US Regulators Consider Holding Securities of Two Banks Below Purchase Price

03/18/2023 01:04 • AI & Tech Insights • 69 views

According to reports, US regulators are considering holding securities under the names of Signature Bank and Silicon Valley Bank that have fallen below their purchase price, a move that will remove one of the possible obstacles to selling these two banks. According to people familiar with the matter, this is a routine practice after the Federal Deposit Insurance Corporation (FDIC) took over the bank, mainly facilitating the conclusion of acquisition transactions. Because if it involves assets with declining value, it will be more difficult to sell the relevant banks. People familiar with the matter said that the relevant asset size of Signature may be between $20 billion and $50 billion, and that of Silicon Valley banks may be between $60 billion and $120 billion. Both Silicon Valley banks and Signature have invested in bonds at low interest rates, and the value of these bonds has plummeted as the Federal Reserve has raised interest rates several times over the past year to cope with soaring inflation.

FDIC is considering holding loss-making assets of Silicon Valley banks to facilitate the smooth completion of the auction

Analysis based on this information:

US regulators are considering a move to hold securities under the names of Signature Bank and Silicon Valley Bank, which have fallen below their purchase price. This would help remove one of the possible obstacles to selling these two banks. According to people familiar with the matter, this is a routine practice after the Federal Deposit Insurance Corporation (FDIC) takes over a bank, primarily to facilitate conclusion of acquisition transactions. However, this move is required because of the declining value of the assets of both banks. At the moment, it is becoming more difficult to sell these two banks due to their asset drop in value.

Reports reveal that according to insiders, the relevant asset size of Signature Bank may range from $20 billion to $50 billion while that of Silicon Valley Bank may range from $60 billion to $120 billion. Both Signature and Silicon Valley banks have invested in bonds with low interest rates, and these bonds have significantly decreased in value. This fall is due to the fact that the Federal Reserve has increased interest rates several times in the past year to combat the soaring inflation.

Holding securities under the FDIC is a process carried out by the US regulators, and it is not unusual. It helps to facilitate the acquisition of banks and remove the obstacle to selling them when their assets have fallen in value. The regulators take hold of these securities to enable them to sell off the banks to potential buyers without significant losses.

In essence, the move by the US regulators to hold securities for both Signature and Silicon Valley banks is not an indictment on these banks since it is a common practice in the industry. The decline in the value of their investments in bonds is due to uncontrollable economic factors such as inflation, and it is not a reflection of the banks’ management.

In conclusion, holding securities of these two banks under FDIC is a means to an end, given their declined value. The move would facilitate the completion of sale transactions for these banks smoothly. By holding these securities, the US regulators would help preserve the value of the securities while carrying on with the necessary transaction.

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