Regulators end the week the way they started – allaying fears, saving a bank

Regulators end the week the way they started – allaying fears, saving a bank

Financial regulators, policymakers and bank executives have spent the week trying to dispel fears that a banking crisis could spread throughout the US financial system.

On Friday, President Joe Biden released a statement calling on Congress to take action to make it easier for regulators to hold senior bank executives accountable for their mismanagement.

“It should be easier for regulators to claw back executive pay, impose civil penalties and ban executives from working in banking again,” the president said. On Monday, after the collapse of Silicon Valley Bank and the takeover of Signature Bank by New York regulators, Biden had reassured Americans that their money was safe and said that “the management of these banks will be fired”.

On Thursday, senators lobbied Treasury Secretary Janet Yellen on future responses to bank meltdowns. Yellen assured them that “our banking system is solid”, but also clarified that deposits of all sizes would be be covered only if “Failure to protect uninsured depositors would create systemic risk and significant economic and financial consequences.

Over the weekend, regulators announcement additional funding to help banks meet their obligations. The Bank Term Funding Program provides banks with loans for up to one year by offering assets as collateral to “protect deposits and ensure the continued supply of money and credit to the economy.” Yellen approved the use of up to $25 billion as a backstop for the fund. The banks borrowed $11.9 billion so far, the Federal Reserve said THURSDAY.

When midsize San Francisco-based First Republic Bank reported trouble this week as depositors began to flee, Yellen worked out a plan with JP Morgan Chairman and CEO Jamie Dimon. Chase, to stabilize her. On Friday, 11 major banks provided an influx of liquidity — $30 billion. On Thursday, the Swiss National Bank said it would provide billions of much-needed cash to support Credit Suisse, a Switzerland-based global investment bank that has struggled financially in recent months.

No reason to panic

Economists say there’s still no reason for most Americans to panic over the recent bank runs, because the banking system is more stable than it was during the financial crisis more than a decade ago. years. But the current crises could still have effects on the economy as the Federal Reserve decides to raise rates again to reduce inflation and federal regulators consider how to move banking policy forward.

The Federal Deposit Insurance Corporation (FDIC) has historically insured up to $250,000 in deposits in the event of a bank failure, and economists say consumers should be careful if they have a bank deposit above that limit.

Matthew Rognlie, an assistant professor of economics at Northwestern University, said Americans with more than $250,000 should spread that money among a few banks.

People may also worry about the damage of the banking crisis to their 401(k)because in most cases they wouldn’t be protected, but if you have a failing investment in a bank stock, you shouldn’t sell at the bottom of the market either, said Galina Hale, professor of economics at the University of California, Santa Cruz.

“So if you hold stocks of banks, yes, there’s a bit of a market downside because of their concerns and there’s not too much information about the health of an average bank. What I would say to people who own bank stocks is to wait and see,” she said.

Although it is difficult for people to see the value deteriorate, the value will recover because there is no “fundamental problem in the economy that would justify a prolonged decline in the stock market at this time”, a Hale added.

How SVB differs from most banks

The panic over the stability of the banking system and the federal government’s intervention to try to prevent damage to the economy may rightly remind people of the 2008 financial crisis and the shutdown of hundreds of banksbut there are a lot of differences to keep in mind, Hale and Rognlie said.

“A financial crisis is more likely when there is a risk that banks have suffered severe losses. This was certainly the case in 2008, when the real estate sector (accounting for by far the largest share of borrowing in the financial sector) collapsed and many risky mortgages were issued. I don’t see anything comparable this time around,” Rognlie said in an email.

In this case, Silicon Valley Bank had billions in unrealized losses, or an asset losing value but had not yet been sold, on bonds, and many of its assets were U.S. government bonds at long-term maturity. Because customers, most were uninsured, began to withdraw their money from the bank, the bank had to sell its securities portfolio at a loss, which led to a bank panic and real losses. First Republic, which also catered to high-net-worth clients, had similar issues. But the majority of banks do not have the same liquidity risk and benefit from what is called a deposit allowance, making it easier for banks to assume interest rate risk. And the big banks have taken advantage of depositors looking for a safer place to put their funds.

Rognlie said Silicon Valley Bank and similar banks are different from most banks, which have more stable deposits.

“More importantly, if a financial crisis were to become a threat, interest rates would fall and treasury bills and (mortgage-backed securities) would rise. … So, in the current circumstances, a financial crisis is to some extent a self-correcting problem,” he added.

Politicians are calling for more regulation of the banking sector following recent bank failures, especially since the backtrack of some of the banking reforms of 2010 which they believe could have helped to avoid the current crisis. But consumers should take some comfort that the regulatory environment is still much better than it was in 2008, Hale said.

“We didn’t have this regulation that now requires banks, especially big banks, to have a lot of capital. We have regulations that require big banks to have a lot of cash, so even a run on a big bank — they should be able to survive. I don’t see a repeat of the Lehman crisis and things like that,” she said.

But that doesn’t mean there aren’t risks to the economy right now. Hale said the downside of federal government intervention and all-depositor coverage is the risk that people will assume that intervention will happen in the future.

“It can create moral hazard. … Suppose I run a small business and I have over $250,000 to deposit in the bank and I’m not going to worry too much about that insurance limit because I’m going to say, “Well, in the In the past, the government gave money to everyone, not just insured deposits, so I’m not going to waste time and complicate them. I’ll just put in half a million dollars. But that might not happen in this photo, right? ” she says.

Rognlie said he was still concerned about another important factor in the health of the economy – the Federal Reserve’s decisions on how much to raise interest rates. From March 2022the Fed continued to raise the fed funds rate to bring down inflation and noted when it last announced its decision to raise rates that it will continue to do so for the foreseeable future. The banking crisis has thrown into question whether the Fed will continue raising rates as high as it has been or whether it will raise rates at its meeting next week.

“As far as I’m concerned about anything, it will add uncertainty to the Fed’s anti-inflation campaign,” Rognlie said. “A week and a half ago, the Fed was planning to raise rates quickly, and the most likely macroeconomic outcome was a moderate slowdown (perhaps a mild recession) in the economy to reduce inflation.

“Now the Fed is going to be more cautious in raising rates – at least in the short term – due to financial sector concerns. cap in a few months if it becomes clear that inflation is not yet slow enough.

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