Bank buyers expect sweeteners as US authorities set new bar

NEW YORK, May 5 (Reuters) – The state buyouts of First Republic, Signature and Silicon Valley banks have created a vicious cycle in which troubled lenders must fail – and get a government bailout – before buyers will step up, industry sources said.

The latest case in point: The Federal Deposit Insurance Corp (FDIC) picked JPMorgan Chase & Co ( JPM.N ) as the winning bidder in an auction to buy collapsed lender First Republic Bank on Monday.

After First Republic struggled to find a private buyer for weeks, the FDIC seized it and struck a deal with JPMorgan to take control of most of its assets. JPMorgan said it would pay $10.6 billion to the FDIC while locking in a loss-sharing deal with the government on mortgage and commercial loans. The FDIC will also provide JPMorgan with $50 billion in financing over five years at an undisclosed fixed rate as part of the deal.

“After what happened with First Republic, banks don’t want to buy another bank until the FDIC takes over,” said Mayra Rodríguez Valladares, a financial risk consultant at MRV Associates who trains bankers and regulators.

“It’s cheaper, the share 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.”

The phenomenon raises fears that the current turmoil will accelerate the concentration of the US banking sector around a handful of institutions, reducing competition for consumers and increasing the risk if a giant bank fails.

Silicon Valley Bank, which imploded in March and sparked the ongoing turmoil at regional banks, was also bought by First Citizens BancShares ( FCNCA.O ) with FDIC help. The purchase drained about $20 billion from an insurance fund financed by banks and run by the government.

The purchase of collapsed Signature Bank by New York Community Bancorp ( NYCB.N ) also involved a buyer picking off parts it wanted to take and leaving behind unwanted assets, such as Signature’s crypto portfolio. The agreement cost the fund 2.5 billion dollars.

After those transactions, listed buyers are now motivated to wait for ailing lenders to collapse so they can get better terms from the FDIC, analysts said.

“For potential buyers, there is an incentive to wait for receivership and FDIC relief,” Christopher Wolfe, head of North American banks at Fitch Ratings.

However, FDIC officials say potential buyers risk losing out if they let the value of an acquisition target deteriorate over time while they wait for an FDIC settlement.

They also deny that megabanks have been given special advantages in recent failures – big banks could bid for SVB, Signature and First Republic, and only the last in that line was acquired by a bank that was considered a Global Systemically Important Bank, or G-SIB.

When the FDIC accepts a winning bid in an estate administration process, the FDIC must follow the “least cost” test, which ensures that the regulator accepts the offer that creates the lowest draw on the deposit insurance fund.

JPMorgan and First Citizens declined to comment. New York Community Bancorp did not respond to a request for comment.

SWEETENERS

US bank mergers were already slow as interest rates rose and recession loomed, analysts at Raymond James wrote in an April 3 note. The first quarter was the quietest opening to a year for bank deals in a generation, they said.

Volatility in regional bank shares makes it even more difficult to enter into agreements. Take Los Angeles-based PacWest Bancorp ( PACW.O ) — shares jumped 82% on Friday after falling more than 40% on Thursday on news that the company was exploring options to shore up its finances.

Market volatility prevents bank buyers from raising enough cash to cover writedowns on struggling assets that would be triggered by a traditional buyout, said David Sandler, co-head of financial services investment banking at Piper Sandler Companies ( PIPR.N ).

While the US authorities were able to offset these demands in the three foreclosure proceedings, they have also set an expectation that they will continue to extend sweeteners to buyers to offset potential losses on unwanted parts of closed banks’ portfolios.

And by allowing JPMorgan, the biggest U.S. bank, to buy a collapsed lender, officials have upended a long-held view that the government would block the banking giants from getting bigger, analysts and bankers said.

Concerns about whether bank bailouts are inadvertently favoring larger banks come at a time when spooked depositors have pulled their money out of smaller banks and sought safety in larger institutions.

Since the 2008 global financial crisis, banks that were considered too big to fail because of their importance to the global economy have gotten even bigger: JPMorgan’s assets rose to $3.7 trillion at the end of the first quarter, up from nearly 1.6 trillion dollars at the end of 2007.

Assets at Bank of America Corp ( BAC.N ), the second-largest U.S. lender, rose to $3.2 trillion at the end of the first quarter, from $1.7 trillion in 2007.

Another advantage of buying through an FDIC receivership is avoiding the lengthy regulatory approval process that other mergers have faced: Canada’s Toronto-Dominion Bank Group ( TD.TO ) on Thursday called off its $13.4 billion takeover of First Horizon Corp ( FHN.N) after spending more than a year trying to get approval.

Market participants are watching to see if regulators become more open to consolidation or speed up takeover approvals, said Jan Bellens, who heads the global banking and capital markets practice at EY, an accounting firm.

“I don’t think we’re at the end of the turmoil yet” for regional banks, Bellens said. “Investors need to be confident that there will be no more accidents or challenges.”

Reporting by Saeed Azhar, David French and Tatiana Bautzer, additional reporting by Douglas Gillison in Washington; Editing by Lananh Nguyen, Michelle Price and Deepa Babington

Our standards: Thomson Reuters Trust Principles.