AFR's Banking Crisis of '23 Brief: 7th Edition

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

April 3, 2023

TO: Interested parties
FROM: Americans for Financial Reform
RE: Banking Crisis of '23 Brief: 7th Edition 

Feedback? carter@ourfinancialsecurity.org and dustin@ourfinancialsecurity.org 
Follow us on Twitter: @realBankReform and @CarterD 

Pithy Narrative – SVB Risk Model – SanFran Fed – Independent Probe – CFPB – Shadow Banks – Fed Nominees – Monetary Policy Crossover – Commercial Property – Money Market Funds – Community Agreements – Politics of Clawbacks – Tenuous Rattner Punditry – What’s in a Name?

Pithy Narrative. “How a Trump-Era Rollback Mattered for Silicon Valley Bank’s Demise,” writes the NYT. Not “if” but “how.” 

• “By deciding to move banks into large-bank oversight much later, Mr. Quarles and his colleagues had created a system that treated even sizable and rapidly ballooning banks with a light touch when it came to how aggressively they were monitored.”

• Bank supervisors said “that they might face retribution if they spoke out or had different opinions.”

SVB Risk Model. WashPost deep dive on how SVB’s model showed interest rate risk was trouble, so they changed the model. 

• Deposit-enabled gambling: “SVB sold for a profit the financial instruments it used to hedge against the risk of higher rates, according to a company presentation.” 

• Also: “changing assumptions about interest-rate risk were shared with federal and state regulators in late 2021 or 2022.”

• WashPost piece about payroll company that SVB banked, suggesting there was a channel for trouble to spread to non-tech companies.

SanFran Fed. An account from Bloomberg also unearths some interesting facts. 

• It hints that the departure of Tracy Basinger as head of supervision, after decades of climbing the ranks and four years at the top, reflected frustration. Her replacement, Azher Abbasi, was previously head of audit, not unusually, but not common. And: “Abbasi’s appointment was made in consultation with the central bank’s vice chair for supervision at the time, Randy Quarles.”

• The SanFran branch sometimes found itself grappling with whatever daring approaches Silicon Valley took to banking. It was completely ambushed by Facebook’s ill-fated Libra proposal. 

Independent Probe. WashPost editorial: "Last year, when the infant formula crisis left store shelves empty and families scrambling, Food and Drug Administration Commissioner Robert M. Califf requested an outside review of the entire human foods program. It’s a model the Fed should follow."

CFPB. In a popular Twitter post of an AFR guest blog, former Rep. Brad Miller makes the point that “restructuring” CFPB, as Republicans seek, amounts to deregulation during a crisis. CFPB director Chopra highlighted our double-standard in treatment of “liquidity issues” for banks and people and links it to CFPB work on junk fees. “When large firms or large banks have liquidity issues, there’s all sorts of government action to make sure but when an individual or a family has a liquidity issue, they get a mountain of fees on them, making it even harder,” he said. 

Shadow Banks. FT’s Rana Foroohar writes after Yellen's speech: “I’d still bet that [shadow banking] is where the real nexus of risk in 2023 and beyond will lie.” Related: Banking turmoil (SVB + Credit Suisse) complicates efforts of Bank of America, Morgan Stanley, Barclays, et al. to unload $25-$30 billion in leveraged loans (private equity) from their balance sheets.

Fed Nominees. Northwestern University Professor Janice Eberly is reportedly under consideration to replace Brainard as vice-chair.

Monetary Policy Crossover. Commentary here from Rajan/Acharya on how easy money paved the way for SVB collapse by driving the creation of large (but uninsured) demandable deposits. But: tougher regulation and supervision was missing. Read this AFR op-ed, which raised the point back in August 2020, when Powell was the pathbreaking easy-money Fed chair.

Commercial Property. CMBS yields suggest rising stress, and the pandemic has already whacked the office building market. But The Economist guesses that a worst-case scenario would eat up “just 10%” of small-bank equity. “The blow would be unevenly distributed, however, and could imperil some institutions.”

Money Market Funds. Chart from Apollo economist showing how much more quickly money has flowed into MMFs in this tightening cycle versus previous ones. Fed research on how MMF yields correlate to Fed tightening. This issue dovetails with the Fed’s reverse repo facility; here’s a primer on that issue.

Community Agreements. The new owners of SVB must honor the community benefits agreements it signed, worth $11 billion ($9 billion in California alone) for the “financial and economic infrastructure of largely low-income communities of color.”

Politics of Clawbacks. Politico assesses the outlook as a bit dicey.

Tenuous Rattner Punditry. Steven Rattner, aka Michael Bloomberg’s money manager, is criticizing “left-leaning critiques of deregulation as ‘political’ (read: bad), in contrast with his own ‘objective’ (read: good, but more specifically pro-industry) opinion.” Don’t fall for it.

What’s in a Name? Philadelphia’s Republic First Bank is fighting investor perceptions that it is in fact SanFran-based First Republic, the beleaguered bank that’s gotten a private-sector rescue package.