Even collapsed banks have lots of assets that the FDIC sells to cover the costs to the Fund. Signature Bank collapse costs the Fund only $2.5 billion
By Wolf Richter for WOLF STREET.
The FDIC is a liquidation machine. And so it announced Sunday night that it has made a purchase and assumption deal with First-Citizens Bank in Raleigh, North Carolina: First-Citizens will buy a big portion of the assets of Silicon Valley Bridge Bank and assume all its deposits (a liability).
The FDIC had created the bridge bank to take on the assets and liabilities, including all deposits, of Silicon Valley Bank, which collapsed on March 10.
On Monday morning, March 27, the 17 branches of Silicon Valley Bridge Bank will open as First-Citizens Bank. Depositors of Silicon Valley Bridge Bank will automatically become depositors of First-Citizens Bank. All transferred deposits will be insured by the FDIC “up to the insurance limit,” the FDIC said.
Customers of Silicon Valley Bridge Bank should continue to use their current branch until First-Citizens Bank tells them that conversions of the banking systems have been completed to allow full-service banking at all of Citizen Bank’s other branch locations, the FDIC said.
Here’s what was included in the deal.
On the day that Silicon Valley Bank collapsed and the FDIC became its receiver – March 10, 2023 – it had $167 billion in assets and $119 billion in deposits, along with some other liabilities — which is what the FDIC took over.
Today’s deal between the FDIC and First-Citizens includes:
- First-Citizens assumes all deposits that are still at the bridge bank (a liability).
- First-Citizens gets $72 billion in assets at a discount of 23%, or $16.5 billion.
- First-Citizens will assume all loan-related financial contracts.
- First-Citizens issued a $35 billion note to the FDIC as additional payment (in addition to assuming the deposits).
- FDIC gets equity appreciation rights in First Citizens BancShares, Inc. common stock [FCNCA] “with a potential value of up to $500 million.” The base share price of the deal is $582.55 per share [update Monday morning: the rights are already in the money, shares spiked 47% to $860.51. In terms of the FDIC’s base: +62%].
- A loss-share transaction on the commercial loans that First-Citizens purchased from the bridge bank; both parties will share in the losses and potential recoveries of the loans in the deal.
A $20 billion loss to the FDIC’s Deposit Insurance Fund.
The FDIC will sell the remaining $90 billion in securities and other assets over time.
The FDIC estimated that the total cost of the SVB collapse to the Deposit Insurance Fund will be $20 billion, after selling the remaining $90 billion in securities and other assets. This includes the additional costs of having covered all deposits, even those that are above the FDIC limits.
What the haircut for uninsured depositors might have been without bailout:
On the day Silicon Valley Bank collapsed, there were still $119 billion in total deposits at the bank, according to the FDIC. The total shortage to cover all deposits would have been $20 billion, and if the FDIC had stuck to its insurance limits, that loss would have represented the maximum haircut for all uninsured depositors. It wouldn’t have been the end of the world.
Signature Bank’s cost to the Deposit Insurance Fund is only $2.5 billion.
On March 20, the FDIC announced that it had sold a big loan portfolio of the collapsed Signature Bank to New York Community Bancorp, which also assumed nearly all of the deposits – except $4 billion of deposits by crypto customers that the FDIC provided directly to those customers. The 40 branches of Signature Bank opened on Monday, March 20, as branches of New York Community Bancorp’s Flagstar Bank.
The FDIC said at the time that the total cost to the Deposit Insurance Fund will amount to only $2.5 billion.
When the FDIC takes over a bank, it gets all the assets.
Banks, even collapsed banks, have a lot of assets, such as loans and securities. At the most basic level, banks collapse and are taken over by the FDIC because those assets are no longer enough to cover the liabilities while at the same time, depositors are trying to yank their cash out, and a liquidity crisis (depositors yanking their cash out that the bank has trouble coming up with on the spot) is then followed by a solvency crisis (assets not enough to cover liabilities).
The cost to the FDIC’s Deposit Insurance Fund isn’t that total amount of deposits, but the shortage after all assets have been sold.
Total estimated cost of the collapses of Silicon Valley Bank and Signature Bank combined of $22.5 billion comes out of the Deposit Insurance Fund that had a balance of $128.7 billion on December 31, 2022. The Fund is funded by the banks that are insured by the FDIC.
And the Fed will get the money back that it advanced to the two bridge banks after the deals close and as the remaining assets are sold.
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