US regulators open to sharing losses for smooth sale of SVB and Signature

U.S. regulators are willing to face losses at Silicon Valley Bank and Signature Bank if it helps sell the failed lenders, according to people briefed on the matter.

The Federal Deposit Insurance Corporation’s willingness to discuss loss sharing is a significant change from the agency’s stance, which expressly ruled out any such deal when it tried and failed to auction off SVB last weekend.

However, the FDIC gave no indication to bidders of how much loss they would be willing to retain or how the deal would be structured.

Selling SVB or Signature can result in immediate losses, as the new buyer must write down the price of certain assets to reflect their current market value.

After taking control of SVB and Signature last week, the FDIC tried to auction off the banks to a buyer but failed to attract interest, receiving only one offer from a non-banking bidder that was rejected.

The lack of interest was partly due to the agency’s unwillingness to discuss the possibility of taking any losses on lenders’ assets, one of the people said.

Buyout titans such as Blackstone Group and Apollo Global Management have expressed interest in buying a portion of SVB’s loan book. However, the FDIC is only willing to accept bids from banks for the entire SVB commercial bank, including loans and deposits, according to people involved in the process.

On Friday, SVB’s holding company filed for bankruptcy protection. The move comes as part of an attempt to salvage value from two divisions — a broker-dealer and a technology investment business — that are separate from the deposit-taking bank.

The FDIC declined to comment on the details of the SVB and Signature sales process managed by Piper Sandler bankers. A Piper Sandler banker involved in the sale process declined to comment.

“We are actively marketing both institutions,” an FDIC spokeswoman said. “We haven’t set a deadline for the bids, but we hope to have them resolved within a week.”

Loss sharing agreements are common in FDIC sales. The FDIC offered generous loss-sharing deals on many deals during the 2008 financial crisis, but later came under fire when some deals turned out to be profitable for the buyer.

Acceptance of the loss-sharing agreement could also open the government to accusations that its attempts to save some banks are actually a bailout.

Most loss-sharing agreements are created as a type of insurance that limits the buyer’s total potential losses from the transaction, with the government covering anything above that amount. However, the FDIC has sometimes agreed to a so-called first loss position, which covers initial losses recognized at the time of the transaction.

Additional reporting by Eric Platt in New York