Silicon Valley Bank deal soothes broader markets, but default stress haunts banks
A buyer for large chunks of Silicon Valley Bank's (SVB) deposits and loans helped cast an uneasy calm on Monday (Mar 27) over fragile markets which have been roiled by worries of a credit crunch and systemic bank stress.
First Citizens BancShares bought all the loans and deposits of SVB and gave the Federal Deposit Insurance Corporation (FDIC) equity appreciation rights in its stock worth as much as US$500 million in return, the FDIC said in statement.
Seventeen former SVB branches will open as First Citizens branches on Monday. First Citizens acquires about US$72 billion in SVB assets at a discount of US$16.5 billion and the estimated cost of SVB's failure to FDIC's deposit insurance fund is about US$20 billion, the FDIC said.
North Carolina-based First Citizens said in a statement that it did not buy other assets or debts of SVB Financial Group, the former parent company of Silicon Valley Bank.
The deal has given markets some respite as it was the first weekend in several weeks that did not bring news of fresh banking collapses, rescue deals or emergency help from authorities to shore up confidence.
"You sweep Silicon Valley off to another buyer, which is good, but the bigger issue is guaranteeing deposits at all those other (regional) banks," said IG Markets analyst Tony Sycamore in Sydney.
"It's a little bit of calm before the next storm."
Last week ended with indicators of financial market stress flashing and Germany's biggest lender Deutsche Bank in the crosshairs, with its shares down 8.5 per cent on Friday and the cost of insuring its bonds against default up sharply.
On Monday, bank shares in Asia were mixed - steady in Australia and Tokyo but slipping in Hong Kong, where Standard Chartered shares fell 4 per cent.
S&P 500 futures rose 0.5 per cent and European futures rose 1 per cent.
The collapse of SVB little more than two weeks ago has reverberated around the world, sending United States depositors fleeing smaller banks for larger cousins while the hit to confidence forced Credit Suisse into the arms of rival UBS last week.
In March, the Stoxx index of European bank shares is down more than 18 per cent and the US KBW regional bank index has lost 21 per cent, with investors on edge about what is next.
"It's clearly not over," Australia and New Zealand Banking Group chief executive Shayne Elliott said in an interview posted to the bank's website, where he said the turmoil has the potential to escalate into a bigger financial crisis.
"I don't think you can sit here and say: 'Well, that's all done, Silicon Valley Bank and Credit Suisse and, you know, life will go back to normal,'" Elliott said. "These things tend to roll through over a long period of time."
CARROTS, STICKS AND ACRONYMS
The sudden spike in tensions for banks has raised questions about whether major central banks will continue to pursue aggressive interest rate hikes to tamp down inflation, and whether tightened lending will hurt the global economy.
In Europe, bank bonds are under pressure and credit default swaps (CDS), or the cost of insurance against defaults, uneasily high. Deutsche Bank's five-year CDS hit their highest since late 2018 on Friday, data from S&P Global Market Intelligence showed.
In the US, where flows into money market funds have risen by more than US$300 billion in the past month to a record atop US$5.1 trillion, focus is on depositors' confidence in regional lenders - which could take some salve from an SVB sale.
The SVB deal comes after several weeks of looking for a suitor and after the FDIC called for separate offers for SVB Private and SVB.
About US$90 billion in securities remains with the FDIC for sale, it said. First Citizens said it wants to build on SVB's venture capital business and it will accelerate an expansion in California.
"Effectively you're going to get a combination of carrots, sticks and acronyms in order to ensure you get the outcome you want and that allows (authorities) to still use interest rates to combat inflation," Rabobank strategist Michael Every said.
"This seems to be part and parcel of that."