Well, That Was Interesting!
As we anticipated, a series of hearings last week clarified what the banking agencies plan, what Congress thinks about it, and what’s soon to come. Based on the reports cited below, we draft the following conclusions from the hearings, testimony, and reaction thereto:
Bowman Strengthens Stand Against New Rules, Possible Supervisory Overkill
In case anyone doubted her meaning last week, FRB Gov. Bowman today repeated her strong opposition to the regulatory rewrites spelled out in what at first seemed the Fed’s but is now apparently only Vice Chairman Barr’s report (see Client Report REFORM221). Ms. Bowman also reiterates her call for an independent study, continued tailoring, and improved supervision.
Bills To Reduce Regulatory Independence Advance
As anticipated at his last hearing, HFSC Financial Institutions Subcommittee Chairman Barr (R-KY) has now formally introduced three regulatory transparency bills. We will shortly provide clients with in-depth analyses of these bills, which we expect quickly to proceed to mark-up on largely party-line votes.
Warren Pounces On Reports Of Treasury-Bond Assessment Proposal
Sen. Warren (D-MA) yesterday sent a strongly-worded letter to FDIC Chairman Gruenberg demanding that the FDIC reject reported big bank plans to replenish the DIF with at-par Treasury bonds rather than the proposed special assessment (see FSM Report DEPOSITINSURANCE120).
BIS’s Carstens Dismisses Crypto, Calls For Tighter Non-bank Controls
In a wide-ranging speech today, BIS General Manager Agustín Carstens sharply criticized cryptocurrencies and called for greater regulation of the nonbank sector to avert a systemic financial crisis.
Hsu Presses Reg Harmonization, Resolution Reform, Merger-Policy Rewrite
We now add our assessment of Acting Comptroller’s Hsu’s testimony to our analyses of those from Messrs. Barr and Gruenberg ahead of HFSC’s hearing later this morning.
Yellen Says White House Supports Community-Bank Exemptions
Speaking today to the ICBA, Secretary Yellen today joined the parade of policy-makers affirming the national importance of community banks.
JEC GOP Counter FRB on SVB Causality
JEC Republican staff today released a memo finding that tailored liquidity rules did not contribute to SVB’s failure, a contrast to the FRB’s SVB report (see Client Report REFORM221).
LLPAs Set for GOP Frying Pan
The majority-staff memo for tomorrow’s Housing Subcommittee hearing makes it clear that, as anticipated, the sole topic will be FHFA’s controversial LLPAs and related GSE pricing.
Senate Banking: Tough Grilling For Failed-Bank CEOs, Growing Consensus For Clawback Bill/Tough Rules
As predicted, today’s Senate Banking hearing with the CEOs of SVB and SBNY was a feisty session in which Democrats built their case for executive clawback legislation and the failed bank executives defended management while repeatedly placing blame on what they called an “unprecedented series of events.”
Yellen Highlights Investor – Not Uninsured-Deposit – Runs, Buoys Sector Mergers
In an interview over the weekend, Treasury Secretary Yellen struck a decidedly different tone on bank mergers than voiced in the Administration’s policy prior to recent failures.
Gensler Outlines Top Financial Stability Concerns
In remarks today, SEC Chair Gensler outlined his financial-stability priorities.
Failed-Bank CEOs Defend Themselves, Contest Need For Receivership
Ahead of testimony tomorrow before Senate Banking, the CEOs of SVB and Signature have filed statements defending their actions and those of their colleagues.
FHFA Seeks Views On New Pricing Framework
Following last week’s announcement that it would postpone its controversial decision to retain an upfront fee related to a borrower’s debt-to-income level, the FHFA today released a Request for Input on the Enterprises’ single-family pricing framework as well as the process for setting their upfront guarantee fees.
Barr Stands His Supervisory, Regulatory Ground
Vice Chairman Barr’s testimony for Congressional hearings this week has just been released along with the Board’s 2023 supervision-and-regulation report.
Gruenberg Sticks To His Guns
FDIC Chairman Gruenberg’s Congressional testimony largely recounts prior statements about the condition of the banking system, recent bank failures, the new special-assessment proposal (see FSM Report DEPOSITINSURANCE120), and the agency’s deposit-insurance reform conclusion (see Client Report DEPOSITINSURANCE119).
DIF Special Assessment
As the law requires and the FDIC Chairman promised after SVB and Signature Bank were declared systemic, the FDIC has now proposed a special assessment to compensate the Deposit Insurance Fund (DIF) for the cost of backing the two banks’ uninsured deposits. The FDIC has proposed to do so via an assessment covering IDIs with uninsured-deposit holdings above $5 billion. This thus exempts most smaller banks, with the FDIC adopting this approach on grounds that it justly penalizes IDIs that benefited the most from these systemic rescues. The new assessment would be applied over at least eight quarters beginning in January of 2024, with the FDIC’s analysis persuading it that the capital and income costs of this targeted approach are sustainable at covered insured depository institutions (IDIs).
How An Ill-Designed Special Assessment Is Sure To Scramble The Structure Of Federal Deposit Insurance
As our forthcoming in-depth analysis will detail, the FDIC’s proposed special assessment raises a raft of policy problems not contemplated by the FDIC despite a steep price tag warranting careful thought at a time of financial instability and recessionary risk. The FedFin analysis will detail the proposal, what the FDIC thinks, and what the proposal might do to whom, but here’s my opinion: the FDIC’s decision to allocate blame for SVB and Signature’s failures to a select group of surviving larger banks is a politically-expedient violation of the principal of insurance and a terrible precedent for the future of federal deposit coverage.
As our forthcoming in-depth analysis will detail, the FDIC’s proposed special assessment raises a raft of policy problems not contemplated by the FDIC despite a steep price tag warranting careful thought at a time of financial instability and recessionary risk. The FedFin analysis will detail the proposal, what the FDIC thinks, and what the proposal might do to whom, but here’s my opinion: the FDIC’s decision to allocate blame for SVB and Signature’s failures to a select group of surviving larger banks is a politically-expedient violation of the principal of insurance and a terrible precedent for the future of federal deposit coverage.
First problem: the FDIC assigns blame to a large group of bigger banks even though its own analysis of the SVB and SBNY failures points to a different underlying reason for the systemic designation. In the proposal, the FDIC targets large holdings of uninsured deposits even though both its post-mortem and the Fed’s of the two systemic failures cites bad management as the most important cause of death. Both agencies do note the new risks posed by social-media runs that hastened the banks’ passing, but each also makes it clear that these new-age runs are an endemic challenge to bank resilience, not a risk unique to SVB and Signature or other banks with large amounts of uninsured deposits. The FDIC proposal contains no explanation of why uninsured-depositories are the systemic rescue’s fall guys even though these deposits aren’t the cause of the two bank failures and the risks …
Warm-Up Acts Over, Congress Readies for Rowdy Performance
We’ll be busy this week giving you in-depth analyses of all of the key hearings scheduled this week and next on what went wrong on bank failures past, present, and hopefully not future. Last week saw two opening numbers: HFSC’s Financial Institutions Subcommittee heard from bank lawyers, an investment bank CEO, and a professor and its Oversight Subcommittee reviewed GAO’s in-depth take-down (see Client Report REFORM223) of what the Fed and FDIC did at SVB and Signature and, by inference, what they said about it. As our analyses described, Republicans are firmly convinced that the banking agencies dropped very big, obvious balls; Democrats aren’t exactly stout defenders, but they are doing their best to chime in with the agencies by emphasizing how badly bank management behaved and how much of their compensation needs to be recouped as reparations.