In the glut of media stories following the failures of Silicon Valley Bank and Signature, the tendency is to treat all small and midsize banks the same, lumping them together under the word “small.” A case in point is a story from The Wall Street Journal that starts with a dire prediction that all “small banks” have suffered from a drain on deposits. Although The WSJ clarifies itself to just discuss midsize banks, which do indeed appear to be struggling more, S&P Capital Markets (in a different story), says that small banks actually added deposits following SVB’s collapse.
Lael Brainard, the White House’s chief economic adviser and former Fed vice chair, put the blame on the recent SVB and Signature Bank failures on the two institutions being “poorly managed” and taking “unacceptable risks.” More importantly for policy making, however, she said that deposit outflows from midsize banks have stabilized and banks are doing what they need to do. “Bank executives have seen some of the stresses that the two failed banks were under, and they’re shoring up their balance sheets, and they are convincing depositors and investors alike that they have a good strategy for risk management,” she said.
The FDIC’s newly installed vice chair, Travis Hill, gave his first policy speech this week. He tackled a variety of issues, including his thoughts on the SVB failure. "Mismanagement of interest rate risk was at the core of SVB's problem," Hill said in his first public remarks since being sworn into the role in January. He also defended S. 2155, a law he helped draft as a Senate staffer, arguing it was not responsible for SVB’s or Signature’s failures. Finally, he cautioned that raising the cap on deposit insurance would lead to more regulations for banks.
Perceptions of credit availability are at a 10 year low, and lending has plunged since the failures of SVB and Signature, according to two separate surveys from Fed regional banks. Consumer spending remains robust, but that could easily change in the coming months.
According to American Banker, hundreds of U.S. banks have underwater securities portfolios and are at risk of failing or being forced to merge. But perhaps an even bigger concern—particularly for community and regional banks—is weakness in the commercial real estate market. “It's one thing to deal with a liquidity crunch, it's quite another to deal with credit losses,” said Brian Graham, partner and co-founder at Klaros Group.
Recently, CFPB Director Rohit Chopra called for regulators to create new tools for monitoring and mitigating risks in the banking system. Chopra said regulators should consider creating "automatic triggers to slow down some risky activity" to better keep up with the ever-faster pace of the financial sector. He urged consideration of “automatic triggers” to flag excessive risks, such as too many uninsured deposits, and said banks need to enforce and administer Dodd-Frank, which already contains, for instance, clawbacks for erroneously awarded executive comp.
In an unrelated story, Chopra also recently called on the the Financial Stability Oversight Council to label apps such as Cash App, PayPal, and Venmo as “systemically important” through the Dodd-Frank provision, and he urged consumers to move funds held in digital wallets to their bank accounts so they could receive access to FDIC insurance.
We’ve seen a lot of media interest in IntraFi lately, much of it focused on explaining what reciprocal deposits are. This article from American Banker goes deeper to discuss how firms like IntraFi have experienced significant growth in the past few weeks. Will it last? Question headlines usually indicate the answer is “No,” but this may be a rare exception.
Bank and credit union lenders maintain that PPP was critical to helping the economy through the pandemic and that banks played a heroic role in helping prop up U.S. businesses, despite recent controversies that have cast a pall over the program’s reputation.