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Was the social media run Silicon Valley Bank’s kiss of death?  Its former CEO says so.  Regulators agree because the more the failure came from the great beyond, the less material their manifold supervisory mistakes.  But, while it’s true that managerial malfeasance and supervisory forbearance played a huge role in recent failures, social-media herds can still trample a bank flatter than a morning croissant.  FedFin outlined solutions shortly after the mid-March failures, but we didn’t then know what we also know now about investor runs.  This memo reviews the runs, updates the regulatory responses, and shows why new liquidity buffers – surely the least controversial of any pending proposal – are urgently needed before the next round of regional bank stress.

Why do I say regional banks aren’t out of the woods?  Maybe they are and here’s hoping, but market volatility combined with three new studies suggest we may well be in a calm before the next storm.

Recent data on deposit outflows, Fed-window use, and Home Loan Bank advances remain so worrisome that federal officials are still promising that all deposits are protected all the time even though federal law says they aren’t.  Still, this moral-hazard safety net did not save First Republic and it’s been insufficient to secure other large regional banks from the threat of near-term failure.  The reason for this is to be found in social media, and not just the kind that powered Silicon Valley’s run– the real threat now isn’t coming from …

Perhaps because its last financial-stability report (see Client Report SYSTEMIC94) was contradicted  just five months later by a systemic-risk designation, the Federal Reserve’s latest report eschews a conclusion about prospective risk in favor of a review of current concerns.  As noted upon the report’s release, these include a somewhat less effusive view of bank resilience than has characterized prior reports but the Board nonetheless views the banking system as sound and recent failures as essentially idiosyncratic.  The report is, however, concerned with midsized-bank CRE concentrations and the near-term impact of macroeconomic factors and deposit outflows on credit availability, noting as Chairman Powell did last week that this could adversely affect economic growth.

The full report is available to retainer clients. To find out how you can sign up for the service, click here and here.…

The reason the FDIC sold First Republic to JPMorgan is that it didn’t want to do yet another resolution that bailed out uninsured depositors.  The reason the FDIC didn’t want to backstop more uninsured depositors is that it would have had to say First Republic was as systemic as SVB and Signature Bank and this was nowhere near as credible.  The reason the FDIC had to find these two earlier failures systemic was because it couldn’t think of anything better and the reason it couldn’t think of anything better in any of these resolutions is that it was wholly unprepared for them and, now, for any of the others that may come suddenly upon us.  The FDIC must quickly rewrite its resolution playbook, but even a good one won’t work without a new set of triggers for meaningful prompt corrective action that forces change at troubled banks and readies the FDIC for resolution – not bail-out – if change doesn’t come quickly.

Last week’s near-death spirals show how quickly banks with respectable earnings and deposit inflows go down for the count when market sentiment turns on them.  Unlike the March failures, regional banks on the ropes since then were punched by investors, not the uninsured depositors who are now big winners on their moral-hazard bet.  These investors weren’t all short-sellers – many of them were equity stockholders who seemed suddenly to realize that the FDIC wouldn’t protect them when a troubled regional is sold to a bigger banking organization.  Why …

In this report, we build on our assessment earlier today of the Fed’s SVB autopsy (see Client Report REFORM221) with an assessment of the FDIC’s self-review of Signature’s failure.  As noted on Friday, the FDIC confines this report to Signature’s supervision; a separate report will address policy recommendations.  Although the analysis has some findings in common with the Fed’s SVB assessment with regard to matters such as supervisors’ failure to keep up with a fast-growing bank, the FDIC principally focuses on key risk indicators at the bank rather than supervisory shortcomings.

The full report is available to retainer clients. To find out how you can sign up for the service, click here and here.…