AFR's Banking Crisis of '23 Brief: 8th Edition

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

April 5, 2023

TO: Interested parties
FROM: Americans for Financial Reform
RE: Banking Crisis of '23 Brief: 8th Edition 

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

Dimon Talks His Book – BPI Nonsense – Non-Banks – Bank Mergers and Financial Stability – More Crisis Ahead? – Fed Probe and Reform – Crypto and the Crisis – Warning from Britain – SVB’s Troubled History – Deposit Insurance – National Security Risks – Dark Money Group on the Crisis – Community Bank Damage Control – Stress Tests

Dimon Talks His Book.  A lot of uncritical, hagiographic repetition in the media of the JPMorgan Chase CEO’s arguments, in his annual letter, a self-serving Wall Street ritual. We need to avoid “knee-jerk, whack-a-mole or politically motivated responses” to the current crisis, he insists. So a few facts are relevant here:

• Big banks like JPMorgan (the biggest) are lobbying hard against tougher capital requirements and Senate Republicans carried their water only days before SVB collapse. (AFR blog on that.) Now their main argument (“tailoring”) is in tatters, so they’re searching for another one and asking us to go slowly until they can find one.

• Dimon has long whined about how the United States “gold plated” capital requirements with the supplementary leverage ratio. (This requirement is good. It makes banks more resilient, but lowers share prices and thus executive pay.)

• Dimon calls government relations his “seventh line of business,” so don’t fall for this line about bank regulation being too “political.” Politics is about who decides and Dimon, like other bankers, is peeved that the public wants a voice in banking regulation too.

BPI Nonsense. Big-bank lobby continues to bang the drum about failures of management and supervision, while avoiding talk of regulation or the law, S.2155. And it’s advocating for bank/corporate welfare. Inoculate yourself against the nonsense with a few facts:

• Its argument that nothing in S.2155 prevented the Fed from imposing enhanced supervision on SVB is disingenuous. In S.2155 implementation, BPI hammered the “tailoring” argument as a way to weaken supervision. Complaining now that the Fed did not do this is like saying “You did exactly what we asked you to do and it caused a banking crisis ... How dare you!”

• BPI successfully petitioned the Fed (AFR objected at the time) to codify via regulation the light supervisory touch that the Powell Fed has applied, so don’t buy the false dichotomy between supervision and regulation, either.

• The group is also trying to pre-empt tougher liquidity rules by suggesting rules should take into account Fed backstops. It’s an argument for bank/corporate welfare: “Let’s not make banks more resilient but instead rely on a government safety net.”

Non-Banks. IMF calls for tougher oversight of non-bank financial firms: “the stability of global markets could hinge on the sector’s resilience as interest rates rise to tame rapid inflation.” Dynamite column from Rana Foohrar, who argues nonbanks are “where the real nexus of risk in 2023 and beyond will lie.”

Bank Mergers and Financial Stability. The crisis has renewed attention on the delayed overhaul bank merger guidelines. CFPB Director Chopra, a member of FSOC and former FTC member, is pondering changes: “What bright line presumptions in merger review would promote financial stability?”

More Crisis Ahead? A pair of scholars use a large database of 2,000+ instances of financial crises to suggest that the response hints at a systemic problem. The responses so far “have already been unusual in their policy mix and size – in the database, the vast majority of events with the same pattern of interventions ultimately evolved into ‘systemic’ bank-distress episodes.”

Fed Probe and Reform. Establishment voice Mohamed El-Erian cites “groupthink” and a lack of “basic accountability” as problems at the Fed and calls for changes. Peter Conti-Brown explains why the Fed can’t investigate itself and proposes a Pecora-style probe.

Crypto and the Crisis. Dicey stablecoin Tether used Signature Bank as its gateway to the banking system. Prominent scholar Art Wilmarth renewed his plan for protecting the banking system from crypto.

Warning from Britain. Bank of England Governor Carney warned that liquidity rules need to change.  “I think the system will probably need to adjust both the definitions of LCR and NSFR.”

SVB’s Troubled History. Jacobin looks back at the troubled history of SVB since its 1983 founding. The writer dubs it “Scandal via Banking” (SVB) after “one long series of red flags.” 

Deposit Insurance. Rep. Khanna, sets his sights on legislation that would require banks to pay higher premiums to the FDIC to protect depositors, including those with more than $250,000 accounts. Conti-Brown says don’t do it; try $200,000 limit for individuals and $2 million for small businesses. A tech CEO writes that private firms might start to offer some sort of deposit insurance.

National Security Risks. SVB attracted the attention of the Pentagon’s Office of Strategic Capital (OSC), which looks to identify “critical technology areas” and fund investments in their direction. 

• In the hours post-collapse, the Pentagon was prepared to funnel cash to affected companies if necessary.

• Sen. Warner issued a statement last month saying that the run on SVB risked “undermining our national security.” Not long after Warner’s statement, the OSC reportedly, in internal messaging, said it was “assessing impacts to national security” posed by SVB’s collapse. 

Dark Money Group on the Crisis. The dark money-affiliated group American Action Forum, with its many links to the finance industry, thinks S.2155 didn’t cause the crisis, of course. (AFR has written on the need to reverse 2018’s deregulation.) 

Community Bank Damage Control. The Independent Community Bankers of America has been making an effort to put some distance between their member banks and SVB, and push consumers toward community banks this April, Community Banking Month. 

Stress Tests. WashPost columnist makes the argument for how to amp up the stress factor in the stress tests, which Barr has said “should be stressful.”