The Bank Slate

INSIGHTS INTO THE BANKING INDUSTRY

Gruenberg gives behind-the-scenes look at bank failures

The Federal Deposit Insurance Corp. received 27 offers from 18 bidders looking to buy Silicon Valley Bridge Bank and/or Silicon Valley Private Bank before the agency decided to sell the bridge bank to First Citizens BancShares in Raleigh, N.C.

Four parties submitted five bids for Signature Bridge Bank before it was sold to a unit of New York Community Bancorp in Hicksville, FDIC Chairman Martin Gruenberg said in a written testimony published prior to his testimony to the Senate Banking Committee.

The FDIC received notice from Silicon Valley Bank the night of March 9 of a $42 billion deposit run. Regulators worked “through the night” to craft a resolution strategy, the testimony said. The FDIC only received two bids that weekend, and only one was valid, leading the agency to create the bridge bank.

Gruenberg said a “contagion effect” hit Signature, which lost a fifth of its deposits on March 10. The bank “could not provide accurate data regarding the amount of the deficit,” Gruenberg said in his testimony.

A “prolonged joint effort” involving Signature, regulators and the Federal Home Loan Bank of New York was needed to resolve the outflows by pledging collateral and obtaining funding from the Federal Reserve’s discount window. The emergency funding fell in place “with minutes to spare” before the Fed’s wire room closed, Gruenberg said.

Gruenberg also addressed the voluntary liquidation of Silvergate Capital, stating that it “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.”

An early look at the past few weeks revealed the “deposit run vulnerabilities” tied to banks having significant amounts of uninsured deposits, along with the liquidity and capital risk tied to selling underwater securities, he said.

“When Silvergate Bank and SVB experienced rapidly accelerating liquidity demands, they sold securities at a loss,” Gruenberg said. “The now realized losses created both liquidity and capital risk for those firms, resulting in a self-liquidation and failure.”

Regulators decided to trigger the “systemic risk exception” and guarantee all deposits because a significant number of accounts belonged to small and midsize businesses, Gruenberg said. Silicon Valley’s 10-biggest deposit accounts had $13.3 billion of total deposits.

“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,” he added.

Finally, Gruenberg said deposit outflows have moderated at banks that were experiencing large outflows the week of March 6, reflecting the banks’ ability to preemptively increase liquidity. Most banks reported no material outflows.

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