Banking Crisis of ‘23 in Brief: 2nd Edition

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

March 27, 2023

TO: Interested parties

FROM: Americans for Financial Reform

RE: Banking Crisis of '23 Brief

Senate and House Hearings This Week

Senate Banking will hear from Fed, FDIC and Treasury officials at a hearing on Tuesday, tomorrow; House Financial Services, on Wednesday. The regulators’ written testimony has interesting things, and interesting non-things. Barr’s is notably light on “What did Powell/board know and when did they know it?” But “textbook case of mismanagement” is already a headline in the NYT.

Barr said they discussed liquidity issues and rising rates at a mid-February 2023 meeting, which is way after rates started rising. (Jason Furman studied Fed financial stability reports and found they “completely missed what happened.”) Barr hinted at tough new capital rules, which mainly affect G-SIBs because they involve operational risk. The Fed internal review will include confidential info, but not clear how much about the board’s involvement.

Gruenberg, who said the FDIC will do its own probe too, revealed that the 10 largest deposit accounts at SVB held 13.3 billion, out of a total $145 billion deposit base. He made clear regulation at $100 billion+ is coming. “The prudential regulation of these institutions merits serious attention, particularly for capital, liquidity, and interest rate risk.”

Notable: the distinction between regulation and supervision in analyzing the collapse of SVB is a false dichotomy. The WSJ reported that when Quarles codified his hand-tying of supervisors it created “10,000 more steps” for examiners to force changes at banks.

The political press is talking up partisan divides on the committee. Sen. Mark Warner, who co-sponsored the 2018 bill that scaled back Dodd-Frank regulations, said he would return donations he received from SVB if the hearing uncovers “malfeasance.” Sen. Sanders wants to keep bankers off Fed regional bank boards.

Sunday’s Big Sale

Ownership of the shuttered SVB will be changing hands after a Sunday night press release from the FDIC announcing an agreement with First Citizens Bank. The North Carolina-based bank expects to be able to “protect customers and stockholders through all economic cycles and market conditions,” as it scoops up a portion of SVB’s assets, deposits and loans. The move is expected to mean a $20 billion hit to the Deposit Insurance Fund, which will be covered by a special levy on the industry. 

The sale makes First Citizens one of America’s 25 biggest banks. With somewhere north of $100 billion in assets, the acquisition just about doubles their size. But as David Dayen of the American Prospect notes, keeps them barely beneath the $250 billion threshold for triggering enhanced prudential standards, thanks to S.2155.

Federal guarantees on bank deposits are still unclear “after several rhetorical U-turns by Treasury Secretary Janet Yellen last week,” NYT’s Dealbook noted. At the end of 2022, nearly $8 trillion of deposits remained uninsured, and the Wall Street Journal estimates that 200 banks would be at risk of failure if half of all of these uninsured depositors pulled their money. Even before the collapse of SVB and Signature, many bank directors said they had already been facing deposit losses. But community banks report modest inflows. In the meantime, money flowing out of deposit accounts is flowing into money market funds, with more than $286 billion worth of investment in March alone. Call reports on May 1 will be important.

First Republic, a mid-sized bank in a tough spot, fought regulators over tougher oversight. A reminder: a big Trump supporter is on the board, and it had a small part in the Stormy Daniels payoff.

Other News

Steve Liesman, a senior economics reporter at CNBC, raises an important question about the Fed’s duties: “Everyone talks about the Fed’s dual mandate (inflation and employment) but not much focus on the dual mandate of monetary policy and supervision.” Can and should they do both? In 2008, they failed to police the largest bank holding companies; in 2023 they failed to handle a large Fed member bank. 

Banks that made similar bets as SVB could start feeling the heat. Dozens of other banks “loaded up on bonds at precisely the wrong time,” says the American Banker, and could face trouble if those investments need to be made liquid as rising interest rates devalue their bonds. But experts say the risk is small.

Silvergate Bank, which is shuttering its operations, took a $44 million loss on a Bitcoin-collateralized loan. 

Rep. Stephen Lynch is hosting a roundtable on banking regulation on March 28. Brookings is hosting a discussion on raising deposit insurance limits on April 5. How does Peter Conti-Brown manage to be everywhere you look these days?!