB had insufficient money to settle all withdrawals. Unless resolved the US banking sector may suffer a dramatic collapse of vulnerable banks.
Editorial credit: JRdes / Shutterstock.com