As the receiver of Silicon Valley Bank (SVB), the Federal Deposit Insurance Corporation (FDIC) is charged with managing SVB's assets to preserve their value and to dispose of them as quickly as possible, consistent with the objective of maximizing the net return on those assets. Now that the FDIC has announced it has entered into a purchase and assumption transaction for all deposits and loans of the interim Silicon Valley Bridge Bank by First–Citizens Bank & Trust Company, Raleigh, North Carolina (First Citizens), borrowers and depositors will have opportunities to alter their new relationships with First Citizens or seek new financial partners. Opportunities also could exist for non-bank entities to purchase some of First Citizens' newly acquired loans.
As Congressional testimony has indicated, SVB failed because its management did not effectively manage its interest rate and liquidity risk, which led to the bank suffering a devastating and unexpected run by its uninsured depositors in a period of less than 24 hours. Congressional testimony further revealed that there was “ineffective board oversight, risk management weaknesses, and the bank's internal audit function” was “deficient.” As a result, SVB “was subject to growth restrictions” imposed by the Federal Reserve.
Additionally, loans and deposits grew exponentially over the past two years. SVB's business model was to concentrate its lending to the technology and venture capital sector. What has been lost in the discussion of SVB's failure is the quality of the loans it made in this sector during its period of rapid growth. It is not known how the Federal Reserve examiners rated the quality of SVB's loan portfolio, but in the FDIC's analysis of the transaction with First Citizens, it estimates a loss of $20 billion (which the FDIC Chairman acknowledges might grow before the receivership is ended). Reflecting the risk and low quality of the $72 billion loan portfolio that was transferred by the FDIC to First Citizens, the loans were purchased at a $16.5 billion discount.
What This Means for Borrowers & Depositors Going Forward
It is expected that many of the SVB borrowers could be engaged in loan workouts, defaults, foreclosure, or bankruptcies. Some customers might want to renegotiate their loans with First Citizens or obtain financing from other banks.
Many of the uninsured deposits were from venture capital firms and the tech sector. These companies generally do not have operating revenue, so they kept large balances in banks in the form of cash deposits, to make payroll and cover operating expenses. All of these deposits, mostly above the $250,000 insurance limit, were transferred to First Citizens.
Billions of dollars of deposits left SVB during the run preceding its closing and afterwards, when it was controlled by the FDIC. All the remaining deposits were transferred to First Citizens, but the FDIC has stated that these deposits “will continue to be insured by the FDIC up to the insurance limit,” further increasing First Citizens book of uninsured deposits. First Citizens' deposit base is almost evenly split between insured and uninsured, and increasing its uninsured deposits could increase its risk. As most of these new uninsured deposits are tied to the loans it acquired, First Citizens might seek to dispose of these loans to reduce that risk.
SVB's failure has caused disruption throughout the banking industry. This disruption will create opportunities and risks in its wake. Lewis Brisbois has created a Bank Default Response Team, led by Washington, D.C. Partner and former General Counsel of the FDIC Thomas A. Brooks, to assist its clients in navigating the changes that will occur. The team also includes several seasoned lawyers who represent clients in the banking, bank regulatory, securities, workouts, lending, bankruptcy, real estate, healthcare, and start-up industries. Visit our Banking & Finance Practice page to learn more about the firm's capabilities in this area.
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