FDIC director suggests a better approach to the agency's failed bank auctions

A notable critic of the FDIC emerged after it brokered the sale of collapsed Silicon Valley Bank to First Citizens BancShares Inc., driving up the stock price of the buyer and saddling the regulator with a $20 billion bill. That critic is one of the regulator's own board members. 

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Jonathan McKernan, a Republican who joined the Federal Deposit Insurance Corp. at the beginning of the year, expressed concern regarding the auction process used by the bank. When a failed lender is auctioned by the regulator, the regulator should do more to get the best price for the lender, he said. 

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"If we leave value on the table, then we are more likely to lose money in the FDIC's deposit-insurance fund, which results in a larger deposit-insurance assessment, which, in turn, ultimately leads to increased costs for bank customers," McKernan said. "Our objective should be to find ways to actively engage potential bidders of all kinds, including those who are outside the banking system, in the bid process."

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Washington is currently in a debate about how to spread the cost of bank failures across the region, amid fears that other regional lenders could collapse as well, even as the heat of the financial crisis begins to lessen. As of March 26, First Citizens' stock price has risen by about 72% and its market value has increased by approximately $6 billion since it purchased SVB on March 26 in a deal that is expected to cost the FDIC approximately $20 billion.

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After Silicon Valley Bank collapsed as a result of the most significant US bank failure in more than a decade, First Citizens agreed to buy the lender out of FDIC receivership. It wasn't long before Signature Bank collapsed in New York, and its deposits and some of its loans were later acquired by Flagstar Bank, a subsidiary of New York Community Bancorp, from the Federal Deposit Insurance Corporation.

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Several alternative asset managers - eager to put their cash to work - are circling around SVB and its parent company's assets to see if they can make a profit. Valley National Bancorp has received backing from Blackstone Inc. to make a bid for the bank, while Apollo Global Management Inc. and Carlyle Group Inc. are exploring lending opportunities. Private equity firms have had their efforts thwarted to a large extent by the FDIC, which views private equity firms as a last resort in most cases.

“There is still work to be done by the FDIC so that when it auctions off a failed regional bank, it gets the best price for the bank,” McKernan said.

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Several aspects of the SVB sale process dissuaded non-bank buyers from deciding to buy the bank's securities, according to sources familiar with the matter, who requested anonymity for the purposes of discussing private information. 

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In the end, the deal that SVB negotiated contained billions of dollars of sweeteners, including a loss-sharing agreement that ensured the FDIC would cover First Citizens' losses on commercial loans in excess of $5 billion for the next five years. During the auction period, the agency offered a different level of loss-sharing agreements to banks than it did to alternative asset managers, according to people familiar with the matter. 

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A representative for the FDIC declined to comment.

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There is an estimate that the collapse of New York-based Signature Bank will add in excess of $2 billion to the cost of SVB's failure, while the collapse of the SVB will cost the FDIC $20 billion. Banks will be able to get the money from the FDIC's deposit insurance fund, which they must pay into every quarter as they attract deposits eligible for protection by the agency.

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In spite of this, the FDIC is positioned to share in gains through the equity-appreciation rights it has attached to the First Citizens and NYCB transactions.