By - Tim Rosado
What follows are the latest developments on the banking situation either directly or indirectly related to events tied to recent bank failures. _____
Oversight
The Federal Reserve (Fed), the Federal Deposit Insurance Corporation (FDIC), and the Government Accountability Office (GAO) all released (April 28) reports on recent bank failures. The Fed report focused only on the failure of Silicon Valley Bank (SVB), the FDIC report focused on Signature Bank, and the GAO report looked at both SVB and Signature Bank. The reports were prepared before the announced takeover (April 29-30) of First Republic Bank by JPMorgan Chase.
Among the key findings of the reports:
SVB (Fed)
Silicon Valley Bank's board of directors and management failed to manage their risks.
Fed supervisors did not fully appreciate the extent of the vulnerabilities as SVB grew in size and complexity. When supervisors did identify vulnerabilities, they did not take sufficient steps to ensure that SVB fixed those problems quickly enough.
The Fed's tailoring approach in response to the Economic Growth, Regulatory Relief, and Consumer Protection Act and a shift in the stance of supervisory policy impeded effective supervision by reducing standards, increasing complexity, and promoting a less assertive supervisory approach.
Signature (FDIC)
The root cause of Signature Bank’s failure was poor management, including that it did not prioritize good corporate governance practices, did not follow FDIC examiner concerns, and was not always responsive or timely in addressing FDIC supervisory recommendations.
Signature’s board of directors and management pursued rapid, unrestrained growth without developing and maintaining adequate risk management practices and controls appropriate for the size, complexity and risk profile of the institution.
Signature funded rapid growth through an overreliance on uninsured deposits without implementing fundamental liquidity risk management practices and controls.
The FDIC could have escalated supervisory actions sooner, examination work products could have been timelier, and communication with Signature’s board could have been more effective.
The FDIC experienced resource challenges with examination staff that affected the timeliness and quality of Signature examinations.
GAO
Federal Reserve Bank San Francisco rated SVP as satisfactory until last June (2022), when the bank was downgraded. The Bank “began working” on an enforcement action in August, but did not finalize the action up until the bank’s failure this year.
The FDIC “took multiple actions” to address concerns related to Signature's liquidity and management, but did not substantially downgrade the bank until the day before it failed.
GAO has had “longstanding concerns with escalation of supervisory concerns” by the Fed and FDIC; recommending in 2011 that regulators consider adding noncapital triggers to their supervisory framework for prompt corrective action (to help give more advanced warning of deteriorating conditions). Regulators considered noncapital triggers, but have not yet added them to the framework. Note: In 2011, GAO released a report Bank Regulation: Modified Prompt Corrective Action Framework Would Improve Effectiveness (GAO-11-612). GAO recommended that to improve the effectiveness of the Prompt Corrective Action (PCA) framework, the heads of the Federal Reserve, FDIC, and Office of the Comptroller of the Currency (OCC) should consider additional triggers to require early and forceful regulatory actions tied to specific unsafe banking practices. GAO eventually chose to close the recommendation as “implemented,” even though its own published assessment says that the agencies were at that time still considering the pros and cons of such triggers; meaning, GAO deemed the mere fact that the agencies were considering the triggers as agencies meeting the specifics of the recommendation.
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Policy
FDIC Deposit Insurance Review. The FDIC released (May 1) what it is calling a "comprehensive review of the deposit insurance system." As part of the review, the agency outlined three options and its recommendation for reforming the system. The three options included
Limited Coverage (the current framework): Maintaining insurance to depositors up to a specified limit (possibly higher than the current $250,000 limit) by ownership rights and capacities.
Unlimited Coverage: Extending unlimited deposit insurance coverage to all depositors.
Targeted Coverage: Offering different deposit insurance limits across account types, where business payment accounts receive significantly higher coverage than other accounts.
The FDIC says that it believes that the Targeted Coverage option "best meets the objectives of deposit insurance of financial stability and depositor protection relative to its costs." This reform option essentially means that the current depositor protection approach would be enhanced for basic business operational needs (e.g., meeting payroll), but not for investment-oriented banking purposes.
Banking Regulation. The Biden Administration released (March 30) a set of banking regulatory reform proposals in the wake of the March banking crisis that followed the collapse of Silicon Valley Bank (SVB) and Signature Bank. The President is urging action on the proposals by the appropriate regulatory agencies.
Among other things, the proposals primarily include actions that reinstate measures modified or dropped by the Trump Administration such as:
Reinstating tougher liquidity requirements previously in place for banks with assets between $100 and $250 billion. The requirements were dropped for banks with assets below $250 billion.
Reinstating annual, instead of current biennial, capital “stress tests,” where regulators evaluate bank risk and the capital they have to withstand the potential losses associated with risks.
Reinstating, for banks $100 to $250 billion in size, to submit comprehensive resolution plans which assert a bank failure would not threaten the financial system.
Deposit Insurance. Members of the House of Representatives Freedom Caucus released a statement (March 20) saying its members "oppose any universal guarantee of bank deposits over the current limit," and that "any universal guarantee of all bank deposits, whether implicit or explicit, enshrines a dangerous precedent that simply encourages future irresponsible behavior to be paid for by those not involved who followed the rules."
Despite the Caucus views, there are others expressing some support for at least looking at the issue of increasing the statutory $250,000 per depositor insurance cap of current law. For example, Senator Elizabeth Warren (D-MA) indicated (May 19) that "lifting the FDIC insurance cap is a good move." The Chairman of the House Financial Services Committee Patrick McHenry (R-NC) indicated that he would look into whether the cap is too low.
Any banking legislation, however, will be very challenging to enact given the political influence of the banking industry and the myriad of interest involved. The Biden Administration and regulatory agency have so far not expressed official views on the current statutory insurance cap.
Treasury Secretary Janet Yellen stated (March 21) that Treasury is prepared to intervene with similar actions taken with SVB and Signature Bank "if smaller institutions suffer deposit runs that pose the risk of contagion."
Bank Executive Accountability. President Biden called on Congress (March 17) to increase bank executive accountability through legislative action that (1) expands Federal Deposit Insurance Corporation (FDIC) authority to enable the agency to claw back compensation of executives of failed banks like SBV and Signature; (2) strengthens FDIC authority to prevent executives from holding future banking industry jobs when their banks enter receivership; and, (3) expands FDIC authority to levy fines against executives of failed banks.
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Industry Response to Banking Crisis
First Republic Bank is being largely acquired by JP Morgan Chase (May 1)–all deposits and a "substantial majority" of assets–after a weekend auction following a regulator takeover. The banking system had tried to stabilize First Republic in March with a $30 billion infusion of in uninsured deposits from 11 major banks (March 16). JP Morgan Chase was among the largest banks each depositing $5 billion (the others were Citigroup, Bank of America, and Wells Fargo). JP Morgan Chase was also part of a Federal Reserve effort to extend a $70 billion operational line of credit to the bank.
Swiss bank UBS announced (March 19) that it is buying rival Swiss bank Credit Suisse, reportedly at the urging of Switzerland's central bank. This action follows an attempt by Switzerland to stabilize Credit Suisse with a $54 billion line of credit from Switzerland's central bank after a primary Credit Suisse investor–Saudi National Bank–failed to come to the bank's rescue.
The FDIC announced (March 19) that New York Community Bank will purchase Signature Bank from the FDIC, following the FDIC's takeover of the bank. The FDIC also announced (March 20) that it will take more time to receive bids for SVB bank.
Moody’s Investor Service placed six banks under review (March 14) for potential credit ratings downgrades in light of the collapse of SVB and Signature. The affected banks include Zions, First Republic Bank, Western Alliance, Intrust Financial, Comerica, and UMB Financial.
Charles Schwab issued a statement (March 13) as part of its “Monthly Activity Report” criticizing comparisons of the SVB and Signature situation the company. The statement argues that a focus on unrealized losses within HTM (i.e., Held-To-Maturity securities) within Charles Schwab has two "logical flaws;" first, that the securities “will mature at par, and given our significant access to other sources of liquidity there is very little chance that we’d need to sell them prior to maturity (as the name implies)” and second, looking “at unrealized losses among HTM securities, but not doing the same for traditional banks’ loan portfolios, the analysis penalizes firms like Schwab that in fact have a higher quality, more liquid, and more transparent balance sheet.”
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Statements after the collapse of SBV and Signature banks
POTUS Statement
President Biden publicly delivered a statement on the situation before the opening of financial markets on Monday, March 13.
The President asserted that the management of the banks will be fired, investors will not be protected, and that the Federal Government must figure out how this situation occurred in the first place, and that "no one is above the law" which implies a some kind of Justice Department legal review.
The President said that he is asking Congress and bank regulators to strengthen the rules for banks to make it less likely such bank failures will happen again.
Treasury, Federal Reserve, FDIC - Joint Statement
A joint statement of the Department of Treasury, the Federal Reserve, and the Federal Reserve included the following key elements:
Treasury has approved actions that fully protects all depositors; that, "depositors will have access to all of their money starting Monday, March 13," and that "no losses associated with the resolution of Silicon Valley Bank will be borne by the taxpayer."
Treasury has also said that it is implementing a "similar risk exception" for Signature Bank of New York, which was closed by the state's chartering authority, including that "all depositors of this institution will be made whole," and that no losses will be borne by the taxpayer."
Shareholders and "certain unsecured debt holders" will not be protected under Treasury's actions, and senior management "has also been removed."
Any losses to the Deposit Insurance Fund to support uninsured depositors will be recovered by a special assessment on banks, as required by law.
The White House
The White House issued a statement following the joint Treasury, Federal Reserve, and FDIC statement. the key elements:
The President is "pleased that they reached a prompt solution that protects American workers and small businesses, and keeps our financial system safe. The solution also ensures that taxpayer dollars are not put at risk."
That American people and business "can have confidence that their bank deposits will be there when they need them."
The President is "firmly committed to holding those responsible for this mess fully accountable and to continuing our efforts to strengthen oversight and regulation of larger banks so that we are not in this position again."
Congress
The Chairman of the House Banking Committee Patrick McHenry (R-NC) issued the following statement:
"This was the first Twitter fueled bank run. At this time, it is important to remain levelheaded and look at the facts—not speculation—when assessing the right path forward," said Chairman McHenry. I have confidence in our financial regulators and the protections already in place to ensure the safety and soundness of our financial system.”
The Chairman of the Senate Banking, Housing, and Urban Affairs Committee Sherrod Brown (D-OH) and the Ranking Member of the House Banking Committee Maxine Waters (D-CA) issued the following joint statement:
“We appreciate the U.S. Department of the Treasury, Federal Reserve, and Federal Deposit Insurance Corporation for coming together to address the Silicon Valley Bank and Signature Bank failures and protect the financial system. Today’s actions will enable workers to receive their paychecks and for small businesses to survive, while providing depository institutions with more liquidity options to weather the storm,” said the Lawmakers. “As we work to better understand all of the factors that contributed to the events of the last several days and how to strengthen guardrails for the largest banks, we urge financial regulators to ensure the banking system remains stable, strong and resilient, and depositors’ money is safe. Americans should continue to be confident in their preferred financial institutions in their communities.”
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