AFR's Banking Crisis of '23 Brief: 16th Edition

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

Apr 26, 2023

Powell Owns This Crisis

We now know that Fed Chair Jerome Powell sought to head off questions about responsibility and accountability around March 12, the day federal regulators resorted to a blanket deposit guarantee to stop the crisis from spreading.

Perhaps that’s because Powell has an extensive record supporting deregulation and lighter supervision, even before he was confirmed to head the central bank. At his Senate confirmation hearing on Nov. 28, 2017, Powell made clear his support for weaker oversight, and for S.2155, the partial rollback of Dodd-Frank that had been introduced two weeks earlier but not yet passed.

Powell’s record is covered more fully in this AFR fact sheet. The Revolving Door Project has a memo of questions that the Fed’s report, coming Friday, must answer to be credible.

Powell all but admitted that “tailoring,” the provision of the bill that promoted nips and tucks to regulations based on the size and complexity of the bank, was a cover for deregulation. And Powell explicitly promised the Fed would identify and remediate problems like the ones that emerged at Silicon Valley Bank – but he failed to deliver.

“If there are institutions that are currently in that [$100-$250 billion] population or that, over time, become systemically risky or even risky,” Powell said on March 1, 2018, “Then we’ll have that in place.” He added, “we haven’t been shy about finding systemic risk under $250 billion.”

It’s all in the public record. And, as the Fed prepares to release its own report on the Banking Crisis of ‘23 — coming Friday — it all underscores the need for a truly independent investigation of the Fed’s actions.

Night of the Living Bank.

First Republic Bank released its earnings report on Monday.

The WSJ reports on its status: the acute liquidity trouble seems to have passed thanks to its ability to cover for its uninsured deposits (at least twice over). But with money from the Fed, FHLB and JP Morgan Chase, the bank is little more than a corpse with razor-thin profitability – a “zombie bank.” A quick earnings call with CEO Roffler’s prepared remarks revealed $100bn worth of deposits lost last month.
First a nearly 90% drop in share value since early March, then a 49% decline during Tuesday trading after earnings came out (causing alarm in Washington). Plans to slash the workforce by up to 25% and reduce executive compensation are on the table.
First Republic has also retained Messina Group, headed by a former Obama bigwig, for advice on their dealings with the Biden administration “as it seeks to negotiate a rescue from turmoil among regional lenders.”

Regulators Warned in Fall.

Regulators received advance warning from bank groups — the ICBA and ABA — ahead of the collapses of SVB and Signature, writes Bloomberg. “In letters and calls from October through December, trade groups and lawmakers told senior agency officials that the losses undermined banks’ liquidity access and might hurt the economy. The losses and the letters were public, but the issue wasn’t treated as a top priority or a harbinger of what transpired in March,” Bloomberg reports.

Protect CFPB.

Advocates push back against proposals in Republican-controlled House to eviscerate CFPB. “This package represents the latest in the string of actions taken by the Bureau’s opponents since its inception to limit the CFPB’s effectiveness,” they write. Remember: CFPB opponents hate it because it works well.

IntraFi and Deposits.

American Prospect reports on a Blackstone-owned firm, IntraFi, that has been lobbying against removing caps deposit insurance and has stepped up its efforts by hiring the Duberstein Group, a longtime Washington lobbying powerhouse. The company, bought by the largest private equity firm in 2019, offers “brokered deposits,” which allow large depositors to spread their money into accounts across hundreds of banks that stay just below the insured limit. Former FDIC chair Bair said the practice is “just gaming the FDIC rules. The FDIC takes all the credit risk, and Promontory [now IntraFi] gets the profit.” The FDIC’s coming review of brokered deposits and deposit insurance could dramatically affect IntraFi’s profitability.

The Big and the Small.

ICBA’s president and CEO Rainey bites back at the ABA’s suggestion that the entire banking industry, big and small, should foot the bill for the DIF after SVB and Signature. Writes Rainey on the divide:

ICBA had no reason to cave to the influence of the too-big-to-fail and too-big-to-manage banks, while those who represented all banks had to walk a fine line—often giving in to the larger banks that paid a higher percentage of the membership dues.

Politico reports that there’s no strong push in Congress to raise deposit insurance caps.

Stablecoin.

Less than a week after Waters hinted at a need to start over on the stablecoin bill, McHenry unveiled a proposal on Monday led by House Republicans for a new draft version. The latest draft is shorter and narrower, scaling back certain provisions targeting trading platforms and custodial service providers. This version would also see an expansion of state-level regulatory authority over Washington. Also: NY Fed changes to its reverse-repo facility may box out Circle’s stablecoin, which holds reserves in a bespoke BlackRock fund.

Coinbase.

Coinbase sued the SEC in an effort to compel the regulator to indicate whether it would formalize rules for the cryptocurrency market, after what it believes was an unfair response (a Wells notice) to a rulemaking request in March. The fight hinges on whether crypto assets are securities. The SEC thinks so, but Coinbase wants it in writing so that it can present a legal challenge.

“The SEC has through its public statements and actions made clear it knows what its answer is,” [Coinbase Chief Legal Officer Paul] Grewal said in an interview Monday. “It just won’t give us notice of that in a way that would allow us to punch our ticket to go to court.”

The crypto exchange is also, apparently, trying to fire up its base of supporters with a commemorative NFT. Coinbase’s trading volume has fallen to a 16-month low, per FT. And Bloomberg wonders, with Coinbase and Gemini looking to journey overseas, whether we’ll even miss what crypto firms have brought (frozen customer funds, money laundering, brazen fraud) when they’re gone.

Bank Oversight.

An op-ed from Brookings reimagines banking oversight with a heed toward the crisis. It notes that regulatory evaluation and strengthening is a good first step, but next steps should go further. The future they envision? An automated system that would target institutions >$100bn in assets, feeding on real-time information from the banks to throw up risk red flags on which supervisors could, and would, nimbly act. Related: banking expert Arthur Wilmarth argues regulators should have used Dodd-Frank’s “orderly liquidation authority” to resolve SVB and Signature.

Corporate Insiders.

The WSJ reports that an increase in insiders’ purchases of their own companies’ stock, most notably in the financial sector, marks a period of optimism after March’s turbulent conditions. There was a notable concentration of these buys occurring on the part of regional banks.

Weep for Investment Bankers.

Apparently they are complaining to the Biden administration that the antitrust crackdown has harmed their income stream. “The volume of M&A activity has fallen sharply over the last year and dealmakers say the effect of President Joe Biden’s antitrust crackdown has also been felt in ways that won’t show up in the data,” Politico writes. “It’s not just the deals they attempt to stop — it’s the deals that never get proposed to a corporate board, for fear of having to subject their transactions to combative regulators.” Golly, that’s awful.

Fintech Lending.

A new paper dives into fintech lending models. Despite promises that lenders would move away from traditional credit scoring, the study reveals that personal loan rates still relied on normal credit scores — and substantially higher interest rates — while other indicators of default were overlooked. “The pricing distortions result in substantial transfers from nonprime to prime borrowers,” the paper concludes.

Treasuries.

Wall Street worries over the approach toward the debt ceiling, leading investors to flee to securities (like one-month T-bills) that would mature before the looming, as of yet unknown X-date. Even retail investors are making the move in the search for alternatives to low-rate deposits. Meanwhile, hedge funds are positioned for an enormous short on Treasuries.

Financial Justice