London/Oakland, California CNN —
In a milestone for the banking crisis, a company has bought most of the remains of the bank that triggered the meltdown.
First Citizens Bank has bought the remaining assets, deposits and loans of Silicon Valley Bank, the US lender that collapsed earlier this month and sparked the crisis, the Federal Deposit Insurance Corporation said in a statement late Sunday.
Investors were relieved to hear that the remnants of SVB have finally found a strong home as it could mean the crisis is beginning to ease.
First Citizens (FCIZP) shares are up more than 47% in morning trade, not only reversing losses First Citizens (FCIZP) shares have suffered since the SVB collapse, but also catching up on the bank’s share redemptions the highest level since November. Other bank stocks also gained in morning trade.
And the KBW Nasdaq Bank Index, which had lost more than 20% since the banking crisis began, rose 4% early Monday before retreating to a 2% gain later in the morning.
Beginning Monday, 17 branches of SVB will begin operations as “Silicon Valley Bank, a division of First Citizens Bank,” First Citizens said. But SVB customers should continue using their current branch until they hear from First Citizens.
The collapse of SVB, which was quickly followed by Signature Bank – another regional US lender – shook global financial markets and triggered a loss of investor and depositor confidence in other vulnerable banks.
Such a deal would have been unlikely just a few weeks ago.
North Carolina-based First Citizens — which provides general banking services through more than 550 branches and offices in 23 states — was about half the size of SVB at the end of last year. With assets of $109 billion as of December 31, First Citizens was the 30th largest US bank according to the Federal Reserve.
SVB, on the other hand, had assets of $209 billion at the time and was the 16th largest bank in the country. After the collapse, regulators transferred SVB’s deposits and loans to a bridge bank.
With the purchase of most of SVB’s business, First Citizens will now be slightly larger than SVB before the collapse, with estimated assets of $219 billion.
As part of the deal, First Citizens is not taking over most of the $90 billion in US Treasuries SVB was holding when regulators took over. It was the decline in the value of these bonds – and not the losses on the loans the SVB had made – that caused problems for the SVB and the entire banking system.
Treasuries held by SVB had fixed interest rates that are now below market value thanks to the US Federal Reserve’s policy of steadily raising interest rates over the past year.
Essentially, when SVB announced that it had to sell about $21 billion of those government bonds at an after-tax loss of $1.8 billion to cover customer withdrawals, it sparked a run on the bank.
Regulators shut down the SVB on Friday March 10 after customers withdrew $42 billion in a single day. It was the second largest bank failure in US history, behind only Washington Mutual in 2008. In an extraordinary move, the FDIC agreed to guarantee all SVB deposits — including those over $250,000 per account that are normally insured.
With the purchase, First Citizens now has $110 billion in SVB assets, $56 billion in deposits and $72 billion in loans, based on the most recent information from the FDIC. The bank also has an agreement with the FDIC that will protect the bank from potential losses on the SVB business loans it has purchased.
“We are committed to building and maintaining the strong relationships that SVB’s Global Fund Banking business has with private equity and venture capital firms,” said Frank Holding, chairman and CEO of First Citizens, in an explanation.
Craig Nix, the bank’s chief financial officer, told investors Monday morning that the bank is hoping to win back some of the SVB customers who have withdrawn their deposits fearing losing access to the cash they need.
While some smaller and mid-sized banks have also lost deposits since the banking crisis began, Nix said deposits at First Citizens grew by $1.3 billion this quarter, even before the deal was announced.
However, should there be a rush for deposits at the combined bank following this deal, First Citizens also announced that it has arranged a line of credit with the FDIC for up to $70 billion so it has the cash it needs. It is expected to have $145 billion in deposits in the combined bank.
First Citizens is buying the $72 billion SVB loans for about $55 billion, a 29% discount, the FDIC said.
“The FDIC estimates the cost of Silicon Valley Bank’s failure to its deposit insurance fund at approximately $20 billion. The exact cost will be determined when the FDIC terminates receivership,” the regulator said.
The second largest bank in Switzerland, Credit Suisse (CS), is the biggest victim of the current crisis. It had to be bailed out a week ago by larger competitor UBS (UBS) in an emergency takeover orchestrated by the Swiss government.