AFR's Banking Crisis of '23 Brief: 12th Edition
A cogent email of curated information on the banking crisis and the response
April 14, 2023
TO: Interested parties
FROM: Americans for Financial Reform
RE: Banking Crisis of '23 Brief: 12th Edition
Feedback: carter@ourfinancialsecurity.org & dustin@ourfinancialsecurity.org
Follow us on Twitter: @realBankReform and @CarterD
Earnings Reports and Deposits – BlackRock Profits Again – Threats to Vulnerable Communities – Recession? – Voters and the Fed – Fed Vice Chair – Fed Facilities – FSB and Rules – Europe’s Bailout Reform – Deposit Insurance – Cross River Bank – Regional Bank Capital – Fintechs – Wall Street Money in Politics – Regulations and the Judiciary
Earnings Reports and Deposits. Several big banks released their earnings reports this morning, shedding light on their deposits as well.
They are making money hand over fist thanks in part to the most aggressive Fed rate-hiking campaign in over 30 years. JPMorgan Chase, for example, raised its guidance for interest income for this year by $7 billion, to $81 billion; that income rose 49% in Q1 to $20.8 billion. Lawmakers have criticized banks for not passing on higher interest rates to their depositors.
Relatedly: Bloomberg crunched data to find that insiders (officers, directors, major shareholders) at regional banks borrowed heavily just before the Fed started tightening. The biggest increases were at banks that either failed or are in a tight spot.
Fed data shows about a $600bn outflow from deposits in Q1 across all commercial banks, some of which flows into money-market funds. Some charts from WSJ are keeping track of earnings, deposits, unrealized losses and more.
JPMorgan Chase reported average deposits down 8% year-over-year and down 3% quarter-over-quarter. But (confusingly) customer deposits rose after the SVB collapse. Wells Fargo reported average deposits down 7% year-over-year and down 2% quarter-over-quarter. Citigroup reported average deposits up 2% year-over-year. PNC reported average deposits down 4% year-over-year, but up by 0.3% quarter-over-quarter.
BlackRock Profits Again. It now manages over $9 trillion thanks to inflows of $110 in the last quarter, $40 billion in March alone. It will also sell off a Credit Suisse portfolio, after getting the same job for SVB and Signature. “This type of dislocation is just going to create more and more opportunity for us,” CEO Fink said.
Threats to Vulnerable Communities. The NYT commissions its own analysis (by four prominent universities!) that suggests the declaration of a systemic risk on Sunday, March 12, was justified on the grounds that the crisis could have spread to communities least able to handle a bank failure:
... a run on deposits at [SVB and Signature] could have set off a cascading series of bank failures, crippling small businesses and economic activity across wide parts of the country … Because so many counties rely on a relatively small number of financial institutions for deposits and loans, and because so many small businesses keep their money close to home, even a modest run on vulnerable banks could effectively stifle access to credit for entire communities … regulators have not permanently addressed the vulnerabilities in the banking system. Those risks leave some of the most economically disadvantaged areas of the country susceptible to banking shocks … communities that were particularly vulnerable to both a lending slowdown and a potential regional bank run were also the ones that suffered most in the pandemic recession … larger financial institutions were unlikely to quickly fill any lending vacuum in those communities if smaller banks failed.
Recession? The minutes from the March 21-22 FOMC meeting showed that officials expect a “mild recession” later this year, as a result of “the potential economic effects of the recent banking-sector developments” and a recovery over the next two. White House Press Secretary Jean-Pierre said Biden’s economic plan has produced success and that recent indicators don’t signal even as much as a pre-recession. Tweets Bill Springs, AFL-CIO chief economist:
It's not encouraging when the March FOMC minutes reveal they moved to a better than 50% chance of a recession in the 3rd quarter but then voted to raise rates. The White House is correct. A recession is not endemic, but the @federalreserve is an exogenous threat.
Voters and the Fed. According to a new poll, voters don’t trust the Fed to fight for everyday Americans. “Voters believe the Federal Reserve is on the side of big business (38%), banks (38%), and Wall Street (30%). Less than 1 in 5 across partisan lines think the Federal Reserve is on the side of average Americans.” Over half want the Fed to stop raising rates, for fear of triggering a recession, but it’s likely to hike again. Only about 40% have confidence in Powell, but billionaire Warren Buffet thinks he’s been doing a “terrific job”.
Fed Vice Chair. White House navigating Senate Dem demands in search for a Fed vice chair. Warren wants Biden to nominate someone who favors a less aggressive monetary policy, while Menendez seeks a Latino economist. White House is eying Northwestern Prof. Janice Eberly, but others are on their shortlist.
Fed Facilities. Use of discount window and the Bank Term Funding Program declined for the fourth straight week, suggesting the acute phase of the crisis is passing. Also, earlier data showing a drop in bank lending may have been misleading.
FSB and Rules. Chair Knot, also president of the Dutch central bank, wants to tighten up rules in light of the recent crisis. In his letter, he mentioned “bank prudential and resolution frameworks.” Knot also noted that while the crisis could result in “reprioritsation” of some of FSB’s work, it remained committed to its in-progress projects around crypto regulation and shadow banking, among other areas of focus.
Europe’s Bailout Reform. Draft proposals from the European Commission contain plans to reform bank bailout norms. A “public interest” test, used to figure out whether a bank would enter resolution or go through normal insolvency proceedings, would expand to include a measure of a failure’s regional impact. Deposit guarantees would help banks, particularly small and midsize ones, meet the threshold of loss beyond which they can tap into a reserve fund. The pay-back priority of deposit guarantees would be downgraded from its current “super-preference,” putting them on equal ground with all deposits but still above unsecured creditors.
Deposit Insurance. There’s a lot of pop history and quick takes on the subject. For some serious history of deposit insurance, check out “More Lives Than a Cat: A State and Federal History of Bank Deposit Insurance in the United States, 1829-1933,” from Dr. Sarah Gates at UNC-Greensboro:
“Government-managed bank insurance represented a renegotiation of the balance of power between the state and private banks to use the power of the state to distribute default risk across all banks, from the weakest to the most powerful …The federal guaranty of bank deposits was not cut from whole cloth in 1933; it was a recurring democratic impulse from the periphery of American capitalism that can be traced to the beginning of the Republic.”
Also: Bank of England Gov. Bailey raises the possibility of expanded deposit protection with a particular eye toward smaller lenders in the UK.
Cross River Bank. Reporting from The Information about fintech-lender and crypto-friendly Cross River Bank, which may share characteristics to SVB and other recently collapsed banks. In December, a mutual fund investor cut its share price valuation by 26%. And, in February, the bank partly pulled back from crypto after a series of collapses, leaving them more exposed to commercial real estate lending. A previous report indicates most of their accounts sit above the deposit insurance limit.
Regional Bank Capital. Per Risk.net (paywalled): “Eleven large US regional banks would have fallen short of their end-2022 regulatory requirements in the absence of a Trump-era paper-loss waiver the Biden administration suggested may be reversed … preventing them from filtering unrealised losses from capital would shrink Common Equity Tier 1 (CET1) capital ratios by an average of 256 basis points compared with Q4 2022 levels.”
Fintechs. The Small Business Administration will allow fintechs to begin offering government-backed loans after lifting a moratorium relating to loan authorization. ABA is unhappy about that.
Wall Street Money in Politics. Super-rich financiers inclined to back DeSantis (including, maybe, Schwarzman/Blackstone, who was a Trumper in the past) but — profiles in courage here — others fear backing a candidate who might lose to Trump.
Regulations and the Judiciary. Trump’s AG, Bill Barr, has joined a new group for whom the U.S. Chamber of Commerce is too lily-livered. It aims to fight regulations and ally with Republicans, which the Chamber only did most but not all of the time.