March 24, 2023
TO: Interested parties
FROM: Americans for Financial Reform
RE: Banking Crisis of ’23 Brief
Nature and Scope of the Inquiry
Let’s take Chair Powell at his word that “of course we welcome” independent probes. There are new demands to the Fed for documents, this time from Sen. Scott, yesterday. Chair McHenry was the day before, asking questions of Yellen and Gruenberg. Chair Brown and Ranking Member Scott have also put SVB and Signature CEOs on notice that their cooperation will be expected.
The first hearing will be before Senate Banking on March 29, i.e. this coming Wednesday.
There have been widespread calls for an independent inquiry so AFR decided to lay down some markers on what would make a good investigation, especially regarding scope (policy, not only bank management and Fed supervision) and evidence (make it public). We’re grateful for retweets of this statement.
What we Know About Regulators and Failed Banks
Powell telegraphed some points that seemed to steer blame away from the Fed. Banking expert Karen Petrou was shocked to hear him stress management, not Fed supervision. Powell could not confirm whether the Fed’s Board received warnings from regional examiners. But the governor of the Bank of England says he had warned the San Francisco Fed for at least two years about SVB. Powell also pointed out that the impact of rising interest rates on banks was “in all the newspapers.” Was that to suggest that Fed supervisors didn’t need to look into that little matter?
Vice Chair Barr said, in a March 9 speech: “The banks we regulate, in contrast, are well protected from bank runs through a robust array of supervisory requirements.” The Revolving Door Project has argued Barr’s prior involvement in fintechs might “cloud his judgment.”
There are former SVB employees who seem to think they would have been able to “reconstruct the balance sheet” through wholesale funding markets. But the FDIC stepped in and shut them down. Private credit firms are unimpressed with SVB’s loan book. The WSJ meditates on SVB’s lack of a chief risk officer.
Congress and the Administration
Where the administration stands on guaranteeing deposits has been a bit murky of late. Yellen seemed to open the door a bit on Thursday: “These are tools we could use again for an institution of any size if we judge that its failure would pose a contagion risk,” she said. Brown said longer-term increases to deposit insurance have bipartisan potential.
Sens. Tillis and Sinema lead a bipartisan letter that is a thinly veiled attempt to steer the Fed probe away from policy (law and regulation) and toward supervision and bank management. Remember, this is where the Bank Policy Institute stands.
Sens. Warren and Scott are teaming up to push for the creation of a Senate-confirmed Fed inspector general. Sen. Sanders introduced a bill that would bar bank executives from serving on regional Fed boards that regulate the very banks they run.
Interesting Opinions
Saule Omarova isn’t messing around as we enter a “banks are public utilities” debate. She suggests in the NYT a government-held “golden share” in major financial institutions. Because “banks can’t be trusted.”
Martin Sandbu writes in the FT that regulators are bungling the response by not focusing on allocating the losses.
Anything Else
The NYT has a run-down in bank borrowing from the Fed (a very high $163.9 billion) looking for signs of stress.
Community bankers insist (Jill Castilla is a prominent one) that they are seeing modest inflows, not outflows. Charles Schwab bank says it could ride out a deposit run. Still plenty of hand-wringing on the subject, like this at the NYT.
The effect of the commercial real estate market on bank health and financial stability is getting more attention, here the NYT, here the WSJ. A lot of reporters are leaning on a recent paper about mark-to-market losses on bank securities portfolios to raise alarms.
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