AFR's Banking Crisis of '23 Brief: 21st Edition

A cogent email of curated information on the banking crisis and the response

May 11, 2023

FDIC Special Assessment Targets Big Banks.

The FDIC held a meeting of its board of directors this morning to approve a proposal for a special assessment to replenish the estimated $18.5bn hole in the deposit insurance fund. The outcome, by a 3-2 vote: big banks will take most of the hit and smaller banks will be shielded based on their total number of uninsured deposits at the end of last year.

The FDIC’s full fact sheet here. Banks with over $50bn in assets would be responsible for 95 percent of the assessment. In all, 113 banks will pay out an annual rate of 12.5 basis points over the course of eight quarters beginning 2024 Q1. There will be a 60-day comment period.
Reports Politico: 65 of the 113 banks receiving the assessment have between $5bn and $50bn. FDIC Vice Chair Hill and board member McKernan (both Republicans) voted against the proposal. OCC Acting Comptroller Hsu issued a statement in support of the proposed rule.
A statement from ICBA applauds the decision: “Community banks should not have to bear any financial responsibility for losses to the Deposit Insurance Fund caused by the miscalculations and speculative practices of large financial institutions. Large banks should pay for the special assessment because they are the chief beneficiaries of these two receiverships.”
Also: the FDIC is suffering from brain drain, leaving it with skimmer ranks and lower capacity to perform its regulatory function. The recent crisis especially, writes NYT, exposes the vulnerability of not only this agency but also its fellow regulators.

FINANCIAL STABILITY

Fed Report.

The Fed released its May financial stability report. It highlights banking sector turmoil, particularly among midsize banks, as a chief area of concern that could continue drying up access to credit in the broader economy. Per the report:

“Despite decisive actions by the Federal Reserve, the FDIC, and the U.S. Department of the Treasury, concerns about the economic outlook, credit quality, and funding liquidity could lead banks and other financial institutions to further contract the supply of credit to the economy.”

NY Fed President Williams indicates that the central bank will continue to monitor lending conditions. He clarifies that while the Fed has not said it’s done with rate hikes, he believes that they’ve made “incredible progress over the past year or so.”

Commercial Real Estate.

NYT notes worry in the Fed’s financial stability report over commercial real estate. Mortgages are coming to term in the following years, and officials are concerned that borrowers won’t be able to refinance. Reminder: Monday’s Fed bank lending survey noted tight standards and low demand. Rising vacancies have already been hitting cities: places like New York, which has enough empty office space to fill 26 Empire State Buildings, and San Francisco.

Bank Trouble.

Pressure is mounting on regional banks through another channel: bonds. Investors want higher yields to hang onto their debt. By contrast, JPMorgan Chase has no problem selling debt, highlighting a core issue in the too-big-to-fail debate. WSJ reports that regulators are considering eventually forcing smaller banks to issue more long-term bonds.

FT columnist El-Erian considers the first two “phases” of the crisis – first, the sudden hemorrhage of deposits from banks, and second, their forward-looking profitability – and how the system can prevent a third. Their suggestions: banks should be more wary with their communication, the Fed should shore up its supervision, have more robust public-private resolution frameworks, and make assurances that the deposit insurance system and regulatory system will be revamped.

And: in an increasingly high-tech banking world, an old crime still rears its ugly head: check fraud. A report from WSJ here.

Further to SVB.

A retrospective from WSJ judges that First Citizens got an even better deal on their SVB purchase than previously thought. Their tangible book value per share, a useful number for bank investors, more than doubled from 2022 Q4 to 2023 Q1. And they marked nearly $10bn according to a Q1 filing.

The bondholders who are fighting the FDIC to retain $2bn worth of deposits from SVB are feeling more confident that they’ll come out on top.

The Peterson Institute for International Economics explores the supervisory shortcomings and delay in resolution action in the SVB case.

The bank lobby draws their own conclusions about SVB’s failure, taking the focus – as usual – away from regulation and instead placing the blame on supervision.

The Sun Never Sets on JPMorgan.

FT examines how Jaime Dimon and his too-big-to-fail JPMorgan has a history of getting even bigger when a crisis rocks the financial system. In 2008, the bank took over Bear Stearns and Washington Mutual; 15 years later, it got First Republic. Dimon and his supporters call it a public service or “profitable patriotism,” in the words of NYU emeritus Prof. Richard Sylla. Others see it for what it is: problematic consolidation. Says Warren:

“Jamie Dimon should have never been permitted to take over a failing bank because JPMorgan is already too big to fail.”

Columbia Professor Adam Tooze reviews in detail JPMorgan’s enormous role in the U.S. economy, diving into the political, social and financial context. It’s almost frightening.

[T]here can be no doubt that as far as strictly financial and banking issues are concerned, JP Morgan and its CEO Jamie Dimon have privileged access to the Fed, the Treasury and the White House.
Furthermore, JP Morgan occupies a pivotal position as a broker-dealer and market maker for US Treasuries, the most important financial asset in the world. It is not by accident that even Bloomberg relies on JP Morgan’s data to track that all-important market.

Crisis of Confidence.

According to Gallup polling, people in the U.S. exhibit a decreasing confidence in their economic leaders. Only about 34% to 38% of Americans have a “great deal” or “fair amount” of confidence in Biden, Powell and Yellen to steer the economy in the right direction. Powell’s rating (36%) is the lowest Gallup has recorded for any previous Fed chair, though not by much.

CONSUMER

Politics and Watchdogs.

Senate Banking accuses Republicans of wanting to let partisan politics interfere with watchdogs like the Fed, CFPB and FDIC.

Credit Card Late Fees.

Sen. Baldwin and colleagues have called on ten of the largest credit card issuers, including JPMorgan Chase and Wells Fargo, for answers regarding their late fee practices. The request comes after the Consumer Financial Protection Bureau proposed a rule which would cap fees at $8, down from a previous maximum of $41. Full letter here. Write the lawmakers:

“While the banking industry has opposed the proposed rule and argued that saddling Americans with excessive late fees is essential for teaching them ‘responsible credit management’ or ‘timely repayment,’ consumers have filed thousands of complaints related to credit card late fees with the CFPB.”

The bank lobby tries to rebut Warren’s charge that credit card companies must explain “exorbitant” late fees with a narrative that suggests they’ve actually always been in favor of consumer protection. Here they are opposing lowering the late fee limit.

CAPITAL MARKETS

Investors.

AFR and 12 other organizations wrote a letter advocating for the SEC to adopt a proposal that would protect private fund investors with greater transparency. From the letter:

“This opaque and siloed system of negotiating Limited Partnership (LP) agreements has enabled General Partners (GPs) to coerce investors to accept unfavorable terms such as indemnification, limited liability, and standard of care provisions that seriously disadvantage investors by providing unduly broad protection for GPs in the case of wrongdoing.”

In response to a proposed SEC rule on “Safeguarding Advisory Client Assets” by strengthening client protections, the bank lobby – ABA, FSF and BPI – retorted with a letter suggesting that the rule would harm investors and the market.

Remaking the Stock Market?

That’s Jon Stewart’s idea, anyway. He and a contingent of small investors spurred by a Reddit-born movement rally behind Gensler’s efforts for “the most sweeping overhaul of share trading in a generation,” reports Politico. The proposed program would see the implementation of a best-execution rule, requiring brokers to carry out their clients’ orders on the most favorable terms. Beyond that: increasing transparency about the quality of their trades, and using auctions to spur competition. Gensler has met considerable opposition for fear that the proposal would disrupt an already functional system.

SEC Documents.

House Financial’s McHenry Huizenga sent a letter to Gensler demanding the SEC turn over documents pertaining to the Sam Bankman-Fried charges, its proposed climate disclosure rule, and registration information for digital asset companies.

PRIVATE EQUITY

One Bankruptcy.

KKR-backed Envision Healthcare plans to file for bankruptcy, buckling under a debt burden laid by its private equity owners. It represented one of KKR’s largest healthcare buyouts ever. Now, it may be one of their largest losses ever. The Center for Economic Policy puts the fall into political context: Envision struggled after passage of legislation which limited surprise medical bills. CEP writes:

We made the case that KKR would move Envision’s profitable assets to a new investment vehicle, out of the reach of creditors, and would leave the left-behind-assets in Envision, still burdened by all the debt its PE owners had loaded on it. This was sure to become untenable and we predicted that Envision would ultimately face a major restructuring, or even bankruptcy. Events proved us right.

More Coming?

Axios notes a possible “bankruptcy boom” on the horizon among companies in private equity portfolios, the product of high interest rates and an economic slowdown. They conclude that conditions are rough in the short-term but that “private equity believes it can jump the bankruptcy wave.”

The Playing Field Changes.

A SportsBusiness report reveals that rights-holders have no idea – or, if they do, they’re not saying – where all the private equity money flooding into sports comes from. The study polled rights-holders at eleven sports clubs across the world. None directly answered a question about investor identities, though some were able to provide a generic script from private equity.

The biggest shift in ownership in the history of professional sport is currently under way. Sport is rapidly heading towards a situation where many elite clubs, along with multiple leagues and federations, could soon have private equity investors holding either minority or majority stakes.

CRYPTO

Rules Inbound.

Republicans on House Financial and House Agriculture are making a move on crypto rules that would reallocate the power of the SEC and CFTC over digital assets, reports Politico. The bill would create definitions on which assets could be regulated as securities, commodities or “an other.” Nothing concrete on the table yet, but Rep. Hill says something can be expected in the coming weeks.

House Democrats plan to step up to protect the SEC’s role in crypto regulation, however. Says Rep. Casten:

“If your goal is to be under-regulated and maintain a Wild West scenario where you can fleece consumers and use this for money laundering … you would vastly prefer to be regulated by a smaller, less well-funded organization."

Stablecoin.

Revolving Door Project examines the hard truths that the SVB collapse exposed about Circle’s USD. For all its stable claims, it’s marked by instability. Billions of its speculative dollars were tied up in the fallen bank, inciting the coin’s own crisis of confidence and causing its value to plunge:

“While it is notable that this unmooring was brought about by a bank failure, it strains credulity to argue that USDC’s de-peg was an unexpected event. Doing so both rewrites the history of an asset that is stable in name only, and offers unwarranted legitimacy to a firm whose purported commitments to prudence are, in reality, extremely shallow.”

HOUSING

Home Prices Fall.

Housing prices have dived in the most parts of the U.S. in a decade as a result of high mortgage rates, reports WSJ. National Association of Realtors chief economist Lawrence Yun observes lower prices in more expensive markets and higher prices in cheaper markets, but those lower prices may not last long due to a shortage of supply.

CLIMATE and FINANCE

Waters Rise.

Climate change poses a tangible threat to homeowners, writes the University of Pennsylvania Professor Benjamin Keys, and they need look no further than their insurance bills. As natural disasters intensified by climate change buffet homes, premiums in the U.S. jumped 12% from 2021 to 2022, and they’re only expected to rise.

POLITICS and MONEY

DeSantis.

Blackstone co-founder, billionaire, and Republican megadonor Steve Schwarzman hesitates to back DeSantis in a prospective presidential bid.

Financial Justice

Discussion about this post