U.S. Backs The Acquisition Of Silicon Valley Bank By First Citizens

An estimated $20 billion hit to a government insurance fund resulted from U.S. authorities' announcement on Monday that they would support a transaction for regional lender First Citizens BancShares FCNCA.O to purchase defunct Silicon Valley Bank.

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The agreement comes after Silicon Valley Bank was taken over by the Federal Deposit Insurance Corporation (FDIC) on March 10 as a result of deposits being lost during a bank run that also brought down Signature Bank SBNY.O and destroyed more than half the market value of several other regional lenders in the United States.

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The FDIC is hopeful that the deal with First Citizens would lessen the impact on a deposit insurance fund it manages to pay for bank bailouts. The fund is refilled by a fee on the whole banking industry rather than using funds provided by American taxpayers.

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According to the FDIC, the transaction will cost its deposit insurance fund almost $20 billion. Along with that, the FDIC also suffered a $2.5 billion loss when it sold Signature Bank to New York Community Bancorp NYCB.N a week ago.

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First Citizens won't make an upfront payment for the transaction. Instead, it claimed that it had given the FDIC equity appreciation rights in its shares that may be worth up to $500 million, which is a small portion of the value of Silicon Valley Bank prior to its failure.

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These powers may be used by the FDIC from March 27 to April 14. The amount of cash it gets will depend on how much First Citizens' stock is worth. In Monday's pre-market trading, First Citizens stock increased by 50% to $874.75.

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According to First Citizens, the agreement calls for them to take over Silicon Valley Bank's assets of $110 billion, deposits of $56 billion, and loans of $72 billion.

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Moreover, First Citizens will work with the regulator to share certain losses on commercial loans in order to give additional downside protection against potential credit losses. First Citizens will also get a line of credit from the FDIC for contingency liquidity needs.

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According to analysts, the decision was beneficial for the venture capital market and financial stability, but only to a certain extent.

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According to Redmond Wong, Greater China market strategist at Saxo Markets, "I don't think First Citizens Bank's acquisition of the SVB loan book and deposits adds much to solve the number one issue that the U.S. banking system is now facing: deposits leaving smaller banks for larger banks or money market funds."

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Silicon Valley Bank, a Santa Clara-based lender with around $209 billion in assets, was the 16th-largest lender in the United States at the end of 2017.

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Shares of European lenders fell dramatically on Friday, led by Germany's Deutsche Bank DBKGn.DE, as investors remain concerned about the state of the global banking industry. Governments are also concerned about the possibility of a credit crisis.

VENTURE CAPITAL BUSINESS

Customers of Silicon Valley Bank will continue to be able to access their accounts through online, mobile applications and branch locations starting on Monday as Silicon Valley Bank, a part of First Citizens Bank, will resume operating out of the 17 previous locations.

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It added that the deal would accelerate its expansion in California and give it wealth management capabilities in the northeast of the United States.

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"We are committed to building on and preserving the strong relationships that legacy SVB's global fund banking business has with private equity and venture capital firms," said First Citizens Chief Executive Frank Holding Junior said in the statement.

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First Citizens has around $109 billion in assets and total deposits of $89.4 billion.

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According to the FDIC, First Citizen paid a discount of $16.5 billion to acquire about $72 billion of SVB's assets.

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The actual amount will be known after the FDIC ends the receivership, however, the FDIC estimated that the failure of Silicon Valley Bank would cost its Deposit Insurance Fund (DIF) around $20 billion.

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Securities and other assets from SVB worth around $90 billion will continue to be in receivership pending disposal, the regulator stated.

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