15th Banking Crisis of '23 Brief

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

Apr 24, 2023

FSOC it to ‘Em.

The interagency body has broken the fetters of the Trump era by voting to abandon the 2019 guidance that made real action, especially company designations, all but impossible. It also released a new analytic framework for how it assesses risk. (All the documents here.)

AFR has been pushing for this step for two years, so AFR is happy. The 2019 guidance was merely a vehicle to stop FSOC from doing the job Congress gave it.
Powell supported that guidance in 2019 … but now professes himself “delighted” to support rolling it back in 2023 because, well, things change. He doesn’t say what, exactly, changed. But Powell, safe with other Trump-appointed deregulators, wasn’t in the hot water then that he is now. (Hat tip: Bank Reg Blog.)
Chopra noted tartly that “market participants have believed the FSOC lacks regulatory credibility when it comes to nonbank designations.” He added: “We will be able to turn some of our work identifying risks in the nonbank mortgage and hedge funds sectors, for example, into more rigorous, firm-specific analyses that could lead to designations.”
Gensler went down memory lane to talk about Long Term Capital Management: “History is replete with times when tremors in one corner of the financial system or at one financial institution spill out into the broader economy.”
Big banks were happy with the step. BPI called it “an important step forward in preserving the stability of the financial system.”
ICBA is all-in as well. “Large nonbank financial institutions that pose outsized risks to the financial system similar to those posed by large banks should be required to meet similar capital and liquidity standards.”
SIFMA commented on this step (“concerning”) via its Asset Management Group. Why? In a word: BlackRock. Also, lotsa SIFMA members do a lot of business with nonbanks.

Credit Crunch.

WSJ tracks the slow-motion effects of the banking crisis and maps the mechanisms by which it happens. The current bank crisis “is in the second or third inning, not the seventh inning,” said [former Dallas Fed President Robert] Kaplan. Also, the smallfolk, and small businesses, living outside cities, are most likely to get hit:

[A] slow-and-steady erosion of deposits at small and midsize banks could continue now that longtime consumers have awakened to the potential to earn more on their money by moving it to money-market mutual funds … Small and midsize banks losing a cheap source of funds through deposit flight could face pressure to raise capital. But that is less attractive when stock prices have fallen, and banks that have lost significant stock-market capitalization may find they can’t raise capital … For hundreds of smaller banks, the likely solution will be to reduce lending … Any lending squeeze could disproportionately affect small businesses because bigger companies that mostly borrow in the capital markets have seen little change over the past month in credit costs or availability … In most U.S. counties, small and midsize banks account for 90% of loans to small businesses.

Social Media Bank Runs.

Further discussion in the FT about this issue, riffing off a new academic paper. It’s “the 2023 banking crisis at its dumbest,” per Fed expert Peter Conti-Brown, and a distraction from real causes.

This discussion is leading to calls to keep the Fed’s discount window open 24/7. Fed governor Waller says emergency loans need faster processing.
But there’s also the view that the insiders already knew SVB was cooked, and social media didn’t matter. Previous snippet here.
The academic paper is here. The notion that this is a widespread, systemic issue conflicts somewhat with notions, cultivated by the bank lobby, that SVB was unique.

Regionals Downgraded.

Moody’s downgraded 11 regional banks, from US Bank ($682 billion in assets) to Bank of Hawaii ($24 billion). This year’s events “have called into question whether some banks’ assumed high stability of deposits, and their operational nature, should be reevaluated,” Moody’s said.

First Republic.

Announces earnings today. The numbers will offer some insight into whether more banks will go under, whether there is contagion, and how desposits behave.

Executive Compensation.

WashPost dives into how this rule, mandated by Dodd-Frank in 2010, never got done. “What we have here is veto by omission,” said Sen. Robert Menendez (D-N.J.), who wrote the Dodd-Frank provision on executive pay. “They don’t like something Congress passes into law — so they just don’t act on it.”

Securities Loophole.

The Fed may close a loophole allowing some midsized banks to disguise their losses on securities: a reporting exemption that SVB took advantage of on its own securities before its collapse. If adopted, it would mean about 30 institutions between $100bn and $700bn could be made to boost their capital, the WSJ reports.

Monetary Policy.

Former NY Fed President Bill Dudley tries to indict monetary policy for the banking crisis. Regulation gets a quick mention at the top.

Deposits Down.

Per Bloomberg: “Deposits decreased by $76.2 billion in the week ended April 12, according to seasonally adjusted data from the Federal Reserve out Friday. The drop was mostly at large and foreign institutions, but they also fell at small banks.” Look at this chart, and you can infer some stabilization. More broadly, there’s now persistent pressure on banks to pay higher rates for deposits.

Community Banks Do Well.

Incoming ICBA Chair Derek Williams touts “relationship-first” approach of community banks, and says they’re doing well, thank you. “For years, megabanks have said they would outperform us, that our business models wouldn’t hold. But we are gaining ground instead of losing it.” Are regulations crushing community banks? No mention of that.

Postal Banking.

Op-Ed from Mark Dimondstein, president of the 200,000-member American Postal Workers Union: “Since the government is already in the business of supporting the banking system, the people ought to demand a system that is designed to better serve the public interest and the common good.”

Apple Bank?

The iPhone maker has unveiled a new savings account with an attractive interest rate. Goldman Sachs runs the back end of this operation. But Apple will be in front of the customer. Is it commerce? Is it banking? Those are important questions that Rana Foroohar discusses in the FT:

… the fact that Apple looks, smells and acts like a bank raises questions about the disruptive effects of fintech, and of Big Tech in general. Silicon Valley loves regulatory arbitrage — move fast and break things in whatever sector you want to disrupt (retail, healthcare, banking, transportation, to name a few) before policymakers realise that you aren’t actually playing by the same rules as other industry participants ... Should Apple hasten the exodus of deposits from the traditional banking sector in ways that start to undermine already beleaguered financial institutions, I suspect that regulators will take a closer look at the business model. The company will also have to be careful to avoid compromising consumer data in ways that trigger antitrust issues.

Former SVB.

First Citizens is going to run SVB as a separate brand. It is struggling to stem a loss of employees and customers.

Bermuda-Bound Coinbase.

The crypto exchange threatens us all with a good time by suggesting the future lies offshore, away from major financial centers. Is it clear our lives would be less fulfilling without them?

Hedge Fund Guy at DNC.

The American Prospect dives into the role of former Rep. Cedric Richmond at DNC, who is supporting a hedge fund takeover of 60 local TV stations.

Quote of the Day.

“Private equity is expanding into other venues and looking at different ways to carve up the carcass,” said John McClain, portfolio manager at Brandywine Global Investment Management. [Emphasis added. Hat tip: Bloomberg]

Hear that, America? You’re the carcass to private equity’s vultures!

Financial Justice