Famous Last Words.
Pop quiz! Who uttered these words back in 2018?
1. “Mid-size banks do not present even a marginal systemic risk.”
2. “[Our bank] does not present systemic risks.”
3. “We strongly believe that we are not even in the same zip code as being systemically important.”
4. “Asset thresholds have no rational connection to systemic risk.”
5. “We’ve not only got to get to the regulatory relief for the $250 billion threshold…I think we have to go beyond that.”
6. “We haven’t been shy about finding systemic risk under $250 billion.”
Answers:
1. Bob Jones, former chairman of the Mid-Sized Bank Coalition
2. Greg Becker, former CEO, Silicon Valley Bank
3. Scott Shay, former chairman, Signature Bank
4. Rob Nichols, president, American Bankers Association
5. Sen. Thom Tillis
6. Federal Reserve Chair Jerome Powell
AFR revisits the chatter around S.2155, the Dodd-Frank rollback legislation of 2018 that contributed to this year’s crisis by taking stock of the executives, lobbyists, and lawmakers who assured us that mid-sized banks would not pose systemic risks. Read the whole piece here. On Powell, see here.
Former SVB and Signature executives — SVB’s Becker, Signature’s Shay and Howell — will face Senate Banking today at their hearing “Examining the Failures of Silicon Valley Bank and Signature Bank.” Becker’s testimony here, Shay’s here and Howell’s here.
Regulators will be testifying as well, their testimony is here. Fed Vice Chair Barr will give a clear signal on a change in supervisory tone: “We need to ensure we have a culture that empowers supervisors to act in the face of uncertainty. Supervisors should be encouraged to evaluate risks with rigor and consider a range of potential shocks and vulnerabilities.”
Barr’s nutshell assessment of the root of the crisis — the “tailoring approach in response to [S.2155] and a shift in the stance of supervisory policy impeded effective supervision by reducing standards, increasing complexity, and promoting a less assertive supervisory approach” — sounds lot like what AFR argued in March.
FINANCIAL STABILITY: Too Big to Fail — Too Small to Succeed — Deposits — Capital Requirements — Further to SVB
CONSUMER: Solicitor General Brief — Worst Lender for Black Borrowers
CAPITAL MARKETS: Attacks on ESG
PRIVATE EQUITY: Private Funds Rule — PE Loses Out
CRYPTO: Coinbase & Former Lawmakers — Dems’ Stablecoin Bill
HOUSING: Buying Ugly Houses
CLIMATE AND FINANCE: Not a Financial Risk? — Disastrous Disruption
Feedback? Reach us at afrbrief@ourfinancialsecurity.org
FINANCIAL STABILITY
Too Big to Fail.
Yellen said in Japan that this year “might be an environment in which we’re going to see more mergers,” and that it’s “something I think the regulators will be open to, if it occurs.” Predictably, this generated headlines like “Bank Merger Rethink.”
The big-bank lobby seems to be working with its friends in government, current and former, to force open the door to more big-bank acquisitions. Two data points. FDIC Republican appointee McKernan got a lot of ink in the WSJ:
“If the stress continues, the banking regulators are going to have to permit M&A,” said Jonathan McKernan, a Republican on the board of the Federal Deposit Insurance Corp. He said regulators should also consider letting private-equity firms take positions in banks.
And former (MAGA-hat-wearing) Comptroller Keith Noreika and the longtime flak at the OCC Bryan Hubbard are also talking up mergers:
Anti-merger rhetoric and draft legislation has certainly made for a hostile environment for banks to pursue natural business combinations in a system with more than 4,000 banks.
AFR Senior Policy Analyst Alexa Philo: “This year we have seen the systemic risks lodged in mid-sized banks, so the idea of bulking them up makes little sense. Rather than talk about making big banks even bigger we should be talking about making the biggest banks a lot smaller. We reduce systemic risks by managing size and imposing tough oversight, not by opening doors to new mergers and acquisitions.”
Reminders: There was pressure on Hsu to deny JPMorgan bid to take over First Republic. Also, the various regulators still need to revise the bank merger guidelines.
Too Small to Succeed.
Bloomberg explores the counterparts to too-big-to-fail banks: mid-sized ones that may be too small to endure market battering:
Amar Reganti, a former US Treasury Department official and now a managing director at Wellington Management, likens it to a “slow-burning fire that sparks up every several weeks.” The sequence starts with a bank’s stock price diving: Speculation abounds, deposits remain relatively steady, and then things calm down until anxiety picks up again. “Almost what’s true or not becomes irrelevant to what the price action is,” Reganti says.
Deposits at midsize banks have stabilized and paper losses on their securities have shrunk, per WSJ, but regional bank stocks had trouble recovering last week as values continued to drop. Investors may be waiting for the shares’ rock-bottoms, when the lenders become enticing to acquirers. Some signs point to investors tapping out, according to Bloomberg, perhaps fearing a fall with no clear end in sight.
Deposits.
NYT sums up data from a NY Fed report on bank funding sources: deposits fled “Gradually, then all at once.” The weeks through March 12, 2023 saw nearly as much deposit flight (~$450bn) as in the year through March 2023 (~$500bn):
According to Fed data, the aftermath of SVB’s collapse saw outflows from super-regionals ($50bn to $250bn in assets) to large banks (>$250bn).
Capital Requirements.
Fed Governor Bowman said in a speech the recent string of bank failures should not be used to justify higher capital requirements, reports the American Banker. (She’s the community bank rep at the Fed; new capital requirements are about the biggest banks, though.) Bowman also called for an independent investigation into the Fed’s shortcomings in handling SVB.
Further to SVB.
Accounting change. “For 10 straight years, Silicon Valley Bank offered financial statement readers two metrics to show how interest rate fluctuations would affect its bottom line,” Bloomberg writes. “But executives at the Santa Clara, Calif.-based bank told a different story in the year-end 2022 financial statement issued just 14 days before the lender’s March 10 collapse.” Auditor was KPMG, as with Signature Bank.
According to WSJ, First Citizens’ purchase of SVB did not include the bank’s Cayman Islands branch, which remained in FDIC receivership. At the end of March, depositors received notice that they would not receive deposit insurance, instead treated as “general unsecured creditors.” A former attorney suggests this isn’t out of the norm — foreign deposits are usually excluded from U.S. insurance. SVB had $13.9bn worth of them on the books by the end of 2022.
CONSUMER
Solicitor General Brief.
The SG submitted its brief to the Supreme Court urging it to reverse the Fifth Circuit’s decision finding CFPB’s funding unconstitutional. Consumer groups also submitted an amicus this week.
Worst Lender for Black Borrowers.
USA Today reports that between 2018 to 2021, KeyBank had the lowest share of mortgage originations to Black borrowers among the U.S.’s 50 largest home purchase lenders (just 2.2% of nearly 47,000 loans). KeyBank has since commissioned a racial equity audit, after a letter from over 80 community and fair-lending organizations to regulators calling for an investigation into potential redlining. The bank has taken on Covington & Burling, a firm that did racial equity audits for Wells Fargo and Citi.
CAPITAL MARKETS
Attacks on ESG.
Last week, the House Oversight Committee held a hearing inviting two attorneys general to examine ESG investing practices, which Republicans have previously tried to identify as responsible for SVB’s collapse. The New Republic reports Alabama AG Steve Marshall, who has worked to overturn the 2020 presidential election, took the opportunity to weave a conspiratorial narrative about ESG. Marshall cited “unelected elites” making decisions “to implement woke climate policy.”
Financial Transaction Tax. The European Parliament is urging the European Commission to impose several new taxes, including one on financial transactions, a longtime progressive priority.
PRIVATE EQUITY
Private Funds Rule.
Senate Banking’s Brown and a contingent of Democratic senators, including Warren, sent a letter to the SEC in support of the recently finalized Form PF amendments, which “will alert regulators during episodes of market volatility and disruption” and “provide additional transparency and come at a critical time.”
PE Loses Out.
The FDIC last week disclosed all of the bids they received for SVB and Signature. Try as they might to get their hands on failed banks, shadow banks like private equity have been out of luck, according to Bloomberg. Despite bids from the likes of Blackstone and Apollo, regulators chose chartered banks over private investment every time, even when nonbanks partnered with traditional institutions.
Reminder: shadow banks are already growing stronger as a result of the crisis even without swallowing up banks.
CRYPTO
Coinbase & Former Lawmakers.
Coinbase is arming itself with former lawmakers — former Sen. Toomey and former Reps. Ryan and Maloney — as advisers as it preps for its legal fight with the SEC. Maloney sponsored legislation that would have granted the CFTC crypto platform oversight powers. And Ryan worked with McHenry on legislation to boost the industry’s growth. AFR statement on committee work here.
Dems’ Stablecoin Bill.
Waters has revealed a new draft stablecoin bill more friendly to federal regulators, less than a month after House Republicans unveiled their own state-friendly version. Waters’ bill shores up consumer protections and vests more power in the Fed. Some elements: companies would be prohibited from mixing customer assets with company assets, nonbanks would be blocked from issuing their own stablecoins, and the Fed would have the authority to reject state-approved stablecoins.
HOUSING
Buying Ugly Houses.
ProPublica goes deep with an article entitled, “The Ugly Truth Behind “We Buy Ugly Houses.’” HomeVestors of America “trains its nearly 1,150 franchisees to zero in on homeowners’ desperation.”
CLIMATE and FINANCE
Climate Not a Financial Risk?
Fed Governor Waller, in a speech, says that he believes climate change does not pose a threat to U.S. financial stability, though he believes the scientific consensus that climate change is happening:
As policymakers, we must balance the broad set of risks we face, and we have a responsibility to prioritize using evidence and analysis. Based on what I’ve seen so far, I believe that placing an outsized focus on climate-related risks is not needed, and the Federal Reserve should focus on more near-term and material risks in keeping with our mandate.
Disastrous Disruption.
Undeterred by talks about risk management, natural catastrophes continue to chip away at rebuilding budgets across the U.S. A Bloomberg op-ed reports that the U.S. has already suffered seven over-$1bn-in-damages disasters this year alone. The pace of incidence has only increased in the past few decades, keeping pace with the rise of atmospheric carbon and global warming.
NOAA has an analysis on these billion-dollar disasters. Since 1980, the U.S. has experienced 355 of them, racking up a damages tab over $2.5tn.
Reminder: home insurance premiums continue to rise.
