AFR's Banking Crisis of '23 Brief: 11th Edition
A cogent email of curated information on the banking crisis and the response
April 12, 2023
TO: Interested parties
FROM: Americans for Financial Reform
RE: Banking Crisis of '23 Brief: 11th Edition
Feedback? carter@ourfinancialsecurity.org and dustin@ourfinancialsecurity.org
Follow us on Twitter: @realBankReform and @CarterD
Credit Crunch? – Open Market Operations – Signature Bank – IMF Predictions – Financial Stability Board – Basel Committee – Executive Compensation – Bank Holding Companies – Voters and Regulation – Deposits and Insurance – Treasury Market – Junk Bonds – FDIC Reserve Corps and Travis Hill – Lawmaker Bank Trades – Treasury Optimism – Bitcoin – Novel Idea from Sweden
Credit Crunch? NYT gives us a big-picture view of credit conditions. No clear conclusions right now, just scattered data points and interpretations. Goolsbee says financial turmoil is good for 50-75 bps of tightening and signals caution. The Dallas Fed released its banking conditions survey for March, which noted tighter credit standards and terms, and a decline in consumer loans. NY Fed boss does not see tightening. NFIB says small businesses feel it. Today’s inflation report, showing persistent core inflation, suggests the Fed might still decide to raise rates again. FT outlines how Fed officials are jousting over future rates.
Open Market Operations. People like Kate Judge delve into this year’s report (for 2022) for kicks. It has vivid charts of how reverse-repo operations have drained money out of the economy.
Signature Bank. NY authorities rebut Barney Frank’s assertion that it was closed to make an example of them over crypto. WSJ reports the bank got into real estate, which softened, then branched out into lending to cab drivers, private equity. And yes, it was in crypto.
IMF Predictions. The IMF published its World Economic Outlook and its Global Financial Stability Report. WEO cites “recent financial sector turmoil” as one of the obstacles to achieving a soft landing, adding uncertainty to an environment marred by turmoil from high inflation and market volatility. That volatility is expected to slash U.S. GDP and tighten lending.
Director of the IMF’s monetary and capital markets department warns of “acute” risks applying pressure to the financial system and that weaker banks might start feeling the crunch if central banks continue to bump up interest rates.
Nine percent of US banks with $10bn-300bn worth of assets, says the IMF, would fail to meet capital requirements if they fully accounted for unrealized losses on securities.
Regional and smaller banks in the United States account for more than a third of total bank lending. So, “a retrenchment from credit provision could have a material impact on economic growth and financial stability,” per the financial stability report.
Financial Stability Board. Chimes in with a letter noting that the current crisis “had its origins within the financial system.” It wasn’t housing or a pandemic. Also, all the current vulnerabilities of the financial system (FSB lists them) are “sensitive to a tightening of financial conditions and a slowing of economic activity,” which could be read as a gentle reproach to the Fed.
Basel Committee. Chair Pablo Hernández de Cos, aka central bank governor of Spain, exhorts regulators to “filter out the noise” of industry lobbying in setting capital and liquidity rules (the Basel Endgame) in the coming months. He noted that in earlier iterations, capital rules for interest-rate risks and bank liquidity guidelines were weakened after bank lobbyists said they were “overly conservative.” On this matter, AFR agrees.
Executive Compensation. In a WashPost interview, Chopra makes a strong push for doing executive compensation rules. See a video snippet here.
Bank Holding Companies. Aaron Klein reminds us that the Fed did not just flub supervision of the bank, but also SVB Financial Group, the bank holding company that also included its venture capital arm. In other words, the holding company is a legacy of deregulation in the 1990s and the entry of banks into other ventures. That speaks in favor of renewed separation of functions.
Voters and Regulation. A poll by Data for Progress suggests that nearly 70% of likely voters are at least somewhat concerned about the health of the banking industry, and about 70% say they would support the restoration of crucial regulations that were rolled back by S.2155. Generally, respondents were supportive of the Biden administration’s actions in the aftermath of SVB’s collapse, though framing was important; calling it an “emergency fund” rather than a “bailout,” for example – the mention of making “billionaire tech investors and multi-million dollar companies” whole caused a sharp dip in support.
Deposits and Insurance. Big banks will report a dip in deposits for the first quarter of 2023 when earnings reports come out, starting on Friday. Forecasts estimate about $100 billion was pulled out from accounts at the Big Four retail lenders in Q1, leaving them $521 billion less in deposits year on year. And some of the big banks that pitched in to rescue First Republic are now setting aside money to strengthen their own reserves. Chopra says: “We have a lot of families across the country querying and searching on the CFPB website about deposit insurance.” Lots of tweeting on this subject:
John Paul Koning: “At one point in the 1990s, over 80% of all U.S. deposits were explicitly covered by FDIC deposit insurance. Since then, insured deposits have fallen to ~55%, the lowest level since the 1960s.”
Morgan Ricks, Aaron Klein, Peter Conti-Brown debate deposit insurance coverage. Pat McCoy has been vocal as well.
Treasury Market. Richmond Fed has an article on possible changes to this key market. It also parrots arguments from the bank lobby, which wants Treasurys to be exempt from capital charges. AFR’s view: more transparency, don’t water down capital rules, and remember: during the pandemic, this exemption (then temporary) was a back-door bailout of banks.
Junk Bonds. Stress from the banking crisis is starting to recede in the junk-bond market. Spreads spiked in the middle of March, which traders take as an omen of recession, but have steadily fallen since then.
FDIC Reserve Corps and Travis Hill. A WSJ article sheds light on a group of executives, waiting in the wings to be called by the FDIC to fly in and take control of the bridge institution when a bank goes under. Also, new-ish Republican FDIC board member Travis Hill, who helped write S.2155 as a Senate staffer, says we should first look at facts to determine its role in the current crisis – but then concludes it had no role, and generally hews to Republican talking points.
Lawmaker Bank Trades. Two lawmakers, Reps. Nicole Malliotakis (R-NY) and Earl Blumenauer (D-OR), reported trades in bank stock amidst their work on the banking crisis fallout. Earlier this year, a bipartisan coalition reintroduced a bill that would prevent members of Congress and their families from trading in individual stocks.
Treasury Optimism. Yellen struck an optimistic chord this week, and the Treasury continues to believe that the U.S. financial system is “strong and sound.”
Bitcoin. Not an alternative to banks and banking, per the NYT, just a rally because, well, that’s where people want to stuff some speculative cash. Reminder: these markets are not very liquid, so a few trades can drive prices.
Novel Idea from Sweden. They fired the manager of their largest pension fund for investing in SVB, Signature and First Republic. Import that idea? Would be better than snus.