Tag: Silicon Valley Bank

Statement of CFPB Director Rohit Chopra, Member, FDIC Board of Directors, on the Proposed Special Deposit Insurance Assessment on Large Banks

Mary Pat Campbell

Link: https://www.consumerfinance.gov/about-us/newsroom/statement-of-cfpb-director-rohit-chopra-member-fdic-board-of-directors-on-the-proposed-special-deposit-insurance-assessment-on-large-banks/

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First, we need to simplify our rules while strengthening them. Too many areas of regulation across our economy have become so complicated with weird formulas, dizzying methodologies, and endless loopholes and carveouts. We need simpler rules to prevent future disasters. A better alternative is to create bright line limits, with clear sanctions, including size caps and growth restrictions. Clearly observable metrics make it easier to monitor and increase consistency.

Second, we need to stop subsidizing the largest and riskiest banks by giving out free deposit insurance. When small banks fail, they rarely lead to much cost to the FDIC’s Deposit Insurance Fund, since they can be fairly easily wound down or sold. But when large banks fail, the costs to the Deposit Insurance Fund and broader economy can be steep. To make matters worse, those institutional clients with the biggest deposits feel they can get around insurance limits by going to the biggest banks. In other words, people perceive that the biggest banks get free deposit insurance over the legal limits by way of their too-big-to-fail status.

Fixing our deposit insurance pricing structure is just one small step that could help address this problem. Large, riskier banks should pay more and small, simpler banks should pay less. We should also make the framework countercyclical, so that we aren’t in the position of raising rates when banking conditions are weak.

While today’s proposed special assessment will not fall on small, local banks, the failure of First Republic Bank will be a direct hit to the Deposit Insurance Fund that is not being recouped through this special assessment. It’s a reminder that we need to fix the fund’s pricing over the long term.

Finally, as Swiss policymakers made clear regarding the recent turmoil involving Credit Suisse, more people are saying the quiet part out loud: the current resolution plans filed by the largest financial institutions in the world, which purport to show how the firms could fail without a government bailout or economic chaos, are essentially a fairy tale.5

The latest failures are another reminder that we must work to eliminate the unfair advantages bestowed upon too-big-to-fail banks. New laws and old laws alike provide a roadmap to end too-big-to-fail and the resulting risks to financial stability, fair competition, and the rule of law.6

Author(s): Rohit Chopra

Publication Date: 11 May 2023

Publication Site: Consumer Finance Protection Bureau

Ranked: The U.S. Banks With the Most Uninsured Deposits

Mary Pat Campbell

Link: https://elements.visualcapitalist.com/ranked-the-u-s-banks-with-the-most-uninsured-deposits/

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Today, there is at least $7 trillion in uninsured bank deposits in America.

This dollar value is roughly three times that of Apple’s market capitalization, or about equal to 30% of U.S. GDP. Uninsured deposits are ones that exceed the $250,000 limit insured by the Federal Deposit Insurance Corporation (FDIC), which was actually increased from $100,000 after the Global Financial Crisis. They account for roughly 40% of all bank deposits.

In the wake of the Silicon Valley Bank (SVB) fallout, we look at the 30 U.S. banks with the highest percentage of uninsured deposits, using data from S&P Global.

Author(s): Dorothy Neufeld, Sabrina Lam

Publication Date: 4 April 2023

Publication Site: Visual Capitalist

The Banking Sector Turmoil in Charts

Mary Pat Campbell

Link: https://www.wsj.com/articles/the-banking-sector-turmoil-in-charts-52bb6095?mod=e2twg

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It has been a wild ride for banks. Silicon Valley Bank, which catered to venture capitalists and startups, collapsed March 10 after a run on deposits that was preceded by a plunging share price and a money-losing bond sale as the bank tried to raise capital. Two days later, Signature Bank SBNY -22.87%decrease; red down pointing triangle was closed by federal regulators following a run. Then, First Republic Bank FRC 29.47%increase; green up pointing triangle, at risk of a run as its share price plummeted, was flooded with cash in an extraordinary action by some of the largest U.S. banks—but its shares resumed their plunge a day later. 

Here is how some banks ended up in the market’s crosshairs.

Author(s): Nate Rattner, Alana Pipe

Publication Date: 18 Mar 2023

Publication Site: WSJ

Capital regulation and the Treasury market

Mary Pat Campbell

Link: https://www.brookings.edu/research/capital-regulation-and-the-treasury-market/

PDF: https://www.brookings.edu/wp-content/uploads/2023/03/Brookings-Tarullo-Capital-Regulation-and-Treasuries_3.17.23.pdf

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The dramatic, though short-lived, disruption of the market for U.S. Treasury debt in September 2019 and the more profound market dislocations at the onset of the COVID crisis in March 2020 have raised the issue of whether the treatment of central bank reserves and sovereign debt in bank capital requirements exacerbated the problems. Changes have been proposed to the Enhanced Supplementary Leverage Ratio (eSLR) and G-SIB (Global Systemically Important Bank) capital surcharge, both of which apply only to the eight U.S. banks designated as globally significant. Because these banks are some of the most important dealers in U.S. Treasuries, regulatory disincentives to hold and trade Treasuries can adversely affect the liquidity of the world’s most important debt market.

Disagreement over whether to adjust the eSLR, the surcharge or both is often just a version of the continuing debate over the right level of required capital. Some banking interests seize on episodes of Treasury market dysfunction to argue for reductions in the eSLR and surcharge. Some regulators, elected representatives, and commentators see any adjustments as weakening post-Global Financial Crisis (GFC) capital standards. Yet it is possible to reduce the current regulatory disincentive of banks, especially at the margin, to hold and trade Treasuries without diminishing the overall capital resiliency of large banks.

The concern with eSLR is that when it is effectively the binding regulatory capital constraint on a bank, that institution will limit its holding and trading of Treasuries. The eSLR can be modified to accommodate considerably more intermediation of Treasuries without significantly undercutting its regulatory rationale. As for the G-SIB surcharge, there are some unproblematic changes that could help.  But the chief complaints from banks about the G-SIB surcharge will be harder to satisfy without undermining the rationale of imposing higher capital requirements on systemically important banks.

Even with a change in the eSLR, banks’ holdings of Treasuries would continue to be subject to capital requirements for market risk. Moreover, as the failure of Silicon Valley Bank has demonstrated, the exclusion of unrealized gains and losses on banks’ available-for-sale portfolio of debt securities, including Treasuries, can give a misleading picture of a bank’s capital position. Following the Federal Reserve’s 2019 regulatory changes, only banks with more than $700 billion in assets or more than $75 billion in cross-jurisdictional activity are required to reflect unrecognized gains and losses in their capital calculations. The banking agencies should consider a significant reduction in these thresholds.

Far-reaching deregulatory changes would not remedy all that is worrisome in Treasury markets today. As the studies cited in the full paper emphasize, a multi-pronged program is needed. In any case, it would be misguided to seek greater bank capacity for Treasury intermediation at the cost of undermining the increased resiliency of the most important U.S. banking organizations or international bank regulatory arrangements. At the same time, it would be ill-advised not to recognize the changes in Treasury markets, beginning with their increased size because of fiscal policy. The modifications of capital regulation, especially the eSLR, outlined in the paper should ease (though not eliminate) constraints on banks holding and trading Treasuries without endangering the foundations of the post-GFC reforms.

Author(s): Daniel K. Tarullo

Publication Date: 17 Mar 2023

Publication Site: Brookings

Bond prices mean revert after all

Mary Pat Campbell

Link: https://allisonschrager.substack.com/p/bond-prices-mean-revert-after-all?utm_campaign=post&utm_medium=web

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On day one of Fixed Income School, you learn that bond prices mean-revert. While a stock or a house’s price can continue to increase as the company or land becomes more valuable, yields can only go so low. Nobody will pay to lend someone else money, or at least, they won’t pay much to do that. Bond prices can only climb so high before they fall. While some evidence shows that yields trended downward slightly as the world became less risky, they still tended to revert to a mean greater than zero.

It’s easy to blame Silicon Valley Bank for being blissfully ignorant of such details. They purchased long-term bonds and mortgage-backed securities when the Fed was doing QE on steroids! Did they expect that to last forever? Well, maybe that was a reasonable assumption, based on the last 15 years, but I digress.

Many of these smaller banks, particularly Silicon Valley, are in trouble because they were particularly exposed to rate risk since their depositors’ profit model relied on low rates. So, when rates increased, they needed their money—precisely when their asset values would also plummet. It’s terrible risk management. But, to be fair, even the Fed (the FED!) did not anticipate a significant rate rise. Stress tests didn’t even consider such a scenario, even as rates were already climbing. Why would we expect bankers in California to be smarter than all-knowing bank regulators?

According to the New York Times, Central Bankers still expect rates to fall back to 2.5%. Why? Because of inequality and an aging population. But how does that work, and what’s the mechanism behind it? No good answer, or not one that squares with data before 1985, but we can hope. Sometimes we just want something to be true and for it to be true for politically convenient reasons.

Author(s): Allison Schrager

Publication Date: 20 Mar 2023

Publication Site: Known Unknowns at Substack

Ohio State Teachers Retirement System Had Massive Investment in Failed Bank

Mary Pat Campbell

Link: https://news.yahoo.com/ohio-state-teachers-retirement-system-200100935.html

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Already under fire for high pay despite big investment losses, the pension system for Ohio’s retired teachers lost between $27 million and $40 million when Silicon Valley Bank failed last weekend. That appears to be by far the biggest investment by a public pension system in the United States.

The losses follow a nearly $10 million loss last year when cryptocurrency platform FTX failed, according to the Ohio Retired Teachers Association, a group that represents pension system members.

The exact losses aren’t immediately known because Anthony Randazzo, executive director of pension watchdog Equable, said they were $39.3 million in a tweet. But pension system spokesman Dan Minnich said in an email, “As of last Wednesday, STRS Ohio held shares of Silicon Valley Bank (SVB) worth $27.2 million.”

Author(s): Marty Schladen

Publication Date: 16 Mar 2023

Publication Site: Yahoo News

The Silicon Valley Bank Bailout

Mary Pat Campbell

Link: https://www.wsj.com/articles/the-silicon-valley-bank-bailout-chorus-yellen-treasury-fed-fdic-deposit-limit-dodd-frank-run-cc80761e?st=vt2heieydvfhixo&reflink=desktopwebshare_permalink

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The Treasury and Federal Reserve stepped in late Sunday to contain the financial damage from Friday’s closure of Silicon Valley Bank, guaranteeing even uninsured deposits and offering loans to other banks so they don’t have to take losses on their fixed-income assets.

This is a de facto bailout of the banking system, even as regulators and Biden officials have been telling us that the economy is great and there was nothing to worry about. The unpleasant truth—which Washington will never admit—is that SVB’s failure is the bill coming due for years of monetary and regulatory mistakes.

Wall Street and Silicon Valley were in full panic over the weekend demanding that the Treasury and Fed intervene to save the day. It’s revealing to see who can keep a cool head in a crisis—and it wasn’t billionaire hedge-fund operator Bill Ackman or venture investor David Sacks, both frantic panic spreaders.

The Federal Deposit Insurance Corp. closed SVB, and the cleanest solution would be for the agency to find a private buyer for the bank. This has been the first resort in most previous financial panics, and the FDIC was holding an auction that closed Sunday afternoon.

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But there is political risk from a bailout too. If the Administration acts to guarantee deposits without Congressional approval, it will face legitimate legal questions. The White House may choose to jam House Speaker Kevin McCarthy if markets aren’t mollified. But Mr. McCarthy has a restive GOP caucus as it is, and a bailout for rich depositors will feed populist anger against Washington.

The critics have a point. For the second time in 15 years (excluding the brief Covid-caused panic), regulators will have encouraged a credit mania, and then failed to foresee the financial panic when the easy money stopped. Democrats and the press corps may try to pin the problem on bankers or the Trump Administration, but these are political diversions.

Author(s): WSJ Editorial Board

Publication Date: 12 Mar 2023

Publication Site: WSJ

Yellen Said “No Bailout” But It’s a Huge Bailout of the Banking System

Mary Pat Campbell

Link: https://mishtalk.com/economics/yellen-said-no-bailout-but-its-a-huge-bailout-of-the-banking-system

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It won’t matter but I am pleased the Journal blasted Bill Ackman and venture investor David Sacks,  as “frantic panic spreaders“.

There’s more in the article about how Rohit Chopra, an Elizabeth Warren acolyte on the FDIC board, is hostile to bank mergers on ideological grounds, perhaps preventing a merger.

The Journal speculates how Biden might illegally act to guarantee all deposits or pressure House Speaker Kevin McCarthy.

….

Once again, the Fed kept interest rates too low, too long, encouraged speculation, then bailed out the banks.

Spare me the sap about this was a depositor bailout not a bank bailout. 

When you value assets at par so that banks don’t have losses, what the hell is it.

Author(s): Mike Shedlock

Publication Date: 12 Mar 2023

Publication Site: Mish Talk