14th Banking Crisis of '23 Brief

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

Apr 20, 2023

April 20, 2023

Crypto in a Time of Crisis

In the “Who thought it was a good idea to do this in the wake of a banking crisis?” category, there was a hearing on stablecoin legislation, which hasn’t seen any bipartisan work since it died last fall. The bill would bless new deposit/security-like instruments (that have often failed in the past) created by issuer/bank-like entities and extend the government safety net. Ranking Member Waters said HFSC is “starting from scratch.” AFR and others sent a letter opposing the reintroduction of the bill on the grounds that it does not adequately protect consumers, investors, and financial markets and may even increase the risks to stability posed by stablecoins:

Stablecoins, despite their name, have proven anything but stable. There are ongoing questions regarding the degree to which their issuers hold enough stable reserves as collateral in order to redeem their customers should they choose to withdraw their funds. What’s more, the fragility of stablecoins and how their vulnerabilities can amplify market instability was on full display during the market crash last spring, where the collapse of the Terra stablecoin and its ecosystem, along with other factors, helped to spur roughly $2 trillion in investor losses in a mere few weeks.

Gensler faced Republican heat; they say his crackdown on crypto hasn’t made markets more stable, but he defended the work. The collapse of crypto-friendly SVB, Signature and Silvergate have left crypto firms momentarily bereft of banking partners.

Credit Crunch?

The Fed’s Beige Book report shows tightening lending conditions in the month following SVB’s collapse. Auto lending has tanked since the collapse of SVB, as lenders tighten standards, with lending to subprime borrowers shrinking most. Dealers in the subprime lending space such as U.S. Auto Sales, whose bonds have been hit as borrowers increasingly fall behind on payments, are having trouble keeping their doors open. WSJ analysis indicates signs of credit stress – growing numbers of companies with ultralow ratings and an increase in defaults – but says that they aren’t elevated relative to historical standards.

Commercial Real Estate

Life insurance companies are pulling back on lending to commercial real estate developers, nervous about a rise in vacancies and a dip in rents. WSJ reports that this comes at a time of dried-up funding sources for building owners while banks pull back too, as they have been since last summer. A survey by Bank of America highlights fears of a credit crisis sparked by pressure on the market.

Regional Banks

Deposits at Western Alliance, one of the midsize banks reportedly identified as being most at risk after SVB’s collapse, have bounced back. Nearly $3bn worth of depositor money plumped up their base in the past few weeks; though, according to its Q1 earnings, their total deposits are still lower year-on-year. While the news somewhat placated regional bank stocks, a CFRA Research analyst doesn’t “think the results will be all that good” for the sector at large, “but it will be bank by bank.”

Government-Backed Lending

The Federal Home Loan Banks have pumped nearly half a trillion dollars into the banking sector this year by way of secured loans, or advances. So we wonder whether that indicates financial distress. SVB, Signature and Silvergate drew on a combined $30.6 billion in the months before their collapse. Brown wants a “detailed review” of lending to now-failed banks. Critics have urged its regulator to evaluate the system’s benefits, including whether it “provides a perverse incentive to lend to institutions right up until they fail.” Says Bruce Morrison, former chair of the Federal Housing Finance Board:

"The question now is: Why does the federal government run competing liquidity sources? Isn't the Fed the liquidity source?... And if there are negatives to borrowing from the Fed, aren't those negatives what we want — to keep companies competing in a proper manner? If the Fed is tough on you when you come for liquidity, isn't that part of its job as a bank regulator?"

Reverse Mortgages

WSJ reports on a government-backed reverse mortgage lender run aground last fall by rising interest rates. The HUD is “exploring ways to offer support to address current liquidity challenges.” Lawyers for the lender say that macroeconomic stress made access to credit more challenging before its eventual bankruptcy.

FDIC and Seized Assets

Mortgage-backed bonds from SVB and Signature went up for auction on Tuesday. With $392 million’s worth on the table in bonds alone, data from Empirasign suggests that the government can expect to get 86 cents on the dollar back for the whole portfolio. At the same time, there’s $2 bn in seized deposits in FDIC receivership that SVB’s former parent company and bondholders want to hold onto, and one attorney says that the FDIC “appears to be taking a more aggressive and less deferential stance than it has in the past.”

Bond Losses

A WSJ article examines how the conditions that led to the crisis are being reversed by the aftershock of the crisis itself. After unrealized losses on bonds due to rising rates sank SVB, the wider-sector turmoil has caused falling yields, dampening these losses across the board. That said, Bank of America is still “deeply underwater on its bonds.”

Private Equity

Private equity-friendly bills — which is to say, bad bills — are coming in the House. One, sponsored by Reps. Wagner and Meeks, would open the door for more ordinary investors to access private equity. Another two from Rep. Barr would exempt more private equity and venture capital firms from SEC oversight.

Deposit Insurance

The FDIC released its semi-annual update on the restoration plan for the deposit insurance fund; we still await its plans for a special assessment to do so. The Financial Times has an explainer on the DIF and how potential assessments to recoup the losses incurred by covering for SVB and Signature might impact banks. Gruenberg has been sensitive to “the impact on community banks,” and Chopra has advocated for the country’s 158 large banks (>$10bn in assets), not community banks, to replenish the fund.

A Man Called Barr

WashPost has a profile out about Michael Barr, taking the reader into his 30-year tenure in the financial regulation space and contextualizing it with his work on the current crisis:

“I wasn’t predicting that the next day there’d be a bank run. I had no idea. I was not expecting that — nobody was expecting that,” Barr told The Washington Post in a recent interview. “But it goes back to the fundamental thing I was saying before: Nobody can predict these things. You just have to be humble about them, and that’s why we need more robust rules.”

Lawmaker Bank Trades

After disclosures previously revealed at least two lawmakers who traded in stock related to their work on the banking crisis, information about more trades from other members of Congress have come to light. NYT reports that at least eight Congresspersons or their relatives sold bank stock in March, per analysis by Capital Trades. On Tuesday, a new bill was unveiled in both the Senate and House seeking to clamp down on what co-sponsors call “corrupt stock trading.”

CFPB Breach

The CFPB reports that an employee forwarded the personal information of more than 250,000 consumers to a personal email in what the agency is calling a “major incident.” Lawmakers have requested briefings from Chopra regarding the incident.

Academic Papers

The Financial Times reports on three recent academic papers with relevance to the banking crisis, on sectoral concentration by banks, the role of social media, and the fickleness of a deposit franchise.

Financial Justice

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