Press Clips

Regional bank crisis may be far from over, experts warn

By Chris Matthews

Regulators should stay vigilant as headwinds remain, say analysts

The stock-market panic over the regional banks has subsided for now, but experts say that regulators should remain focused on shoring up the stability of the sector amid economic headwinds that could persist for years to come. Shares of regional banks like PacWest Bancorp Corp. PACW, -6.46% have rebounded in the past week following news that their deposit bases had stabilized, with the SPDR S&P Regional Banking ETF gaining nearly 15% from its early March lows….A new variable for regulators to consider is the speed with which runs on Silicon Valley Bank and Signature Bank occurred, according to Karen Petrou, co-founder of the banking advisory firm Federal Financial Analytics, Inc. “The most radically new lesson of the recent crisis is the vulnerability of banks to viral runs,” she said, noting that new technology has enabled panic to spread much faster than in previous eras, carving out a new terrain for regulators to navigate….Petrou said that these new realities mean that Congress should increase deposit insurance for business transaction accounts and regulators must get serious about improving bank supervision and becoming much more assertive when they see behavior that could lead to worries about bank solvency. There were quite a lot of opportunities for regulators to step in and turn these failed banks around,” she said. “We’ve got to have much better supervision.”

https://www.marketwatch.com/story/regional-bank-crisis-may-be-far-from-over-experts-warn-2b793d95

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Consensus on Fed’s post-crisis reforms might be elusive

By  Kyle Campbell

There is a lack of consensus on the Federal Reserve Board about what bank regulation and supervision should look like after the recent string of regional-bank failures. Michael Barr, the Fed’s vice chair for supervision, laid out several changes he’d like to see in his report on the failure of Silicon Valley Bank last month. But remarks by Fed Gov. Michelle Bowman raised questions among policy analysts about how much of Barr’s post-crisis agenda will actually be adopted. Karen Petrou, managing partner at Federal Financial Analytics, said the language of Bowman’s speech indicates some fundamental disagreements within the Fed that could prove difficult to bridge. “[Fed Chair Jerome] Powell has essentially decided that he endorsed the Barr report and then you have Bowman saying only one board member saw it. Clearly, there seems to be some internal issues there in terms of transparency and collegiality,” Petrou said. “Whether those continue and then how they drive what the others do is much harder to predict because it’s not policy, it’s personal.”

https://www.americanbanker.com/news/consensus-on-feds-post-crisis-reforms-might-be-elusive

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After Dimon’s First Republic purchase, tougher banking regulations loom

New rules forcing the big banks to increase their capital reserves are in the works, along with changes for regional banks

By David Lynch

When regulators earlier this month needed someone to take the failed First Republic Bank off their hands, they chose Jamie Dimon, the chief executive of JPMorgan Chase, putting him in position to boost his company’s annual profits by half a billion dollars….“The biggest focus will be the midsize regional banks. That’s where the thrust of the changes are going to be,” said Karen Petrou, managing partner of Federal Financial Analytics. “But the endgame will affect JPMorgan. It is likely to significantly increase capital requirements for some of the biggest banks.”Together, the flurry of regulation promises to reshape the competitive landscape…

https://www.washingtonpost.com/business/2023/05/10/jpmorgan-jamie-dimon-banking-regulations/

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For Fed supervision, cultural shortcomings are nothing new

By  Kyle Campbell

Last month’s Federal Reserve report on the failure of Silicon Valley Bank has put the policy objectives of former Vice Chair for Supervision Randal Quarles back under the microscope. Many factors contributed to what was then the second-largest bank failure in U.S. history, according to the report, but one finding, in particular, places blame directly at Quarles’s feet. Though he is not named in the report, it states that his office directed a shift in supervisory practices that made supervisors reluctant to elevate issues and take decisive action against banks…Karen Petrou, managing partner of Federal Financial Analytics, has a less hardlined view on the Fed’s future as a regulator, but she agrees that the primacy of monetary policy making within the organization has contributed to its supervisory weaknesses. Petrou said supervisors are rarely blindsided by failures; it’s more the case that the regulators identify critical issues that go unchecked. For Fed-supervised banks, she blames this disconnect on supervisors receiving insufficient support from leadership. “Supervisors need to be rewarded for and given the tools, which they don’t have, to cut problematic action short,” she said. “What we see constantly in supervision is a negative feedback loop in which banks fail to do what they’re told and sometimes even double down to try and do as much of what’s making them money as fast as they can before they think they have to stop.”

https://www.americanbanker.com/news/for-fed-supervision-cultural-shortcomings-are-nothing-new

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‘Targeted’ deposit insurance could work. But it will have to wait.

By  Ebrima Santos Sanneh

WASHINGTON — A recent Federal Deposit Insurance Corp. report pointed to increased deposit insurance coverage for certain business accounts as the most promising policy response to the recent spurt of bank failures. But so-called “targeted insurance” poses significant administrative challenges to work as intended, the agency said, and experts say that getting Congress to grant the FDIC the authority before the 2024 election is improbable….”I do not think the operational problems, while notable, are in any way insuperable,” said Karen Petrou, managing partner at Federal Financial Analytics. “There are already numerous ways to game coverage the FDIC seeks to control via reporting requirements, etc. If these accounts are non-interest-bearing and available only to entities that are not natural persons or other corporate structures the FDIC wishes to include, this will work as well as most other coverage limits.”

https://www.americanbanker.com/news/targeted-deposit-insurance-could-work-but-it-will-have-to-wait

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Apple’s savings account upends traditional banking – or does it?

By Mitchell Hartman

With all the tumult in banking and interest rates still rising, many bank customers have been moving their money around, looking for safety and a better return on their deposits. Apple recently launched a new savings account in partnership with Goldman Sachs. According to a report in Forbes, it attracted nearly a billion dollars in just the first four days after launch in late April, with a quarter-million accounts opened in the first week….But there could be risks, said Karen Petrou at Federal Financial Analytics, as consumer-technology brands expand into banking. She worries about financial-data privacy and adequate regulation. But most important, “It is really vital that deposits are FDIC insured,” she said.

https://www.marketplace.org/2023/05/04/apples-savings-account-upends-traditional-banking-or-does-it/…

Dud-Frank? Post-2008 reforms played little role in bank resolutions

By  Kyle Campbell

After three bank failures in less than two months, some regulatory observers say the government’s response to such distress is little changed from 2008, raising questions about the reform efforts undertaken during the past 15 years. The legislative response to the last banking crisis, the Dodd-Frank Act of 2010, sought to create a new playbook for handling bank failures, one that would allow regulators — or, ideally, banks themselves — to wind down troubled institutions in a controlled manner. The hope was that doing so would prevent government bailouts and brokered sales that make ‘too big to fail” banks even larger. Instead, the crisis of 2023 has seen regulators make two systemic risk declarations, absorb significant losses and sell failed depositories to other banks, including the biggest bank in the country, JPMorgan Chase. “What is damning is there appears to have been no playbook,” Karen Petrou, managing partner of Federal Financial Analytics, said. “If there was, it didn’t work.” The latest failed institution to be put through this process was San Francisco-based First Republic Bank, which was seized by the Federal Deposit Insurance Corp. and sold to JPMorgan in the early hours of Monday morning, allowing the bank’s 80-plus branches to open as scheduled at the start of the workweek.

https://www.americanbanker.com/news/dud-frank-post-2008-reforms-played-little-role-in-bank-resolutions

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How Washington Got on Board With a Big-Bank Deal for First Republic

By Ben Eisenand Andrew Ackerman

Federal regulators wanted a strong deal for First Republic Bank. As a result, they helped America’s largest lender get even bigger.  JPMorgan Chase JPM 2.14%increase; green up pointing triangle
beat out bids from at least three smaller peers, according to people familiar with the matter. The bank said it had some 800 people working over the weekend to scour First Republic’s books and assess its business…“I’m not opposed to what was done, but I do think the lack of options speaks to a truly bankrupt resolution process,” said Karen Petrou, managing partner of Federal Financial Analytics, a regulatory advisory firm for the banking industry. The largest U.S. banks grew rapidly in the decade after the last financial crisis, benefiting in part from the presumption that they were too important to the financial system to be allowed to fail. They became fabulously profitable, putting them in position to weather the regional bank meltdown of the last two months—and even thrive. JPMorgan led a group of 11 banks to temporarily rescue First Republic in March by depositing $30 billion at the bank to help replenish the money that customers withdrew in a panic after two midsize banks failed in one weekend.

https://www.wsj.com/articles/how-washington-got-on-board-with-a-big-bank-deal-for-first-republic-609188aa?mod=Searchresults_pos1&page=1…

JPMorgan Chase’s purchase of First Republic Bank is intended to end a budding financial crisis, but it risks doing so by reviving a political battle over the power of the nation’s largest financial institutions. Already the largest U.S. bank with its more than $3.2 trillion in assets, JPMorgan added an additional $200 billion in loans and securities by acquiring First Republic in a pre-dawn transaction with the Federal Deposit Insurance Corp….“Thirteen years after Congress told them to prepare to resolve these banks, they still couldn’t do it to two medium-sized, non-complex banking organizations, and now here’s a third,” said Karen Petrou, managing partner of Federal Financial Analytics, a Washington consultancy. “This is a very high-cost resolution.” Indeed, the FDIC’s $35.5 billion estimated tab for the three bank failures exceeds the $34.1 billion in insurance premiums that the FDIC collected from the second quarter of 2018 to the end of last year, according to Bert Ely, a banking consultant in Alexandria, Va.

https://www.washingtonpost.com/business/2023/05/01/first-republic-bank-seized-jp-morgan/

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First Republic Bank collapse spurs fears for banking system, broader economy

By Karl Evers-Hillstrom

The demise of First Republic Bank raises questions about the strength of the U.S. banking system and the broader economy that relies on it. Monday’s shutdown marks the nation’s second-largest bank failure — First Republic Bank had nearly $230 billion in assets last month — eclipsing the Silicon Valley Bank collapse. Three of the four largest bank failures in U.S. history have taken place over the last two months…Karen Petrou, managing partner at policy research firm Federal Financial Analytics, wrote in a memo that the FDIC is encouraging “moral hazard that enables self-interested management, hands-off boards, insufficient supervision, and systemic risk.” To protect First Republic depositors, the FDIC is using an estimated $13 billion from its deposit insurance fund, which is paid for by fees on banks.

https://thehill.com/business/banking-financial-institutions/3982011-first-republic-bank-collapse-spurs-fears-for-banking-system-broader-economy/…