SVB/FDIC: favours for saviours ensure rescues ensue

Wall Street remains skittish about regional banks. The clearest indication: shares of First Citizens Bancshares only jumped 50 per cent on Monday. The North Carolina-based institution is taking over defunct tech lender Silicon Valley Bank. This delivers a subsidy so staggering that the market reaction looked miserly by contrast.

First Citizens previously had a market capitalisation of roughly $9bn based on a book value of the same amount. It will now absorb a $72bn loan book and $56bn of remaining deposits at a $16bn discount to net asset value.

The SVB’s steward, the Federal Deposit Insurance Corporation, has provided that sweetener to make the bulk of SVB somebody else’s problem.

A week ago, when New York Community Bancorp rescued Signature Bank, it took mostly cash as assets and left Signature’s loan book with the government. First Citizens is taking on SVB’s lending portfolio, notably parts that provide “capital call” financing to buyout firms, as well as those loans to tech companies and even wineries.

First Citizens negotiated protections from two risks. First, on the liability side, if SVB deposit flight continues, First Citizens has borrowed $35bn from the FDIC at a modest rate of 3.5 per cent and has access to additional funding from the agency. Second, on the asset side, the bank has struck a loss-sharing deal with the FDIC on loan losses over $5bn.

Balance sheet aside, acquisitive First Citizens gets a shot at operating what was, until recently, the premier local bank in one of America’s most desirable locales.

The shares of First Citizens and NYCB rallied sharply after each took on assets of seized banks at substantially discounted valuations, together gaining market value of around $6bn. Each said they went for an FDIC subsidy figure that would keep existing capital ratios stable. But in a regular deal, they would have issued equity to achieve this

The FDIC, while negotiating nearly $1bn of equity upside from the sales, estimated the total cost to its insurance fund of more than $20bn. That gain would be less than the value accretion so far at First Citizens and NYCB.

The lesson for now is that bank rescues are a partial transfer of value between unlucky and lucky bank shareholders. This is accompanied by an even bigger deadweight loss to banking’s stakeholders.