Silicon Valley Bank deal offers beleaguered banking investors relief

NEW YORK - Regional United States lender First Citizens BancShares scooped up the assets of failed peer Silicon Valley Bank (SVB) on Monday, in a vote of confidence for the battered banking sector that prompted a rally in bank shares.

SVB’s collapse in March was the trigger for the worst banking shock since the 2008 global financial crisis, sending bank stocks globally on a wild ride and raising fears of systemic stress that could lead to more bank failures.

But news of the SVB deal – after previous attempts to sell the bank failed – and a weekend free of fresh troubles helped boost confidence, especially among fragile US regional banks, whose stocks rose sharply on Wall Street on Monday.

Broader indicators of financial market stress were also calmer, with government bond yields rising and the euro higher against the dollar.

“The banking sector had been holding its breath over the weekend, wondering whether Monday morning would deliver another bank in need of a rescue,” said Ms Danni Hewson, head of financial analysis at AJ Bell.

“Instead, nerves have been bathed in the soothing balm of certainty as one of America’s largest family banks gobbled up a chunk of Silicon Valley Bank, wiping the name from America’s streets and hopefully from the front of investors’ minds.”

First Citizens BancShares, which has built a reputation of buying troubled rivals, bought all of SVB’s loans and deposits, giving the Federal Deposit Insurance Corporation (FDIC) equity rights in its stock worth as much as US$500 million (S$665 million) in return.

First Citizens said it would take on assets of US$110 billion, deposits of US$56 billion and loans of US$72 billion, and expand in California.

The FDIC retains some US$90 billion in securities held for disposal.

“We see the sale of SVB to a regional bank as politically helpful to the banks. It allows the industry to argue that large regionals can be resolved without help from the mega banks,” said analysts at TD Cowen.

Shares of First Citizens, which also has an agreement to share some potential losses with the regulator, soared 53.7 per cent on Monday.

Solid footing

Top US banking regulators plan to tell Congress that they will comprehensively review their policies in a bid to prevent future collapses and signalled that new bank rules are in the works – such as tightening up requirements for larger regional banks and how to police heavy reliance on uninsured deposits.

Fed vice-chair for supervision Michael Barr and FDIC chairman Martin Gruenberg – who are due to speak at a Senate hearing on Tuesday – will also echo other policymakers in emphasising that the overall financial system remains on solid footing.

The White House also reiterated its reassurances on banks, saying the US banking system is safe.

The collapse of SVB and New York-based peer Signature Bank has left politicians wary of public perceptions that banks are being bailed out again, after anger over the sector’s costly rescue in 2008.

The FDIC estimates SVB’s failure will cost a federal deposit insurance fund used to rescue banks about US$20 billion.

The fund does not take US taxpayer money and is instead replenished by a levy on the entire banking sector.

Signature’s failure cost the FDIC US$2.5 billion but had no other direct cost to taxpayers outside of the FDIC, Wells Fargo analysts wrote.

“The bottom line is that the second- and third-largest bank failures are now resolved,” said Wells Fargo analysts.

Buying time

The First Citizens deal boosted shares of other smaller regional banks, including First Republic, which has been at the forefront of investors’ minds. Its shares jumped almost 12 per cent.

Regional peers Western Alliance Bancorp and PacWest Bancorp each climbed more than 3 per cent.

Major US banks JPMorgan Chase & Co, Citigroup and Bank of America advanced between 2.9 per cent and 5 per cent.

Banking stocks in Europe also rebounded after a shaky previous session.

Germany’s biggest lender Deutsche Bank, which had slumped 8.5 per cent on Friday alongside a sharp jump in the cost of insuring its bonds against default, rose 6.2 per cent.

The Stoxx index of top European bank shares is still down more than 17 per cent in March, however, and the US KBW regional bank index has lost 20 per cent, as investors remain on edge about what is next.

The banking tumult has prompted investors to question whether major central banks will continue to pursue aggressive interest rate hikes to tamp down inflation, and whether tightened lending will hurt the global economy.

But Bank of England governor Andrew Bailey signalled that interest rate setters would continue to focus on fighting inflation and would not be swayed unduly by worries about the health of the global banking system.

Even before the present crisis erupted, bank lending to euro zone companies had slowed for the fourth straight month in February, signalling increased caution from lenders.

In the US, flows into less risky money market funds have risen by more than US$300 billion in the past month to a record atop US$5.1 trillion. REUTERS