The FDIC Shouldn’t Allow A Foreign Concern To Buy Silicon Valley Bank

In the aftermath of the spectacular failure of Silicon Valley Bank, the FDIC recently extended the bidding process to take over its successor entity, Silicon Valley Bridge Bank, to today, March 24th. The extension may be an indication that the agency has had trouble attracting viable buyers. This is not entirely surprising, given the rapidity of the bank’s collapse as well as the accelerated timeline to find a buyer to assume responsibility for the bank’s operations going forward.

After the bidding process closes, regulators will have to make several decisions. For starters, it has left open the possibility of separating the bank itself from the Silicon Valley Private Bank, a wealth management company that caters to the high-wealth individuals that have bank accounts with Silicon Valley Bank. But this seems to be a backstop option, and the FDIC will likely prefer a bid for both entities.

The FDIC also must decide whether any of the bids received are sufficient to keep Silicon Valley Bank operating as a going concern, or whether it would make more sense for taxpayers—and for the health of the country’s banking sector at large—to simply sell the bank’s portfolio of loans and wind down the bank. The FDIC would likely prefer not to go this route, given the challenges such a move would create for the bank’s customers, not to mention the impact it would have on the thousands of people the bank still employs.

But assuming the FDIC does receive several bids that it deems viable, which news reports suggest is likely, it must think carefully about the criteria it uses to determine the winner. Simply selecting the highest bid may not necessarily be in the best interest of taxpayers, the bank’s remaining depositors, and the country’s financial markets, which have experienced two of the most stressful weeks since the 2008 financial crisis.

One issue the FDIC may very well need to consider is whether it would make sense to allow a foreign bank to take over Silicon Valley Bank if one offered a viable bid. While Treasury Secretary Janet Yellen refused to rule that out when asked about the possibility, the reality is that foreign ownership of such a bank would be deeply problematic, and is something the FDIC should avoid if at all possible.

One problem with a foreign owner is that the FDIC would not already be the primary regulator of the acquiring bank, and this would muddy the regulatory status of a revamped Silicon Valley Bank. If it were to become an arm of a foreign bank, the acquiring bank itself would need to be subject to the FDIC’s authority, which would complicate a takeover and likely delay the return of Silicon Valley Bank to full financial health. Since a U.S. bank would already fall under U.S. regulation—and presumably already be in compliance—there would be no new regulatory hurdles for the acquiring bank.

If the acquirer were a U.S. bank already subject to FDIC regulation it would also be easier for the FDIC, Federal Reserve and other regulatory authorities to monitor the integration process, instead of them trying to supervise a foreign-based bank whose primary regulator was elsewhere.

Congress and the White House would doubtless prefer that the FDIC sell Silicon Valley Bank to a U.S. bank, for the simple reason that doing so would be the best way to engender stability in the country’s banking system. Even a diminished Silicon Valley Bank would presumably continue to play an outsized role in the finances of thousands of tech firms as well as a multitude of investors and executives. While all deposits at Silicon Valley Bank are currently guaranteed, that guarantee will disappear once the bank is taken over by a bidder–making it all the more important that U.S. regulators be closely involved in the transition and integration process.

Silicon Valley has always attracted foreign investment. While this fact is not in and of itself an issue, a foreign-owned Silicon Valley Bank could potentially give foreign powers some modicum of control over who the bank loans money to and under what conditions, not to mention intelligence on the nature of the innovations being developed by the bank’s customers. The mere possibility of such a thing should be of concern to Americans.

The FDIC must do what it thinks is best for both the taxpayers and the nation’s banking system while satisfying the political constraints being placed upon it by a Congress and White House anxious to head off any further bank failures and protect an increasingly fragile economy.

But amongst these exceedingly complicated set of factors, there is one consideration that is an easy call: keeping Silicon Valley Bank out of the hands of any foreign concern. The undue political tension, problematic regulatory considerations and exacerbated uncertainty in the market created by such a move would come at a time when our financial system can least afford it.