By Pete Schroeder and Saeed Azhar
WASHINGTON (Reuters) – The lightning speed at which the banking sector fell into turmoil has shaken global markets and governments, bringing eerie memories of the financial crisis back to life. As in 2008, the effects could be long-lasting.
In the space of a week, two U.S. banks collapsed, Credit Suisse Group AG needed a lifeline from the Swiss, and America’s largest banks agreed to pour $30 billion into another ailing firm, First Republic Bank, in a bid to to increase confidence.
The unrest brought back memories of the frenzied weekend deals to bail out banks during the 2008 financial crisis, and led to monumental action by the US Federal Reserve, the US Treasury Department and the private sector. As in 2008, the initial panic does not seem to have died down.
“It makes no sense after the actions of the FDIC and the Fed and the Treasury (last) Sunday that people are still concerned about their banks,” said Randal Quales, the former top banking regulator at the Federal Reserve. He now faces renewed criticism of his agenda at the Fed, where he oversaw efforts to reduce regulation for regional banks.
“In an earlier world, it would have calmed things down by now,” Quarles said.
The collapse of Silicon Valley Bank, which held large numbers of uninsured deposits above the Federal Deposit Insurance Corporation’s (FDIC) guaranteed limit of $250,000, shook confidence and prompted customers to withdraw their funds. US bank customers have flooded banking giants including JPMorgan Chase & Co, Bank of America Corp and Citigroup Inc with deposits. This has led to a crisis of confidence and a strong sell-off among smaller banks.
“We do a lot of contingency planning,” said Stephen Steinour, CEO of Huntington Bancshares Inc, a lender based in Columbus Ohio. “We started doing the ‘what if’ scenario and looking at our playbooks.”
As banks grapple with short-term shocks, they also assess the long-term.
The rapid and dramatic events have fundamentally changed the landscape for banks. Now big banks can get bigger, smaller banks can struggle to keep up and more regional lenders can close. Meanwhile, US regulators will try to tighten scrutiny on medium-sized companies most affected by the stress.
US regional banks are expected to pay higher rates to depositors to avoid switching to larger lenders, thus facing higher borrowing costs.
“People are actually moving their money around. All these banks are going to look fundamentally different in three months, six months,” said Keith Noreika, vice president of Patomak Global Partners and a former Republican Comptroller of the Currency.
2008 AGAIN AGAIN?
The current crisis may feel frighteningly familiar to those who lived through 2008, when regulators and bankers sat in locked rooms for days trying to devise solutions. The bank-led raise of $30 billion to First Republic on Thursday also reminded people of the industry-led effort in 1998 to bail out Long-Term Capital Management, in which regulators struck a deal for industry giants to pump billions into the ailing hedge fund .
With this latest panic, there are differences.
“For anyone who has lived through the global financial crisis, this past week feels hauntingly familiar,” Josh Lipsky, senior director of the Atlantic Council GeoEconomics Center and former IMF adviser, wrote in a blog post. “Looking beyond the surface, it’s clear that 2023 bears little resemblance to 2008.”
In 2008, regulators had to contend with billions of dollars in toxic mortgages and complex derivatives sitting on bank books. This time, the problem is less complex, as the holdings are US Treasury bonds, Lipsky writes.
And this time around, the industry is fundamentally sound. While Congress and regulators have weakened safeguards for regional banks over the years, stricter standards are in place for the largest global banks, thanks to a sweeping set of new restrictions from Washington in the Dodd-Frank financial reform bill.
That stability was on display Thursday, when the biggest firms agreed to place billions in deposits with First Republic, essentially betting that the firm would stay afloat. Still, the company remains under pressure, with the share price falling 33% on the day after the capital injection.
“Banks are actually healthier than they were[2008 crisis] because they’re basically allowed to do pretty much nothing in terms of actually taking on real underlying credit risk in their assets,” said Dan Zwirn, CEO of Arena Investors in New York.
Now bankers and regulators are grappling with an unexpected set of challenges. Deposits, long seen as a reliable source of bank money, have now been called into question.
And those who have seen the rapid collapse of the SVB wonder what role social media, now ubiquitous but niche in 2008, has played in raising money.
“$42 billion a day?” said a senior industry official who declined to be named, referring to the massive deposit flight Silicon Valley Bank saw before it filed for bankruptcy. “That’s just insane.”
REGULATION LENS
The last crisis changed the banking sector, as huge companies went under or were bought by others and Dodd-Frank was introduced. Similar efforts are now underway.
“Now the regulators know that these banks are a greater risk to our overall economy than they thought. And I’m sure they will go back and tighten regulations as much as they can,” said Amy Lynch, founder and president of FrontLine Compliance .
Analysts say a divided Congress is unlikely to enact comprehensive reforms. But banking regulators, led by the Fed, indicate they are likely to tighten existing rules for smaller companies 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. Those rules may become stricter after the Fed completes its review.
“They definitely need to, they’re not even supposed to, they need to rethink and change their strategies and the rules that have been adopted,” said Saule Omarova, a law professor who once nominated President Joe Biden to join the Office of the Comptroller of the Currency. to lead.
The recent crisis has also put the big banks back on Washington’s radar, possibly undoing the industry’s years of work to escape the tarnished reputation it carried with it after the 2008 crisis.
Prominent critics of big banks, such as Senator Elizabeth Warren, are criticizing the industry for passing simpler rules, most notably a 2018 law that allows medium-sized banks like Silicon Valley Bank to avoid the most powerful oversight.
Other policymakers reserve their anger for regulators and wonder aloud how the SVB could have ended up in such a predicament while watchdogs were at work.
The Federal Reserve plans to review its oversight of the bank internally. But the call for an independent look is growing. On Thursday, a bipartisan group of 12 senators sent a letter to the Fed, saying it was “seriously concerning” that regulators had not identified the weaknesses ahead of time.
“SVB is not a very complicated bank,” said Dan Awrey, a Cornell Law professor and an expert on banking regulation. “If large and non-complex can’t get proper oversight, that 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)
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