Silicon Valley Bank & Signature Bank Portfolios Up For Sale After US Regulatory Pressure.

Silicon Valley Bank & Signature Bank Portfolios Up For Sale After US Regulatory Pressure.

According to persons familiar with the situation, the Federal Deposit Insurance Corporation (FDIC) has hired consultants to sell the securities portfolios that the new owners of the defunct Silicon Valley Bank and Signature Bank rejected.

The portfolios are made up of low-yielding assets that the two regional banks accumulated while interest rates were almost zero, like Treasuries and US government agency-backed securities.

As current interest rates are higher than the yield on these assets, the new owners of Silicon Valley Bank and Signature Bank, First Citizens Bancshares Inc. and New York Community Bancorp Inc., respectively, would have been forced to take a loss by assuming ownership.

According to regulatory filings and public assertions, the securities portfolios of Silicon Valley Bank and Signature Bank have a face value of around $90 billion and $26 billion, respectively. In order to disclose potentially damaging information regarding the sale process, the sources stipulated anonymity. The FDIC decided not to provide a comment.

It’s unknown how much money the sale of the portfolios will cost the FDIC’s deposit fund. All US banks that participate in the deposit insurance programme of the FDIC are required to pay a fee to replenish the fund, which is used to guarantee deposits at failed lenders.

The FDIC predicts the deposit fund will lose $20 billion and $2.5 billion, respectively, from the sales of Silicon Valley Bank and Signature Bank. After-sales of the banks’ loan books and securities portfolios are complete, it will reveal the final numbers.

While some of the loans are being sold independently, others were transferred to First Citizens and New York Community with FDIC insurance. According to Reuters this week, the FDIC has hired Newmark Group Inc. to sell the $60 billion in retained loans from Signature Bank.

Silicon Valley Bank sold $21.5 billion worth of its securities portfolio on March 8, two days before it went bankrupt, resulting in a loss of $1.8 billion for the company. This reflected the portfolio’s potential for loss. The 10-year Treasury yield at the time was roughly 3.9%, while the portfolio’s average yield was only 1.79%.

What Caused Silicon Valley Bank to Fail?

Between 2019 and 2022, Silicon Valley Bank had a tremendous expansion, which left it with a sizable number of deposits and assets. A tiny portion of those deposits was kept in cash, but the majority were utilised to purchase Treasury bonds and other long-term obligations. These investments often have minimal risk levels and low returns.

Bonds issued by Silicon Valley Bank, however, were riskier investments as a result of the Federal Reserve raising interest rates in reaction to high inflation. Silicon Valley Bank’s bonds lost value when investors could purchase them at greater interest rates.

When this was going on, a number of Silicon Valley Bank’s clients—many of whom work in the IT sector—experienced financial difficulties and started taking money out of their accounts.

Silicon Valley Bank made the decision to sell some of its investments in order to handle these substantial withdrawals, but those sales were unsuccessful. SVB’s $1.8 billion loss signalled the beginning of the bank’s demise.

Some people think that the repeal of the Dodd-Frank Act, which was the primary banking regulation implemented in response to the financial crisis of 2008, led to Silicon Valley Bank’s demise much earlier.

As part of Dodd-Frank, banks with assets of $50 billion or more would be subject to stricter regulations and oversight. Yet President Donald Trump‘s 2018 Economic Growth, Regulatory Relief, and Consumer Protection Act drastically altered that requirement. The 2018 law raised the threshold to $250 billion rather than $50 billion.

Silicon Valley Bank didn’t have enough assets, despite being the 16th-largest bank in the nation, to be subject to additional regulations and oversight. Regulators would have kept a closer eye on SVB if the threshold had never been altered.

A Chronology of the Collapse

From a distance, Silicon Valley Bank’s demise occurred suddenly over the course of just a few days. This is a chronology of events:

Silicon Valley Bank disclosed on March 8 that it had lost $1.8 billion on its bond portfolio and that it intended to raise $2.25 billion by selling both regular and preferred stock. Following this disclosure, Moody reduced Silicon Valley Bank’s issuer and long-term local currency bank deposit ratings.

March 9: At the start of trading, SVB Financial Group, the holding company for Silicon Valley Bank, saw a sharp decline in its stock price. The stock values of other significant banks also decreased.

In addition, more SVB clients started making withdrawals, totalling $42 billion in attempted withdrawals. On March 10, SVB Financial Group stock trading was suspended.

Federal regulators declared they would take over the bank before it could begin operations for the day. Deposits were transferred to a bridge bank established and run by the FDIC after regulators failed to locate a buyer for the bank, with the assurance that protected deposits would be accessible by Monday, March 13.

Federal regulators announced emergency steps on March 12 in reaction to the fall of Silicon Valley Bank, enabling clients to reclaim all monies, including uninsured ones. SVB Financial Group, the parent company of Silicon Valley Bank, filed for bankruptcy on March 17.

The entire Silicon Valley Bridge Bank was acquired by First Citizens Bank on March 26, with the exception of $90 billion in securities and other assets that were still in FDIC receivership.

Effect on Investors & Depositors

For each type of account, the FDIC protects bank deposits up to $250,000 per depositor per bank. In other words, you would receive a full refund if you had $250,000 in a Silicon Valley Bank account.

However, deposits in most Silicon Valley Bank accounts exceeded $250,000, making the majority of the money uninsured. The majority of the time, this would imply that account holders would lose any funds above that amount.

To assist, the Federal Reserve declared on March 12 that it would invoke a systemic risk exemption, which would result in the full repayment of all depositors, including those whose funds were not insured.

Investors won’t have as much luck, though. The FDIC can shield depositors from losses, but it is unable to do the same for shareholders and holders of unsecured debt. To put it another way, anyone who owned stock in SVB Financial Group may not be able to receive their money back.

Who Covered the Rescue Cost?

For each type of account, the FDIC protects bank deposits up to $250,000 per depositor per bank. In other words, you would receive a full refund if you had $250,000 in a Silicon Valley Bank account.

Several people quickly questioned what it would entail for taxpayers when word of regulators’ decision to reimburse all depositors spread.

When the Federal Reserve announced its decision, it made it plain that no losses would be borne by taxpayers. Instead, the Federal Deposit Insurance Corporation, the agency in charge of protecting customer deposits, will provide the money.

The FDIC is able to absorb these kinds of losses because of the quarterly premium payments it receives from all insured institutions. On March 26, 2023, the FDIC made an estimate that the failure of SVB would cost its Deposit Insurance Fund around $20 billion.

Yet to argue that taxpayers won’t be responsible for any losses would be oversimplified. It’s possible that some of the losses will trickle down to you after taxes, even if they don’t cover everything.

If your bank must pay extra for deposit insurance, it may choose to increase the interest rate it charges on loans to you or reduce the interest it pays on savings accounts.

Are Credit Unions More Secure Than Banks?

Credit unions are a non-profit alternative to traditional commercial banks. This means they provide no defence in and of themselves. Each account you open will provide the same level of security for your money.

Similar to the FDIC’s coverage of bank deposits, the National Credit Union Administration (NCUA) provides deposit insurance for credit unions up to $250,000.

Conclusion

Since the 2008 financial crisis, the largest bank failure was caused by Silicon Valley Bank’s demise in March 2023. Additionally, the collapse severely undermined consumer confidence in the economy, given the preexisting worries of a recession.

The bank’s bankruptcy served as a reminder that the financial system has a number of flaws, including a lack of regulation for banks with assets under $250 billion.

Fortunately, federal authorities reacted swiftly to the collapse of SVB, putting in place a number of measures to lessen depositor losses and restore trust in the banking industry and the economy at large.

Edited by Prakriti Arora