What's really going on behind SVB auctions?

Kerem Gülen
Mar 14, 2023
Updated • Mar 14, 2023

Regulators are reportedly making preparations to try the auction of Silicon Valley Bank again following an unsuccessful attempt to find a buyer over the last weekend.

The bank's substantial size is presenting a challenge for regulators, who tend to prefer selling off failed companies to ensure an effortless resolution.

It is quite rare for financial institutions equipped to acquire a large regional bank with assets surpassing $50 billion to be found, according to Martin Gruenberg, the current Federal Deposit Insurance Corp. (FDIC) chairman. Gruenberg expressed his opinion on the matter previously in a 2019 speech at Brookings.

The combined assets of Signature Bank and Silicon Valley Bank, both of which experienced failures in 2023, amounted to an impressive $319.36 billion. It's worth noting that Martin Gruenberg highlighted that most bank failures are considerably smaller in scale.

In reality, more than 98% of bank failures that occurred since 2007 were related to banks with assets valued at less than $10 billion. It's crucial to keep in mind that a bank is only regarded as failed when regulators take control of it. As a result, Silvergate Bank's recent announcement that it will be liquidating does not fall under this category.

For whom the bell tolls?

The unforeseen collapse of Silicon Valley Bank, which ranks as the second-largest bank failure in the United States, has prompted regulators to take immediate action to reduce the resulting damage, as per a report from The Wall Street Journal. In reaction to the situation, officials from the FDIC have conveyed to Senate Republicans that they have more leeway to assist in the sale of the company.

Sources familiar with the matter have indicated that regulators have categorized the failure of Silicon Valley Bank as a threat to the financial system, allowing them to implement emergency measures. The Wall Street Journal has reviewed the notes on the briefing, shedding light on this development.

The regulators' recent categorization of the failed bank as systemic has given them more freedom in their attempts to cover all depositors impacted by the bank's failure, including those with deposits surpassing the standard insurance limit of $250,000.

Moreover, this action has provided regulators with the ability to offer incentives like loss-sharing agreements to potential buyers, as noted by former regulators. Despite no successful bids from the largest banks in the United States during the previous auction for Silicon Valley Bank on Sunday, at least one offer was submitted by another institution.

Nevertheless, the FDIC declined this offer, as officials informed lawmakers on Monday. The exact schedule for the second auction remains uncertain at this time. The FDIC's takeover of Silicon Valley Bank on Friday occurred following a deposit run, which ultimately proved fatal to the bank's efforts to raise new capital and bolster its financial position.

This unprecedented failure of Silicon Valley Bank underscores the challenges regulators face in managing the risks of large-scale financial institutions. While the FDIC's response highlights the effectiveness of the measures in place to protect depositors, it also raises questions about the potential impact on the broader financial system. As the FDIC prepares for the second auction of the bank, the industry is watching with bated breath to see how the situation unfolds.


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