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The US government’s sell-off of failed banks raises expectations for sweeteners in the future

Three major US regional banks have failed in the space of six weeks, requiring intervention by the Federal Deposit Insurance Corporation (FDIC). The sudden demise of Silicon Valley Bank in mid-March simultaneously dragged Signature Bank into the abyss and threw the US banking sector into turmoil.

While federal intervention to secure deposits at these two financial institutions has brought some stability overall, some banks continue to falter. Last, The First Republic Bank in San Francisco succumbed after it was revealed that over half of bank deposits were withdrawn in the first three months of the year.

JP Morgan stepped in to buy the bank from the FDIC for $10.6 billion and entered into a loss sharing agreement on commercial loans and residential mortgages. The transaction will cost the FDIC deposit insurance fund an estimated $13 billion. JP Morgan also secured $50 billion in five-year financing at an undisclosed fixed price as part of the deal.

The FDIC says that the Megabanks received no special benefits in their acquisitions of the failed financial institutions. However, analysts are worried that prospective buyers are now waiting for ailing banks to collapse in order to get sweeteners. FDIC officials counter that if they allow an acquisition target’s value to deteriorate over time while awaiting FDIC receivership, potential buyers risk losing out.

“There is a motivation for potential acquirers to wait for receivership and FDIC assistance,” Fitch Ratings’ head of North American banks, Christopher Wolfe, told Reuters.