After the FDIC brokered the sale of collapsed Silicon Valley Bank to First Citizens BancShares Inc. — driving up the buyer’s stock price and saddling the regulator with a $20 billion bill — it got a notable critic: one of its own board members.
(Bloomberg) — After the FDIC brokered the sale of collapsed Silicon Valley Bank to First Citizens BancShares Inc. — driving up the buyer’s stock price and saddling the regulator with a $20 billion bill — it got a notable critic: one of its own board members.
Jonathan McKernan, a Republican who joined the agency in January, expressed concern regarding the Federal Deposit Insurance Corp.’s auction process. The regulator should do more to get the best price when it auctions failed lenders, he said.
“If we leave value on the table, that increases the loss to the FDIC’s deposit-insurance fund, which then means larger deposit-insurance assessments and ultimately increased costs for bank customers,” McKernan said. “We should be looking at ways to actively involve potential bidders of all types, including bidders from outside the banking system.”
The debate over how to spread the cost of bank failures is raging in Washington amid concern that other regional lenders may collapse even as the heat of the crisis abates. First Citizens’ market value has increased by roughly $6 billion and its stock has surged about 72% since it bought SVB on March 26, in a deal that is poised to set the FDIC back about $20 billion.
First Citizens agreed to buy Silicon Valley Bank out of FDIC receivership after the lender unraveled in the biggest US bank failure in more than a decade. New York-based Signature Bank’s collapse quickly followed, and its deposits and some of its loans were later purchased from the FDIC by New York Community Bancorp’s Flagstar Bank.
Some of the biggest alternative-asset managers — eager to put cash to work — had been circling SVB and its parent company’s assets. Blackstone Inc. agreed to back a bid for the bank by Valley National Bancorp, while Apollo Global Management Inc. and Carlyle Group Inc. explored deals for loans. Their efforts were largely thwarted by the FDIC, which typically views private equity firms only as a last resort.
“The FDIC has some work to do to ensure that it gets the best price when it auctions a failed regional bank,” McKernan said.
Some elements of the SVB sales process dissuaded non-bank buyers, according to people familiar with the matter, who asked not to be identified discussing private information.
The ultimate deal for SVB contained billions of dollars of sweeteners, including a loss-sharing agreement ensuring the FDIC will cover First Citizens’ losses in excess of $5 billion on commercial loans for the next five years. As the auction was underway, the agency provided different levels of loss-sharing agreements to banks than it did to alternative-asset managers, the people said.
A representative for the FDIC declined to comment.
The FDIC estimates that SVB’s failure will cost $20 billion while the collapse of New York-based Signature bank will add an additional $2.5 billion. The money will come from the FDIC’s deposit insurance fund, which banks pay into every quarter as they attract deposits qualifying for the agency’s protection.
Still, the FDIC is positioned to share in gains through equity-appreciation rights attached to the First Citizens and NYCB transactions.
–With assistance from Katanga Johnson.
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