Report: FDIC Rescues Create ‘Vicious Cycle’ for Future Bank Purchases

Do banks need to fail — and get government help — before buyers come forward?

A report by Reuters Friday (May 5) citing industry sources said that recent government-arranged purchases of First Republic, Signature and Silicon Valley banks had set such a “vicious cycle” in motion.

For example, the Federal Deposit Insurance Corp. (FDIC) last week picked J.P. Morgan Chase as the top bid in an auction to purchase First Republic. 

In that deal, J.P. Morgan said it would pay $10.6 billion to the FDIC while also forging a loss-sharing agreement with the government on residential mortgages and commercial loans and getting $50 billion of financing.

“After what happened with First Republic, banks don’t want to buy any other bank before the FDIC takes over,” Mayra Rodríguez Valladares, a financial risk consultant at MRV Associates, told Reuters.

“It’s cheaper, the stock price goes down and you don’t have the natural problems in M&A (mergers and acquisitions) negotiations that may not end in a deal.”

After the FDIC brokered sales of First Republic, Signature and SVB, publicly-traded buyers have an incentive to wait for struggling banks to fail to get a better deal from the government, analysts tell Retuers.

“For potential acquirers, there is a motivation to wait for a receivership and FDIC assistance,” said Christopher Wolfe, head of North American banks at Fitch Ratings.

But the report also notes that FDIC officials say buyers risk losing out by letting the value of banks fall as they wait for the government to seize ailing lenders.

There’s another issue at play here, as Amias Gerety, partner at QED Investors, told PYMNTS’ Karen Webster last week.

“The big getting bigger — well, that’s the real policy question of the day,” Gerety said. 

He cautioned against assuming the biggest banks are the safest — risks abound, and if one of those marquee names fails, there’s no obvious buyer waiting to come to its rescue.

“The rapid-fire failures of SVB, of Signature and of FRB have demonstrated the success of the banking system overall, but further instability poses the question of who steps in next,” PYMNTS wrote. “J.P. Morgan is unlikely to keep entering the fray to scoop up smaller players, and there’s no guarantee that we’ll see consortiums of private equity and investor groups banding together, as we saw during the last crisis with, say, IndyMac.”

There’s another reason the flight of deposits to bigger banks should be a cause for concern, Gerety said: “The diversity of our banking system is a huge strength.”