AFR's Banking Crisis of '23 Brief: 13th Edition

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

April 18, 2023

SVB Did In Fact Fail! – Gaming Capital Rules – Bank Lobby Misdirection – Nonbank Scrutiny – Treasuries – De Novo Banks – Deposits – The Answer is No – Stablecoins – SVB’s Whodunnit – SVB Lending – First Republic Lending – Mortgage Bonds – Government-Backed Lenders – PE Hearts Sinema – Wells Fargo Does Not Heart Unions – CFPB and Junk Fees – Industrial Policy and Finance

SVB Did In Fact Fail! The below snipped from an AI chatbot suggests that artificial intelligence might still have a ways to go:

Gaming Capital Rules. In addition to earnings and deposits, major bank CEOs also discussed plans to game the new capital rules that are coming, none more so than JPMorgan Chase’s Dimon. “We've got our smartest people figure out every angle to reduce capital requirements,” Dimon said. One angle: learn from private equity and insurance. Hat tip to Bank Reg Blog, which includes a closer look at what the banks said. Related: the Basel Committee is examining ways that large-bank rules might need to apply to mid-sized banks, since SVB collapse “has shown you don’t have to be internationally active to be able to generate cross-border spillovers.”

Bank Lobby Misdirection. After a phase of lip-service to fact-finding, BPI has settled on the (false) talking point that SVB collapse simply reflects bad management. One important point: it’s trying to tell us supervision (especially the weakening of supervisory guidance) played no role. First, the argument is nonsensical. The point of supervision is to supervise, so if supervisors don’t identify and remediate failure (like managing interest rate risk), then there’s a problem. Second, after the weakening of guidance, “it became more of a battle to get a bank to agree to changes,” reports WSJ. Bottom line: Quarles’ policy was to weaken supervision and codify it into regulation at the behest of BPI, a “rare step,” the group notes. It came home to roost when SVB collapsed.

Nonbank Scrutiny. Gensler calls for greater attention to be paid to asset-laden nonbanks, such as hedge funds and other shadow banks (private equity). He cited a “once-in-a-generation” rally on Treasury bonds in March as evidence that bank turbulence spills over into other sectors. Related: Jeffries investment bank runs through risks to “alts,” aka private equity and hedge funds and is sanguine. FT dryly notes: “It may not surprise you to learn that private equity firms in particular are mammoth fee-payers to investment banks.”

Treasuries. The FT has a deep dive on “all-to-all” trading, a plan the Treasury is considering to break the lock primary dealers (banks) have on trading U.S. government securities. Reminder: banks have sought easier capital rules for Treasuries to smooth functioning, so this approach would let regulators pursue a more liquid market without giving in to bank blackmail.

De Novo Banks. Fed Gov. Bowman warns about the past decade’s stagnation in bank formation. While the system is strong and built on a “solid regulatory foundation,” she says, the decreasing number of banks reduces competition and harms local economies. Bowman suggests that charter strip acquisitions, the growth of nonbanks and the increasing role of fintechs may drive the trend 

Deposits. Fed data reveals an uptick in bank deposits, with the increase at small banks outpacing those at large banks for the week ending April 5. Plus, no outflows that week. Mid-sized banks are having to increase benefits, including interest rates, to hold onto savers. Deposits at Charles Schwab, State Street, and M&T bank fell, while Apple (backed by Goldman Sach) will offer a savings account with a fat interest rate. A good regional bank wrap from Maya Rodriguez Valladares. New polling on attitudes toward safety of deposits and deposit insurance. NY Fed has a blog post on using the minimum balance at risk metric to avoid runs on insured deposits.

The Answer is No. ICBA wrote to Gruenberg, demanding that community banks be exempt from any potential FDIC special assessment used to cover for SVB’s and Signature’s deposit bases. John Buhrmaster, president and CEO of 1st National Bank of Scotia, has an op-ed on this subject as well.

Stablecoins. House Financial Services published a draft of an upcoming stablecoin bill that is substantially the same as one from last year. A hearing is scheduled for Wednesday. American University Prof. Hilary Allen tweets: 

TL;DR, it won’t fix problems with stablecoins (which aren't used for payments anyway), but it will extend govt safety net to more firms.

SVB’s Whodunnit. A Barry Eichengreen article highlights the foremost possible suspects in the lineup: incompetent management, incompetent customers, incompetent regulators, and reckless macroeconomic policies. 

“While we can plump for better bank management, there will always be inexperienced bank managers, and board members too distracted to provide effective oversight. We can pass legislation allowing the FDIC to claw back bonuses paid to managers of failed banks. We can revisit double-liability laws from the nineteenth century, when a bank’s shareholders were on the hook for more than just the current value of its assets when it went bust … [T]he only viable solution is more effective bank regulation. Some argue that regulators cannot be trusted, and that regulation can never be effective. They invoke SVB as a case in point. This cynical view is in fact a counsel of despair. As long as we have banks, we will always have bank failures. Given this reality, we need regulators to draw lessons from the SVB debacle, incorporate them into their procedures, and get back to work.”

SVB Lending. An FT article dives into the unconventional lending and investment practices that boosted SVB’s risk. Many of their venture loans went to companies “with modest or negative cash flows [and] no established record of profitable operations,” reads their last set of accounts. And they shoveled customer money into government bonds. 

First Republic Lending. The wobbly bank that’s having a hard time finding the right rescue(r) lent a lot of money to wealthy people (Goldman prez, ex-Blackstone) on sweet terms that are now bitter for the bank. One commentator:

If you are a regional bank and the president of Goldman Sachs comes in and says “hi I’d like to make an $11 million interest-rate bet with you,” you are getting adversely selected.

Mortgage Bonds. Morgan Stanley signals danger for mortgage-backed securities, which could end up with permanently lower valuation as the market feels the ripples of SVB’s collapse. Currently, banks have a heavy presence that may need to scale back with attention toward the duration of their holdings, say analysts. 

Government-Backed Lenders. Lawmakers are honing in on the Federal Home Loan Banks, the group of government-backed lenders that loaned out $30bn to SVB, Signature and Silvergate. Critics suggest that the loans to these failed banks represent the taxpayers footing the bill when the government exercises little caution with financial risk. Calls for stricter supervision and increased oversight have cropped up from people like Sen. Cortez-Masto and Rep. Torres, who previously sponsored a companion bill to overhaul the FHLB system, and Senate Banking Chair Brown.

PE Hearts Sinema. Blackstone, Carlyle and KKR employees were Sinema’s three largest contributors thanks to her help in preventing closure of the carried interest loophole. Overall, finance provided nearly half of her Q1 fundraising haul. Her presumptive challenger Gallego raised more.

Wells Fargo Does Not Heart Unions. Employees working with Communications Workers of America could start notching up organizing victories, according to an internal presentation obtained by Bloomberg. Alternative view: management at Wells needs all the help it can get, including divestitures.

CFPB and Junk Fees. Director Chopra summarizes what the agency is doing to promote competition. The Cato Institute objects, a sign that it prefers to worship markets, rather than understand them.

Industrial Policy and Finance. Democracy Journal considers wider industrial policy in the context of the collapse of SVB, Signature and Silvergate, major lenders in the tech and crypto sectors, with an eye toward having a “public option” in a space full of private ownership. 

We need to harness the power of finance as a tool of industrial revival. That requires more direct and smarter public action inside financial markets. One thing we could and should do is offer institutional investors meaningful alternatives to speculative investments like crypto. To lessen the pressure on pension funds and other long-term investors to chase short-term returns, we need to give them more attractive and sensible opportunities to invest in cutting-edge infrastructure, clean manufacturing, and other productive sectors. We need a twenty-first-century “public option” for private equity-type investment.

Feedback? carter@ourfinancialsecurity.org and dustin@ourfinancialsecurity.org 
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