AFR's Banking Crisis of '23 Brief: 10th Edition
A cogent email of curated information on the banking crisis and the response
April 10, 2023
TO: Interested parties
FROM: Americans for Financial Reform
RE: Banking Crisis of '23 Brief: 10th Edition
Feedback? carter@ourfinancialsecurity.org and dustin@ourfinancialsecurity.org
Follow us on Twitter: @realBankReform and @CarterD
Lending Conditions – Regional Bank Options – Monetary Policy Crossover – Questions from Congress – Auditor Issues – Venture Capital – Nonbank Crisis – Deposit Insurance Debate – Risk-Takers – FedNow Propaganda
Lending Conditions. Deposits are somewhat stabilizing at U.S. banks while their commercial lending declines (but still marked a decline in the last weeks of March), as analysts eye the latest weekly H.8 report from the Fed. At the consumer level, banks have been trying to win over new depositors with offers and promotions. A Goldman Sachs report says tightening at small- and medium-size banks will slow the economy.
Tightening lending conditions are adding pressure to the commercial real estate sector, already suffering from empty offices from low demand, rising interest rates and a mountain of debt.
Regional Bank Options. Traders are buying up options related to midsize lenders as regional bank share prices momentarily stabilize. They may be expecting dramatic stock swings with either large gains or losses depending on the banks’ reported earnings.
Monetary Policy Crossover. As the Fed pursues lower inflation with higher interest rates, the effects may not be limited to financial stability. Black unemployment, now at a record low, could also take a hit. Details on racial disparities in unemployment from the Groundwork Collaborative here.
Questions from Congress. Warren and Ocasio-Cortez sent letters to fourteen of SVB’s largest depositors probing their relationship with the bank. They asked for disclosures of investment duration and deposit amounts, and information about possible exclusive benefits. The lawmakers cited reports that the bank offered tech startups perks that other firms might not have received, such as low-interest loans, ski trips and dinners. They seek answers by April 24.
Auditor Issues. In the weeks before their collapse, SVB’s auditor, KPMG LLP, one of the Big Four audit firms, failed to flag the issue that eventually sank the bank as a critical audit matter, a measure introduced by audit regulators in 2017 that brings attention to risks and uncertainties in financial statements for investors. Now, they, along with underwriters including Goldman Sachs, Bank of America and Morgan Stanley, have been named in an investor lawsuit. KPMG’s U.S. executive Paul Knopp stands by their assessment, placing the blame on “market-driven events.”
Venture Capital. SVB was a heavy-hitter in the venture-debt field. Its collapse has many wondering what will happen to startups and venture capital, which contracted in the first quarter of 2023. Valuations are at a fraction of their peaks from the past two years.
Nonbank Crisis. A WSJ op-ed signals danger from under-regulated nonbank financial intermediaries (NBFIs), who the IMF report hold nearly half of all global financial assets. NBFIs seem to be increasingly interested in ties with banks across national borders, and, despite the diversity of these institutions, their portfolios are becoming more similar. The NY Fed has a paper on how it’s happening in the U.S.
Deposit Insurance Debate. A WSJ op-ed from Brookings’ Aaron Klein pointed to the New Deal-era cap on coverage. Uncapped deposit insurance, says Klein, burdens individual depositors in the interest of protecting the wealthy and large companies. Right-wing groups sent a letter to Congress, citing a taxpayer bailout and moral hazard if the limit is expanded. Expect a flurry of experts weighing the pros and cons of this topic for weeks to come.
Risk-Takers. An article from Inside Philanthropy asks, with an eye toward the crisis, who is allowed to take risks. Investment bets turning sour sank SVB, but their risk-takers were given an out that communities of color, says the columnist, would not have been given.
FedNow Propaganda. There has been pushback against the conspiracy theory that FedNow is a “woke” digital currency controlled by the government. The Fed says in an FAQ that, no, it is “not related to a digital currency” and is just a payments system for funds transfers at banks and credit unions.