Tag: Federal Deposit Insurance Corporation (FDIC)

The FDIC Finds a Buyer for Silicon Valley Bank

First Citizens Bank, based in based in Raleigh, North Carolina has purchased Silicon Valley Bank. Photo from the Wall Street Journal.

When the Federal Deposit Insurance Corporation (FDIC) took over Silicon Valley Bank (SVB) on March 10, 2023, it kept the bank in operation by setting up a “bridge bank.” The Silicon Valley Bridge Bank kept SVB’s branches running and allowed depositors–including those with deposits above the FDIC’s $250,000 insurance limit–to withdraw funds. The Silicon Valley Bridge Bank borrowed from the Federal Reserve Bank of San Francisco to ensure that it had the funds available to meet deposit withdrawals.

The FDIC prefers to use bridge banks to operate failed banks for as short a time as possible. Typically, the FDIC will seize a bank on a Friday and ideally will have identified another commercial bank willing to purchase the seized bank by the start of business on the following Monday. Finding a bank to buy SVB proved difficult, however, for two reasons:

1. The Biden administration has been skeptical of increasing concentration in the banking industry. That fact may have kept the FDIC from attempting to recruit a large bank to buy SVB, or large banks may have been reluctant to buy SVB because they believed that the Federal Trade Commission or the antitrust division of the U.S. Department of Justice would have blocked the purchase or would have imposed restrictions on how the bank could be operated.

2. Following the Great Financial Crisis of 2008-2009, some banks that purchased failing financial firms found themselves having to deal with loans and securities that had declined in value and with lawsuits from investors in the bank. That history may have caused many banks to be reluctant to buy SVB.

After two attempts to auction SVB failed to attract a buyer, on Sunday, March 26, the FDIC announced that First Citizens Bank, a regional bank based in Raleigh, North Carolina had agreed to purchase SVB. Before the merger, First Citizens was the thirtieth largest bank in the United States, so its purchase of SVB would not significantly increase concentration in retail banking.

Under terms of the purchase, on Monday morning First Citizens began operating SVB’s 17 branches, which now become First Citizens’ branches, assumed responsibility for SVBs deposits, and received $70 billion in SVB’s assets, at a 16.5 percent discount. About $90 billion in SVB’s assets will remain with the FDIC until a buyer for them can be found. The FDIC believes it will have lost about $20 billion from its Deposit Insurance Fund (DIF) as a result of the SVB’s failure. The FDIC will use a special levy on commercial banks to replenish the DIF.

The FDIC’s announcement of First Citizens’ purchase of SVB can be found here.

Is the Banking Crisis Over? Some Banks Don’t Seem to Think So

Bank borrowing from the Fed. Figure from the Federal Reserve Bank of St. Louis FRED data set.

Discount loans were the Fed’s original policy tool. As we discuss in Macroeconomics, Chapter 15, Section 15.4 (Economics, Chapter 25, Section 25.4) and in Money, Banking, and the Financial System, Chapter 13, Section 13.1, Congress established the Fed to serve as a lender of last resort making loans to banks that were having temporary liquidity problems because depositors were withdrawing more funds than the bank could meet from its own cash holdings. Discount loans were intended to be short term, often overnight, and were to be made only to healthy banks that were solvent—the value of the banks’ assets were greater than the value of their liabilities—and that could pledge short-term business loans (called at the time “real bills”) as collateral. 

Today, healthy banks with temporary liquidity needs can request a loan through the Fed’s discount window (an antique term dating from the early years of the system when the loans were literally made at a specific window at each regional Fed bank) from the Fed’s primary credit facility, or standing lending facility. Over the years, the importance of discount loans declined. The establishment of the Federal Deposit Insurance Corporation (FDIC) in 1934 reassured households and businesses that held deposits below the insurance limit that they did not need to withdraw their deposits at the first sign of trouble with their local bank. As a result, after the establishment of the FDIC few banks experienced runs.

In addition, the development of the federal funds market gave banks another source of short-term credit. Because the federal funds rate is typically lower than the interest rate (the discount rate) that the Fed charges on discount loans, most banks find borrowing in the federal funds market preferrable to borrowing at the Fed’s discount window. As banks’ use of discount loans declined, many banks were afraid that going to the discount window would be seen by depositors and investors as a sign the bank was in financial trouble. This stigma was an additional reason that most banks avoided borrowing at the discount window.

As the figure shows, in the years leading up to the Great Financial Crisis, the volume of discount loans had dwindled to very low levels. After a surge in discount borrowing following the failure of the Lehman Brothers investment bank in September 2008, discount borrowing gradually fell back to low levels. A smaller surge in discount borrowing occurred in the spring of 2020 at the beginning of the Covid–19 pandemic in the United States. Discount borrowing quickly declined during the following months.

The failure of Silicon Valley Bank (SVB) on March 10 and Signature Bank on March 12 pushed the volume of discount loans to record levels, as shown by the vertical line at the far right of the figure. The values in the figure include three types of loans:

  1. Primary credit, which are traditional discount loans.
  2. Other credit extensions, which are loans from Federal Reserve District Banks to the FDIC to fund so-called bridge banks established by the FDIC to operate SVB and Signature Bank until either purchasers can be found for the banks or their assets can be sold and the banks permanently closed.
  3. Loans under the Fed’s Bank Term Funding Program, which are loans the Fed has made under this new facility established on March 12. The loans are secured by the borrowing banks’ holdings of Treasury and mortgage-backed securities.

The data underlying the figure come from the Fed’s H.4.1 statistical release, “Factors Affecting Reserve Balances of Depository Institutions and Condition Statement of Federal Reserve Banks,” which can be found here.

Which banks are doing this borrowing? To avoid stigma, the Fed doesn’t release the names of the banks for two years, but, presumably, regional banks, such as First Republic Bank, that have been experiencing substantial depositor withdrawals are doing so. (First Republic has publicly announced that it is borrowing from the Fed.) The amounts borrowed are so large, however, that it appears that a significant number of banks are either in need of liquidity or are preparing to be able to meet waves of deposit withdrawals should they occur. 

Whether the banking crisis that began with the failure of SVB is largely over is unclear at this point, but the managers of some banks are preparing in case the crisis continues. 

Sheila Bair Would Have Voted “No” on SVB

Photo from Washington College via Wikipedia.

Sheila Bair served as chair of the Federal Deposit Insurance Corporation (FDIC) from 2006 to 2011. This week, she was interviewed on the Wall Street Journal’s “Free Expression” podcast. She states that she had still been chair of the FDIC she would have been against the decision on Sunday, March 12, 2023, to declare that Silicon Valley Bank (SVB) as being systemically important. The declaration formed the basis of the decision by the FDIC, the Federal Rerserve, and the Treasure that SVB’s customers with deposits above the normal $250,000 insurance limit would be allowed to withdraw all their funds beginning Monday morning.

She argues that it would have been better to have followed the FDIC’s usual procedure of allowing insured depositors to withdraw their funds and declaring a “dividend” that would have allowed withdrawal of 50 percent of uninsured deposits. As SVB’s assets were sold, uninsured depositors would be able to make additional withdrawals, although because the value of the assets would likely be less than the value of the deposits, uninsured depositors would suffer some losses.

She believes that SVB’s problems were the result of poor management and she doubts that the bank’s uninsured depositors suffering losses would have led to runs on the deposits of other regional banks.

The wide-ranging interview is well worth listening to in full. The podcast can be found here.