The Federal Deposit Insurance Corp. received 27 offers from 18 bidders on all or parts of Silicon Valley Private Bank and Silicon Valley Bridge Bank NA before agreeing to sell the bridge bank to First Citizens BancShares Inc., Chairman Martin Gruenberg said in written testimony released ahead of a March 28 hearing before the Senate Banking Committee.
Separately, there were five bids from four interested parties for Signature Bridge Bank NA before the agency approved Flagstar Bank NA, a subsidiary of New York Community Bancorp Inc., as the bridge bank's purchaser.
Gruenberg said in his testimony that the US financial system remains sound despite the bank turmoil, but he pointed to investigations into the banks' oversight and potential new regulations. Some highlights include the following.
Behind the scenes at bank failures
Silicon Valley Bank notified the FDIC of its $42 billion deposit run on the evening of March 9, and regulatory agencies worked "through the night" to put a resolution strategy in place, Gruenberg said. The agency solicited purchasers for the failed bank over the following weekend but received only two bids, of which only one was a valid offer. It then moved to create a bridge bank to engage a wider range of potential acquirers while continuing the bank's operations.
The FDIC later extended the bidding process even though there was "substantial interest from multiple parties" because it determined it needed additional time to explore all options and maximize value, he said.
At Signature Bank, a "contagion effect" led to deposit outflows March 9 and 10. The bank lost 20% of its deposits on March 10 and "could not provide accurate data regarding the amount of the deficit," Gruenberg said. Resolution of the negative balance required a "prolonged joint effort" among Signature Bank, regulators and the Federal Home Loan Bank of New York to pledge collateral and obtain the necessary funding from the Federal Reserve's discount window to cover the negative outflows, he added.
The Signature Bank emergency funding was accomplished "with minutes to spare" before the Fed's wire room closed, Gruenberg.
A harbinger in Silvergate
Prior to those failures, Silvergate Capital Corp.'s self-liquidation "demonstrated how traditional banking risks, such as a lack of diversification, aggressive growth, maturity mismatches in a rising interest rate environment, and sensitivity to liquidity risk, when not managed adequately, could combine to lead to a bad outcome," Gruenberg said. "Many of these same risks were also present in the failure of SVB."
Common threads
Both SVB and Signature Bank relied heavily on uninsured deposits, while both Signature Bank and Silvergate had cryptocurrency exposure, Gruenberg said. Silvergate and SVB both had accumulated losses in their securities portfolios.
"When Silvergate Bank and SVB experienced rapidly accelerating liquidity demands, they sold securities at a loss. The now realized losses created both liquidity and capital risk for those firms, resulting in a self-liquidation and failure," he said.
Preliminary lessons from the failures are that significant amounts of uninsured deposits open banks to "deposit run vulnerabilities" and that selling securities for a loss creates liquidity and capital risk, Gruenberg said.
Future regulation
Gruenberg said the failures of Silicon Valley Bank and Signature Bank show the impact that banks with assets of $100 billion or more can have on financial stability, adding that "prudential regulation" of banks of that size merits "serious attention," particularly for capital, liquidity and interest rate risk. Such regulation would include the capital treatment tied to unrealized losses in banks' securities portfolios, he said.
"Given the financial stability risks caused by the two failed banks, the methods for planning and carrying out a resolution of banks with assets of $100 billion or more also merit special attention, including consideration of a long-term debt requirement to facilitate orderly resolutions," Gruenberg added.
Deposit insurance
Gruenberg estimated the total loss to the FDIC's Deposit Insurance Fund from the two bank failures at $22.5 billion, with $20 billion of that from the resolution of Silicon Valley Bank and $2.5 billion from the resolution of Signature Bank.
Regulators felt it was prudent to enact the "systemic risk exception" to guarantee all deposits because a significant number of depositors were small and medium businesses that were put at risk of not making payroll or paying suppliers, Gruenberg said. For example, the 10 largest deposit accounts at Silicon Valley Bank held $13.3 billion in total, he said.
The losses to the fund will be repaid through special assessments on banks, and the FDIC plans to issue a notice of proposed rulemaking with details in May. The agency also plans to review the deposit insurance system and release a report by May 1 reviewing deposit insurance coverage levels, excess deposit insurance, and implications for risk-based pricing and deposit insurance fund adequacy.
Big banks appear to see deposit inflows
Banks are reporting instances of corporate depositors moving money to diversify their exposures and increase their deposit insurance coverage, Gruenberg said. Some bank clients have also moved their deposits out of the banking system and into government money market funds or US Treasury bonds. "In general, the largest banks appear to be net beneficiaries of deposit flows," he said.
However, Gruenberg said deposit outflows have moderated at the banks that were experiencing large outflows the week of March 6, as those banks worked preemptively to increase liquidity. Banks have relied on Federal Home Loan Bank advances to strengthen liquidity and are also prepared to access the Fed's discount window and Bank Term Funding Program by ensuring that they have prepositioned collateral.
Moreover, while some banks reported a "moderate decline" in total deposits over the past two weeks, the vast majority reported no material outflows, he said.
Investigations
The FDIC has launched investigations into directors, officers, professional service providers and other parties affiliated with the failed banks for losses they caused to the banks and misconduct in the management of the banks, Gruenberg said. The agency's chief risk officer will review the FDIC's supervision of Signature Bank and plans to release a report by May 1.
The Fed announced a similar review on March 13, to be completed also by May 1.
