NEW YORK (Reuters) – Government-brokered purchases of First Republic, Signature and Silicon Valley banks have created a vicious circle in which distressed lenders need to fail — and get government help — before buyers can step up. sources say.
The latest case in point: Federal Deposit Insurance Corp (FDIC) selected JPMorgan Chase & Co (JPM.N) as the winning bidder in an auction for collapsed First Republic Bank on Monday.
After First Republic struggled to find a private buyer for weeks, the FDIC seized it and struck a deal with JPMorgan to gain control of most of its assets. JPMorgan said it will pay the FDIC $10.6 billion, while it books a loss-sharing agreement with the government on residential mortgages and commercial loans. The FDIC will also provide JPMorgan with $50 billion in financing for five years at an undisclosed fixed rate as part of the deal.
“After what happened with First Republic, banks don’t want to buy any other bank before the FDIC takes over,” said Mayra Rodríguez Valladares, a financial risk advisor at MRV Associates that trains bankers and regulators.
“It’s cheaper, the share price comes down and you don’t have the normal problems of M&A negotiations that may not end in a deal.”
This phenomenon raises concerns that the current turmoil will accelerate the concentration of the US banking sector around a handful of institutions, reducing competition for consumers and increasing the risks in the event of a giant bank failure.
Silicon Valley Bank, which imploded in March and sparked ongoing unrest in regional banks, was bought by First Citizens BancShares (FCNCA.O) with the help of the FDIC. The purchase drained about $20 billion from a bank-financed government-run insurance fund.
The acquisition of the collapsed Signature Bank by New York Community Bancorp (NYCB.N) also involved a buyer choosing which parts to take and leave unwanted assets, such as Signature’s crypto wallet. The deal cost the fund $2.5 billion.
Analysts said that after these transactions, publicly traded buyers are now eager to wait for the defaulted lenders to collapse so they can get better terms from the FDIC.
“For potential acquirers, there is an incentive to wait for custody and the FDIC’s help,” said Christopher Wolfe, head of North American banks at Fitch Ratings.
However, FDIC officials say potential buyers risk losing out if they allow the value of the acquisition target to deteriorate over time while they wait for an FDIC watchdog.
They also deny that big banks have taken special advantages in recent failures — big banks can bid for SVB, Signature and First Republic, the latter of which was only acquired by a bank considered a global system-wide important bank, or G-SIB.
When accepting the winning bid in the receivership process, the FDIC must follow the “least cost” test, which ensures that the organizer will accept the offer that creates the least hurdle for the DIC.
JPMorgan and First Citizens declined to comment. New York Community Bancorp did not respond to a request for comment.
Analysts at Raymond James wrote in an April 3 note that US bank mergers were already slow with rising interest rates and a recession imminent. They said the first quarter was the quietest one-year opening for bank deals in a generation.
The volatility in regional bank stocks makes it difficult to close deals. Take Los Angeles-based PacWest Bancorp (PACW.O) — its shares jumped 82% on Friday after plunging more than 40% Thursday on news that the company is exploring options to boost its finances.
David Sandler, co-head of investment banking for financial services at Piper Sandler Companies (PIPR.N), said market volatility is preventing bank buyers from raising enough money to cover distressed asset writedowns, which would result from a traditional takeover.
While US authorities were able to offset these requirements in the three receiverships, they also set an expectation that they would continue to extend sweeteners to buyers to offset potential losses on unwanted portions of closed banks’ portfolios.
Analysts and bankers said that by allowing JPMorgan, the largest US bank, to buy a failing bank, officials upended the long-held view that the government would stop the banking giants from expanding.
Concerns about whether bank bailouts inadvertently favor larger banks come at a time when terrified depositors are withdrawing their money from smaller banks and seeking safety in larger institutions.
Since the 2008 global financial crisis, banks once considered too big to fail because of their importance to the global economy have gotten bigger: JPMorgan’s assets swell to $3.7 trillion at the end of the first quarter, up from about $1.6 trillion at the end of 2007.
Assets at Bank of America Corp (BAC.N), the second-largest US bank, swelled to $3.2 trillion at the end of the first quarter, from $1.7 trillion in 2007.
Another benefit of buying through FDIC custody is avoiding the lengthy regulatory approval process that other mergers have faced: Canada’s Toronto-Dominion Bank Group (TD.TO) on Thursday canceled its $13.4 billion acquisition of First Horizon Corp (FHN.N) after spending more than General trying to get approval.
Jan Bellens, who heads global banking and capital markets practices at EY, an accounting firm, said market participants are watching to see if regulators are becoming more open to consolidation or accelerating acquisition approvals.
“I don’t think we’re at the end of the turmoil yet” for regional banks, Billins said. “Investors need to be confident that there will be no more mishaps or challenges.”
(Cover) By Saeed Azhar, David French, Tatiana Pautzer, and Douglas Jellison in Washington. Editing by Lanan Nguyen, Michelle Price and Deepa Babbington
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