When a North Carolina lender agreed last weekend to take out $60 billion in loans from failed Silicon Valley Bank, it made a deal that gives it protection if some of those assets go bad.


How much protection? The Federal Deposit Insurance Corporation will replace First Citizens Bank (FCNCA) for 50% of all commercial credit losses — if the losses on the loans made by Silicon Valley Bank are over 5 billion dollars.

And this isn’t the first time the FDIC agreed to give First Citizens such a cushion.

The agency has done so nine times before, on more than $8 billion in other loans First Citizens took out from failed institutions, from First Regional Bank in Los Angeles to Williamsburg First National Bank in Kingstree, SC. The FDIC ultimately paid $675 million, according to a 2020 First Citizens fileor approximately 56% of the total losses on these loans.


First Citizens is not the only US lender to benefit from these sweeteners.

Loss-sharing deals, which first appeared in the early 1990s during the savings and loan crisis, became a fixture after the 2008 financial crisis as regulators took down hundreds of banks and struggled to find buyers willing to take on a mountain of troubled mortgage.

From 2008 to 2013, the FDIC entered into 590 loss-sharing agreements. The pacts involved $216 billion in assets seized from 304 failed banks.

“We appreciate the trust”

Nine of those deals went to First Citizens, based in Raleigh, NC, as it scooped up FDIC-seized banks from California to Florida.

In 2014, the company estimated that the FDIC would have to provide it with more than $1 billion to cover the regulator’s share of future losses on all of these loans, according to a notification from the company. But the actual federal payout dropped to roughly $675 million as of 2020, when nearly all loss-sharing agreements had expired.

The nine deals, along with other government-backed acquisitions, helped First Citizens amass a significant regional banking footprint.

With the new assets assumed last week from Silicon Valley Bank, it is now one of the nation’s 20 largest lenders. Its shares rose 50% the day the deal was announced.

The bank could not be reached for comment.

CEO Frank Holding said in a press release on March 27 that “we have partnered with the FDIC to successfully complete more FDIC-backed transactions since 2009 than any other bank, and we appreciate the trust the FDIC has once again placed in us.”

Who is winning

These trades are good for bankers because they reduce risk. Are they good for the FDIC?

The FDIC has historically said “yes,” arguing that it would cost more to simply liquidate the assets of these failed institutions. The regulator states on its website that it saved more than $41 billion by striking the 590 deals during the last crisis.

“The longer the FDIC holds bank assets, generally the lower the asset’s value,” said John Popeo, a lawyer who previously worked for the FDIC helping to sell failed banks.

Proponents of shared-loss arrangements also argue that the deals allow loans to stay in the private sector, with bankers who know local markets. “It will save a lot of work for the FDIC because a bank in a local community will probably be better positioned to collect and service these loans,” said former FDIC Chairman Bill Issac, who ran the agency from 1981 to 1985.

Federal Deposit Insurance Corporation (FDIC) seals are seen outside its headquarters, Tuesday, March 14, 2023. Depositors pulled out savings and investors largely sold off bank stocks as the federal government rushed to reassure Americans that the banking system is safe after two banks. failures. (AP Photo/Manuel Balce Ceneta)
The seal of the Federal Deposit Insurance Corporation is displayed outside its headquarters. (AP Photo/Manuel Balce Ceneta)

Taxpayers are not on the hook for the losses if the FDIC is forced to pay. They come from the FDIC’s $128 billion Deposit Insurance Fund, which is funded by all U.S. banks and is typically used to freeze bank depositors up to $250,000 per account. If the deposit insurance fund runs out, the FDIC has the ability to levy higher fees on the banks.

The FDIC has said the total cost of resolving the failure of Silicon Valley Bank is expected to reach $20 billion, without providing a breakdown of the expenses.

Fluctuating losses

How much has the FDIC paid to share loan losses with banks over the decades?

A current total could not be determined, but estimates and cumulative bills have surfaced in the past. During 2012, according to a report by 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 in 2015, according to a report from the inspector general, who acts as a watchdog over the agency. The actual losses paid by the FDIC up to April of that year totaled $28 billion. That number rose by $29 billion in September 2016, according to another report.

“When we originally did the estimates, it was in the middle of the crisis,” an FDIC resolution official told Yahoo Finance. “As a country we were lucky because we got out of it [crisis] pretty quickly into a good economy and that helped keep the losses from being so high.”

General comments from First Citizens Bank, the new buyer of failed SVB, Silicon Valley Bank on March 28, 2023 Credit: BauerGriffin / MediaPunch /IPX
A First Citizens Bank branch sign. Credit: BauerGriffin / MediaPunch /IPX

A Florida bank received a significant 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 under in 2009 with $12.8 billion in assets. It was one of the biggest failures of that time.

The investment group that took the bank from the FDIC in 2009 negotiated a loss-sharing agreement for 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 just over $2 billion, according to a report from the inspector general. The FDIC paid 80% of that amount.

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