Pete Schroeder and Saeed Azhar
WASHINGTON (Reuters) – The lightning speed with which the banking industry descended into turmoil has shaken global markets and governments, reviving eerie memories of the financial crisis. As in 2008, the effects can be long-lasting.
In the space of a week, two US banks have collapsed, Credit Suisse Group AG needed a lifeline from the Swiss and America’s biggest banks agreed to deposit $30 billion into another struggling company, First Republic Bank, in an effort to boost confidence.
The turmoil evoked memories of frantic weekend deals to bail out banks in the 2008 financial crisis and prompted massive action by the U.S. Federal Reserve, the U.S. Treasury and the private sector. As in 2008, the initial panic does not seem to have been quelled.
“After the actions of the FDIC, the Fed and the Treasury (last) Sunday, it makes no sense that people are still worried about their banks,” said Randal Quarles, the Federal Reserve’s former top banking regulator. He now faces renewed criticism for his agenda at the Fed, where he oversaw efforts to reduce regulations on regional banks.
“In a previous world, that would have calmed things down by now,” Quarles said.
The collapse of Silicon Valley Bank, which had large uninsured deposits above the $250,000 limit guaranteed by the Federal Deposit Insurance Corporation (FDIC), shook confidence and prompted customers to withdraw their money. Banking giants such as JPMorgan Chase & Co, Bank of America Corp and Citigroup Inc. have been flooded with deposits by US bank customers. This has led to a crisis of confidence in smaller banks and a sharp sell-off.
“We do a lot of contingency planning,” said Stephen Steinour, CEO of Huntington Bancshares Inc., a Columbus, Ohio-based lender. “We started doing ‘what if’ scenarios and looked at our playbooks.”
As banks grapple with short-term shocks, they also assess the long term.
Rapid and dramatic events have fundamentally changed the banking landscape. Now, big banks can grow, smaller banks can strain to keep up, and more regional lenders can close. Meanwhile, U.S. regulators are looking to increase oversight of stressed mid-sized companies.
Regional U.S. banks are expected to pay depositors higher interest rates to keep them from switching to larger lenders, leaving them with higher funding costs.
“People are actually moving their money, all these banks look fundamentally different three months, six months from now,” said Keith Noreika, vice chairman of Patomak Global Partners and a former Republican comptroller of the currency.
2008 ALL AGAIN?
The current crisis may seem frighteningly familiar to those who lived through 2008, when regulators and bankers huddled in closed rooms for days to come up with solutions. Thursday’s bank-led $30 billion boost to First Republic also reminded people of the 1998 industry-led attempt to save Long-Term Capital Management, in which regulators brokered billions with industry giants for the struggling hedge fund.
There are differences in this latest panic.
“For anyone who lived through the global financial crisis, the past week will feel hauntingly familiar,” Josh Lipsky, senior director of the Atlantic Council’s GeoEconomics Center and a former IMF adviser, wrote in a blog post. “If you look past the surface, it’s clear that 2023 bears little resemblance to 2008.”
In 2008, regulators had to grapple with billions of dollars worth of toxic mortgages and complex derivatives on the bank’s books. This time the problem is less complicated because the holdings are the US Treasury, writes Lipsky.
And this time, the industry is fundamentally healthy. While Congress and regulators have trimmed safeguards for regional banks over the years, standards for the largest global banks are stricter, thanks to Washington’s 2010 Dodd-Frank financial reform law.
That stability was on display Thursday when the biggest companies agreed to put billions in deposits into First Republic, effectively betting that the company would stay afloat. Nevertheless, the company remains under pressure, with its share price falling 33 percent the day after the capital injection.
“Banks are actually healthier than they used to be[2008 crisis] because they haven’t really been allowed to do virtually anything to take real credit risk on their funds,” said Dan Zwirn, CEO of Arena Investors in New York.
Now bankers and regulators are grappling with unexpected challenges. Deposits, long considered a reliable source of bank money, have now come into question.
And those who watched SVB’s rapid collapse wonder what role social media, now ubiquitous but niche in 2008, might have played in pulling in the money.
“$42 billion a day?” said one senior industry official, who declined to be named, referring to Silicon Valley Bank’s massive deposit flight before its failure. “It’s just crazy.”
The last crisis changed the banking industry as massive firms went under or were bought by others and Dodd-Frank was enacted. Similar efforts are currently underway.
“Now regulators know these banks present a greater risk to our overall economy than they thought. And I’m sure they’ll come back and increase regulation as much as they can,” said Amy Lynch, founder and president of FrontLine. Compliance.
A fragmented Congress is unlikely to advance comprehensive reforms, analysts say. However, bank regulators led by the Fed say they are likely to tighten rules on smaller firms at the center of the current crisis.
Currently, regional banks with less than $250 billion in assets have simpler capital, liquidity and stress testing requirements. Rules may intensify after the Fed completes its review.
“They absolutely must, not even should, they must rethink and change their strategies and their adopted rules,” said Saule Omarova, a law professor who was once nominated by President Joe Biden to lead the Office of the Comptroller of the Currency.
The recent crisis has also put the big banks back on Washington’s radar, potentially erasing the industry’s tarnished reputation from years of trying to escape the 2008 crisis.
Prominent big-bank critics, such as Sen. Elizabeth Warren, criticize the industry for pushing for simpler rules, particularly a 2018 law that allows mid-sized banks like Silicon Valley Bank to avoid the toughest oversight.
Other decision-makers hold back their anger at the regulators and wonder aloud how SVB could have ended up in such a difficult situation with watchdogs at work.
The Federal Reserve plans to conduct an internal audit of the bank’s supervision. But the independent look demands more and more. On Thursday, a bipartisan group of 12 senators sent a letter to the Fed saying it was “gravely concerned” that supervisors did not detect weaknesses in advance.
“SVB is not a very complicated bank,” said Dan Awrey, a Cornell law professor and bank regulation expert. “If the big and uncomplicated don’t get proper oversight, it begs the question: Who the hell can we regulate?”
(Reporting by Pete Schroeder and Saeed Azhar, additional reporting by Matt Tracy, Nupur Anand and Douglas Gillison; Editing by Megan Davies and Anna Driver)