Regulatory Note — SVB II – Sales of the Bridge Banks
THIS IS THE SECOND IN A SERIES OF REGULATORY NOTES ON THE SILICON VALLEY BANK AND SIGNATURE BANK FAILURES AND THEIR CONSEQUENCES. THE FIRST NOTE CAN BE FOUND HERE.
On March 19, 2023, the FDIC sold substantial portions of Signature Bridge Bank (“SBB”) to Flagstar Bank, National Association (“Flagstar”), and, on March 26, significant portions of Silicon Valley Bridge Bank (“SVBB”) to First-Citizens Bank & Trust Company (“FCB”). The terms of the two transactions, memorialized in purchase and assumption agreements for Flagstar’s acquisition of SBB (the “Flagstar P&A”) and FCB’s acquisition of SVBB (the “FCB P&A”), depart in important ways from the typical P&A transaction. (1)
This Note highlights elements of the two transactions and compares the more significant and publicly available terms of the transactions in a table beginning on page 3.
Least cost. The resolution of a closed bank must be at the “least cost” to the FDIC – unless federal regulators invoke the systemic risk exception. The regulators did so when the FDIC announced it would protect all depositors, both insured and uninsured, in the transfer of Silicon Valley Bank (“SVB”) and Signature Bank (“Signature”) to bridge banks. Notwithstanding the systemic risk exception to the least cost requirement, the sales of assets as part of the P&A transactions are subject to a separate standard, explained below, that the FDIC maximize the value of any asset sale.
Purchase price. As is customary in a P&A transaction for a failed bank, neither acquiror has paid anything up front for the assets purchased. In the Signature transaction, Flagstar assumed the deposit liabilities in exchange for a discount on the assets that it purchased of $2.7 billion or approximately 21%. FCB similarly received a discount on the assets purchased, $16.5 billion or approximately 23%, but FDIC holds a five-year note from FCB.
FDIC financing. Under the SVB P&A, the FDIC is financing the sale to FCB through a five-year $35 billion note. FDIC financing is rare: the FDIC financed only three acquisitions during the financial crisis.
Loss-sharing. Loss-sharing in the two transactions varies considerably. The SVB P&A provides that the FDIC and FCB will share losses evenly on commercial and certain other loans, after FCB has borne the first $5 billion in losses, while the Signature P&A does not include any loss-sharing. Historically, loss-sharing reflects or is a proxy for the measurement of economic conditions in the banking industry. Under the original 2008 P&A agreements that were developed at the height of the financial crisis, in order to attract acquirors, the FDIC shouldered 80% of the losses over a five- or ten-year period, depending on the assets, and, if losses exceeded a certain agreed-upon threshold, the FDIC would bear 95% of the losses. The FDIC was able to gradually reduce its loss- sharing in 2011 and largely phased it out in the fourth quarter of 2013 – that is, bidders did not require loss-sharing. Read in the light of this history, the Flagstar P&A (with no loss-sharing) suggests that industry conditions are sound, while the FCB P&A (with a 50% loss-sharing) indicates some concerns although nothing near financial crisis levels.
Liquidity protection. Unusually, the FDIC is providing substantial liquidity to FCB in the form of a $70 billion credit facility. The facility is designed to protect FCB against future withdrawals; under the P&A, FCB is assuming less than $70 billion in deposits – $56.5 billion. There is no such facility for Flagstar. Both FCB and Flagstar also may access the discount window, the Federal Reserve’s Bank Term Funding Program, and advances from the appropriate Federal Home Loan Bank.
FDIC equity appreciation rights. Both P&As give the FDIC an interest in any appreciation in the value of the common stock of the acquirors’ holding companies during brief periods following the respective acquisitions. Under the FCB P&A, the FDIC has an option to receive a cash payment up to $500 million reflecting an increase in FC BancShares stock price; the FDIC exercised this option on March 28 and received the maximum amount. The Flagstar P&A gives the FDIC an option to purchase up to $300 million in NYC Bancorp common stock; the FDIC has exercised this option as well.
Retained assets. In both transactions, the FDIC (as receiver) has retained proportionally more assets than in a typical P&A. While reports of total amounts seem to differ, the FDIC appears to have a total of at least $174 billion in assets to dispose of after the sales of the bridge banks. Based on the FDIC press releases, the retained assets contain approximately 57% of SVB’s assets and 65% of Signature’s assets (both calculated as of December 31, 2022.) The FDIC’s holdings now include substantial asset portfolios: from both banks together, the FDIC holds approximately $114 billion in securities, roughly $87 billion (of which a large portion are mortgage-backed securities) from SVB and $27 billion from Signature; and, from Signature, a $60 billion loan portfolio, comprised primarily of commercial real estate loans, commercial loans, and a smaller pool of single-family residential loans.
The FDIC will begin to market the Signature loan portfolio later this summer. It has also retained a financial advisor to sell the securities portfolios in a “gradual and orderly” way so as to minimize any adverse impact on market functioning. By statute, sales of assets by the FDIC must abide by five principles: maximizing the return, minimizing the loss, ensuring adequate competition, prohibiting discrimination, and preserving housing for low- and moderate-income individuals.
Retained liabilities. Both FCB and Flagstar assumed nearly all of the deposits of SVB and Signature, respectively. In both transactions, however, any crypto-related deposits remain with the FDIC.
(1) Public versions of both the Signature P&A and the SVB P&A have been posted on the FDIC website. The holding companies of both acquirors have summarized the material parts of the agreements in Form 8- Ks. New York Community Bancorp, Inc. (“NYC Bancorp”), the holding company of Flagstar, filed two 8- Ks, one on March 20, 2023, and the other on March 23, 2023. First Citizens BancShares, Inc. (“FC BancShares”), the holding company of FCB, filed an 8-K on March 27, 2023.
