Thanks to regulators, SVB will be the most costly bank failure in history

The FDIC estimates that the SVB resolution will cost the deposit insurance fund $20 billion. 

The receivership has already lost $16.5 billion in the discounted loan values needed to consummate the First Citizens deal. The FDIC retains some upside by acquiring equity appreciation certificates in the deal, but any gains will be tempered by an agreement for the FDIC to partially share future losses in the transferred loans. 

Will the SVB receivership suffer only $3.5 billion in additional losses when it liquidates $90 billion in held-to-maturity securities? As of SVB’s Dec. 31 regulatory reports, these securities reportedly had  $15 billion in mark-to-market losses. Time will tell, but I am guessing the insurance fund losses will exceed the $20 billion initial estimate and be, by far, the most costly bank failure in history — a title formerly held by the $12 billion insurance fund loss on IndyMac.  

If the FDIC had treated SVB as a routine bank failure, it would have been resolved without any cost to the FDIC deposit insurance fund. Under normal rules, losses would have been borne by the uninsured depositors as required by the FDIC Improvement Act of 1991 which mandates that the FDIC carry out resolutions in a manner that imposes the least cost on the deposit insurance fund.

Instead, the U.S. Treasury, the Federal Reserve and the FDIC choose to declare SVB a “systemic risk” to the financial system so they could impose a blanket deposit insurance guarantee that will cost the FDIC fund at least $20 billion, probably more, instead of virtually nothing if the bank was resolved following normal procedures. Other banks, and ultimately taxpayers, will pay for SVB’s insurance fund losses, losses that were a direct result of regulatory neglect.

If the SVB failure was treated as a routine bank failure, it could have been resolved with minimal cost to the FDIC deposit insurance fund. When it failed, the bank had $167 billion in total assets funded with at most $4.8 billion in fully insured deposits and at most $9.4 billion in deposit insurance fund liability for the 37,466 accounts with balances in excess of the $250,000 FDIC insurance limit. The $9.4 billion estimate overstates the insurance fund’s liability because roughly $42 billion in deposits ran before the bank was closed. 

SVB’s 2022 year-end regulatory reports show $209 billion in assets funded with about $175.5 billion in deposits, of which about $157 billion were held in accounts with balances in excess of the $250,000 FDIC insurance limit. When the FDIC closed the bank, it had $119 billion in remaining deposits.

On March 26, The FDIC consummated a deal that reportedly transferred $56.5 billion in deposit liabilities to First Citizens Bancshares of Raleigh, N.C. The assets transferred from the receivership reportedly included $72 billion in SVB loans valued at $55.5 billion, a $16.5 billion discount from SVB’s book valuation. The SVB receivership also transferred other assets, including SVB branches, that must have been valued at $1 billion since an FDIC receivership sale usually transfers an equal value of assets and liabilities to the acquiring institution. Reportedly, $90 billion in SVB securities remain in the FDIC receivership.

On its final day of operations, SVB reportedly suffered a depositor run of about $42 billion that sealed its fate. By the time the FDIC closed SVB bank, it had liquidated roughly $42 billion in cash and other securities to fund its depositor run. The details of the First Citizens deal suggest that roughly $62.5 billion in additional deposit funds ran after deposits were fully guaranteed in the FDIC bridge bank.

The systemic risk exception deposit blanket guarantee allowed $62.5 billion in deposits to run, most of which were above the FDIC insurance limit and would have normally taken losses in SVB’s resolution. First Citizens reportedly acquired $56.5 billion in deposits transferred without any depositor losses. 

If the FDIC had followed its normal resolution policies, taxpayers would not now be facing the pass-through cost of higher bank deposit insurance premiums banks will pay to cover SVB’s FDIC insurance fund losses. Instead, the administration’s choice to invoke a “systemic risk exception” and guarantee all of SVB’s depositors has allowed $62.5 billion of uninsured deposits to run thereby transferring more than $20 billion in losses to the deposit insurance fund and ultimately to taxpayers. The blanket guarantee has made SVB the most costly bank failure in FDIC insurance fund history.

Paul Kupiec is a senior fellow at the American Enterprise Institute.