Silicon Valley Bank experienced a historic collapse on March 10. This briefly turned into a financial crisis that brought down two other banks. A new buyer is found to have bought the Santa Clara bank from the largest regional bank in America two weeks later.
First Citizens Bancshares Inc. purchased large parts of Silicon Valley Bank according to the FDIC. This move puts them in the Top 25 U.S. banks.
Via The Wall Street Journal
$119 billion in deposits, $72 billion of SVB loans, and approximately $72 billion in SVB’s loans will be purchased at a discount of $16.5 billion. SVB’s securities worth $90 billion will remain under receivership.
Santa Clara-based SVB was taken over by regulators on March 10. The panic that erupted after the collapse of Signature Bank led to the bankruptcy of Santa Clara, Calif.-based SVB on Saturday. On March 10, regulators took control.
This sale is a significant milestone in regulatory efforts to fix up two of the most devastating bank failures in history. Investors are worried about the future of the global financial system.
FDIC agreed that it would share any First Citizens’ losses and potential gains from SVB’s commercial loan portfolio. The FDIC estimates that the failure of SVB would cost the federal insurance fund which manages around $20 billion or approximately 10% of the bank’s assets.
SVB’s collapse seems to be mainly due to risky business practices, some of which federal regulators were well aware of in advance. Added to this, a run on deposits and rising interest rates caused tech companies to withdraw cash that the bank didn’t have.
The collapse resulted in the collapse of New York’s Signature Bank, which the FDIC also took control of two weeks ago. There was also the near-collapse and dissolution of First Republic (another tech-aligned banking institution). The federal regulators decided to support uninsured depositors of Signature Bank and Silicon Valley Banks in an effort to calm the fears of depositors at banks.
In light of this news, the markets have seen a rebound and Wall Street appears more confident in the financial industry. According to the Wall Street Journal article, however, smaller financial institutions still face a confidence crisis.
However, smaller U.S. banks are still losing deposits due to an increase in inflows following the Covid-19 pandemic. These outflows are mostly going to the United States’ largest lenders, many of whom are considered to have implicit government backing. In part, these outflows are due to the higher rates offered in money-market funds and short-term Treasury debt. The Federal Reserve has raised interest rates sharply in an effort to curb high inflation.
However, the big question is how these financial moves could impact the Federal Reserve moving forward. Wall Street warned that such a move could prove disastrous. However, the Federal Reserve Board voted in favor of increasing the interest rate by 25 base points (0.25%) to continue its goal to bring inflation down to 2%.