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Delay in creation of Silicon Valley bridge bank may complicate resolution


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Delay in creation of Silicon Valley bridge bank may complicate resolution

The delayed formation of Silicon Valley Bank's bridge bank, announced three days after the bank failed, came as part of a highly unusual sequence of events that could affect the way the institution's affairs are resolved.

During a run on Silicon Valley Bank on March 10, the state of California closed the bank and appointed the Federal Deposit Insurance Corp. as receiver. It was not until March 13 that regulators announced they were transferring the failed bank's deposits and assets to a newly created bridge bank, called Silicon Valley Bank NA, from the FDIC receivership program.

"This is not a planned approach in this sequence," Alexander Rolfe, managing director at consultancy JCSmithAdvisors, said in an interview. In previous cases, regulators typically announced the creation of a bridge bank together with the decision to close the bank, an approach that helps reassure stakeholders, Rolfe said.

"You have a better situation because the employees, borrowers and depositors woke up to find out the bank had been closed, but they already knew that there was a new CEO in place and employees will show up to work and do their job," Rolfe added. "That's not the case at Silicon Valley Bank."

In comparison to Silicon Valley Bank, agencies appeared to have the capacity to form the bridge bank for Signature Bank immediately upon its failure, Rolfe noted.

When the New York Department of Financial Services took possession of Signature Bank and appointed the FDIC as receiver on March 12, the FDIC said in the same announcement that it had established Signature Bridge Bank NA and transferred all of Signature Bank's deposits and substantially of its assets to the bridge bank.

Regulators' move to close Silicon Valley Bank the morning of March 10 came as a surprise to many. The FDIC initially did not guarantee that uninsured deposits would be covered.

"I think this is unprecedented — really a seizure of a bank of this size without a buyer or liquidation plan in place," David Larson, managing director at financial consultancy Artisan Advisors, said in an interview. "What surprises me is that they weren't able to anticipate what the impact [was] going to be on the rest of the system."

More leeway for M&A

The bridge bank structure will give the successor entities to both Silicon Valley Bank and Signature Bank more leeway to unwind through M&A, even though Silicon Valley Bank's efforts to find a buyer over the weekend have not come to fruition.

"Based on an outside observer's perspective, trying to find an acquirer for Silicon Valley Bank in a matter of a couple of days was proved to be impossible," Adam Smith, a partner at law firm K&L Gates, said in an interview.

The bridge bank structure will provide additional time for potential buyers to sort through what is available to acquire, Smith said. It should also shift the failed banks out of crisis mode, increasing their overall franchise value, he added.

Signature Bridge Bank is in a better position to seek a buyer because it was created immediately upon the failure of Signature Bank, Rolfe said. In comparison, Silicon Valley Bank's bridge bank faces a messier resolution because the original bank was already cleaved and disintegrating under the FDIC's prior payout strategy, he added.

An uncommon move

The "systemic risk exception" that the FDIC and the Federal Reserve Board use to initiate the formation of a bridge bank was authorized by law in 1991 and first used in the 2008 financial crisis, according to the FDIC. In late 2008 and early 2009, the systemic risk exception was used for three of the four largest banks: Citigroup Inc., Bank of America Corp. and Wachovia Bank NA, which was acquired by Wells Fargo & Co.

The most recent bridge bank at a large scale was the one formed upon the failure of IndyMac Federal Bank F.S.B. in July 2008, Rolfe said.

"Bank failures are very uncommon," Rolfe added. "The use of a bridge bank to resolve a bank failure is incredibly uncommon."

Bridge banks are fully owned and controlled by the FDIC with national bank charters, and the FDIC would not, in practice, want to be in the business of banking for too long, said Jim Adkins, managing partner of Artisan Advisors.

The private sector is also wary of the nationalization of the banking sector, Adkins said. Bridge banks have a lifespan of up to five years after extensions.

However, the FDIC will typically assist with due diligence and other examinations during the period it is in control — and that can have benefits, Adkins added.

"Buying something from a bridge bank, generally, could be a lucrative thing because everything's been cleaned up," Adkins said.