AFR's Banking Crisis of '23 Brief: 9th Edition
A cogent email of curated information on the banking crisis and the response
April 7, 2023
TO: Interested parties
FROM: Americans for Financial Reform
RE: Banking Crisis of '23 Brief: 9th Edition
Feedback? carter@ourfinancialsecurity.org and dustin@ourfinancialsecurity.org
Follow us on Twitter: @realBankReform and @CarterD
Bank Lobby Divisions – Monetary Policy Crossover – Money and Liquidity – Reverse Repo – BlackRock Profits Again – Fed Independence – Macro Models – Tooze and the Polycrisis – Compensation Clawbacks – D&O Insurance – Accounting and Securities Portfolios – Commercial Real Estate – Hedge Funds – Retail Traders Unbothered – Gen Zers (And Others) Aren’t – Banker Job Market – FedNow Nonsense
Bank Lobby Divisions. ABA Prez Nichols demurred yesterday on deposit insurance fees/coverage: ABA has not "come up with a position yet," per a C-SPAN interview. ICBA Prez Rainey pounced, saying they won’t pony up for bigger banks. Who should pay for the inevitable higher fees caused by SVB’s and Signature’s failure? Unlike ICBA – who solely represents community banks – ABA members come in all sizes. Mid-sized ones want megabanks to help cover costs. So, Nichols presides over a house divided. We wish him well.
Monetary Policy Crossover. The banking crisis is tightening credit conditions beyond Fed rate-raising. (Good charts here.) Job numbers today revealed still-strong growth, which keeps the prospect of even higher interest rates on the table. But the numbers, collected in early March, don’t reflect any developments after the SVB collapse.
Money and Liquidity. There’s now $5.25 trillion in money market funds, an all-time high; the number is still growing, but more slowly than in recent weeks. Banks are now drawing less from the discount window but more now from the new Fed facility that doesn’t apply a haircut to their collateral.
Reverse Repo. As cash from depositor accounts flows out and into money market funds, the Fed has seen an increase in money going through its overnight reverse repurchase facility. This dynamic pulls money out of the banking system. Money market cash that sits at the Fed is not working elsewhere in the economy, nor is it helping banks manage deposit flows.
BlackRock Profits Again. The world’s largest asset manager will sell off an $87 billion securities portfolio from Silicon Valley Bank and Signature’s $27 billion portfolio for the FDIC. In 2020, the Fed chose BlackRock to help administer pandemic relief programs, an enormous boost to its exchange-traded fund business.
Fed Independence. Expect grousing from all corners about it, including this article, describing the extreme deference with which we treat the Fed. There are already bills to change the reserve bank boards and appoint a real IG. Previous snippets: here and here. A WSJ article takes the reader through the Fed’s “down to the wire” decision to tick up interest rates two weeks after the banking crisis kicked off.
Macro Models. Important article in The American Prospect about how macroeconomic models include buried assumptions that tilt against sensible regulation. Worth remembering that a banking crisis is extremely costly. Regulations that may also impose costs come nowhere close to the cost of a recession brought on by a banking crisis. Not to mention that models – and industry lobbyists of course – typically overstate regulatory costs.
Tooze and the Polycrisis. Mega-brain Adam Tooze popularized the term polycrisis to describe the many challenges the world faces right now. He collects his writings on the various financial crises we now face in a Substack post.
Compensation Clawbacks. After the sale of Credit Suisse to UBS, the Swiss government has ordered the clawback of $50 - $60 million CHF (about $55 - $66 million USD) from around 1,000 employees, which “takes account of the most senior managers’ responsibility for the situation” at the bank. Reminder: there’s bipartisan legislation already on clawback authority.
D&O Insurance. Insurers providing “directors and officers” policies have grown nervous amid falling public confidence in the banking sector. Financial institutions like banks, venture capital and private equity can expect a tougher bar of approval, higher premiums and lower coverage limits moving forward.
Accounting and Securities Portfolios. Expect greater-than-usual explanations and data in SEC filings for the first quarter about securities portfolios and how banks are managing deposit risk. The WSJ already dug into it at 435 banks.
Commercial Real Estate. A potential storm is brewing in this market. Rising interest rates and a chill on lending will weigh on local and regional banks, especially when it comes time to renegotiate mortgages – more than half of them by 2025. And banking isn’t this market’s only problem; there’s the trend away from in-person and toward hybrid/remote work.
Hedge Funds. They profited more than $7 billion on short-sells on bank shares, possibly “the single most profitable month for short sellers in the banking sector since the 2008 financial crash.” Sharp moves in the market as a result of the crisis have left some funds in the red.
Retail Traders Unbothered. Lately, individuals have been buying the dip in bank shares. Investors have been especially interested in bigger banks. Net purchases of Bank of America stock have gone up to $769 million this year. Pension fund CalPERS thinks it could profit from bank restructuring.
Gen Zers (And Others) Aren’t. Meanwhile, a new Harris Poll captures the fear and non-fear of Americans living through the banking crisis. More small-bank customers felt their money was safe compared to customers at bigger banks. Gen Z is the least confident in the safety of their money, but wealthy Americans (household incomes >$100,000) are the most fretful over bank failures. And remote workers tend to be more concerned about bank closures than their in-person colleagues.
Banker Job Market. Americans who have previously faced a tough job market may feel some Schadenfreude as Wall Street bankers feel the pinch.
FedNow Nonsense. Conspiracy theories abound to the effect that FedNow, the real-time payment system that will come online in July, is actually a central bank digital currency that will track your every financial move. So DeSantis is saying nutty things about woke-ism, liberal agendas, and how Florida will take charge of its own currency. But the Constitution gives that power only to Congress.