When a North Carolina lender agreed last weekend to assume $60 billion in loans from the failed Silicon Valley Bank, it struck a deal that provides it with protection if some of those assets go bad.
How much protection? The Federal Deposit Insurance Corporation will reimburse First Citizens Bank (FCNCA) for 50% of all commercial loan losses — if the losses of those loans made by Silicon Valley Bank are above $5 billion.
And this is not the first time the FDIC agreed to provide First Citizens with such a cushion.
The agency has done so nine previous times, on more than $8 billion in other loans First Citizens assumed from failed institutions ranging from First Regional Bank in Los Angeles to Williamsburg First National Bank in Kingstree, S.C. The FDIC ultimately paid $675 million, according to a 2020 First Citizens filing, or roughly 56% of the total losses on those loans.
First Citizens isn’t the only U.S. lender that benefited from these sweeteners.
Loss-share agreements, which first surfaced in the early 1990s during the savings-and-loan crisis, became a fixture following the 2008 financial crisis as regulators took down hundreds of banks and scrambled to find buyers willing to take on a mountain of troubled mortgages.
From 2008 to 2013, the FDIC struck 590 loss-sharing agreements. The pacts applied to $216 billion in assets seized from 304 failed banks.
‘We appreciate the confidence’
Nine of those agreements went to First Citizens, based in Raleigh, N.C., as it scooped up FDIC-seized banks from California to Florida.
By 2014 the company estimated the FDIC would have to provide it with more than $1 billion to cover the regulator’s share of future losses on all those loans, according to a filing from the company. But the actual federal payout dropped to roughly $675 million as of 2020, when nearly all of the loss-sharing agreements had expired.
The nine deals, along with other government-assisted acquisitions, helped First Citizens amass a sizable regional banking footprint.
With the new assets assumed last week from Silicon Valley Bank, it is now one of the country’s 20 largest lenders. Its shares jumped 50% on the day the deal was announced.
The bank couldn’t be reached for comment.
CEO Frank Holding said in a news release on March 27 that “we have partnered with the FDIC to successfully complete more FDIC-assisted transactions since 2009 than any other bank, and we appreciate the confidence the FDIC has placed in us once again.”
These deals are good for bankers because they reduce their risk. Are they good for the FDIC?
The FDIC has historically said ‘yes,’ contending that it would cost more to simply liquidate the assets of these failed institutions. The regulator states on its web site that it saved itself more than $41 billion by striking those 590 agreements during the last crisis.
“The longer the FDIC holds bank assets, generally the lower the asset’s value,” said John Popeo, an attorney who previously worked for the FDIC helping sell failed banks.
Proponents of shared-loss arrangements also argue the deals allow loans stay in the private sector, with bankers who know local markets. “That’s going to save the FDIC a lot of work because a bank in a local community is probably going to be better situated to collect on and service those loans,” said former FDIC Chair Bill Issac, who ran the agency from 1981 to 1985.
Taxpayers are not on the hook for the losses, if the FDIC is forced to pay. They come out of the FDIC’s $128 billion Deposit Insurance Fund, which is funded by all U.S. banks and typically used to backstop bank depositors up to $250,000 per account. If the deposit-insurance fund runs out, the FDIC does have the ability to impose higher fees on banks.
The FDIC has said total costs of resolving the Silicon Valley Bank failure are expected to be $20 billion, without providing a breakdown of expenses.
How much has the FDIC paid to share loan losses with banks over the decades?
A current total couldn’t be determined, but estimates and cumulative counts have surfaced in the past. In 2012, according to a report from the FDIC’s Office of the Inspector General, the FDIC expected it would have to pay $43 billion to cover its share of all future losses from the 2008 era.
That estimate dropped to $32 billion by 2015, according to a report from the Inspector General, which acts as a watchdog over the agency. The actual losses FDIC had paid for through April of that year amounted to $28 billion. That count rose $29 billion by September 2016, according to another report.
“When we originally did the estimates it was in the middle of the crisis,” a FDIC resolution official told Yahoo Finance. “As a country, we were lucky because we came out of that [crisis] pretty fast into a good economy and that helped keep the losses from being so high.”
One Florida bank received a sizable loss-sharing payment during that time, according to the Inspector General. The FDIC ultimately paid $1.6 billion to the new owners of BankUnited, a Coral Gables, Fla.-based institution that went down in 2009 with $12.8 billion in assets. It was one of the largest failures of that era.
The investment group that took the bank from the FDIC in 2009 negotiated a loss-sharing agreement on a pool of more than 46,000 loans. The FDIC agreed to reimburse BankUnited for 80% of losses up to a threshold of $4 billion and 95% of losses above $4 billion.
As of June 30, 2011, BankUnited had claimed losses of slightly more than $2 billion, according to an Inspector General report. The FDIC paid 80% of that amount.