A year ago, the government and America’s biggest banks joined forces in a rare moment of exuberance.
They were forced into action after Silicon Valley Bank collapsed on March 10, 2023, quickly followed by two other lenders, Signature Bank and First Republic. Faced with the threat of a worsening crisis that could threaten the banking industry — the worst since 2008 — rivals and regulators have put together a huge bailout fund. All three sick banks were declared insolvent by the government and sold.
The biggest banks emerged from the era bigger, after taking over accounts from their smaller rivals. But they also became more confident in challenging regulators on what went wrong and what to do to prevent future crises. In fact, many bankers and their lobbyists are quick to describe the period as a regional banking crisis, a term that tends to understate how worried the industry was at the time.
One reason for the heightened tensions is that government officials have proposed rule changes that lenders argue would make their businesses more difficult, and would have done little to prevent the collapse of Silicon Valley Bank. Regulators say last year’s crisis proves that changes are needed. They point to increased risks in the commercial and residential real estate markets and the increasing number of so-called problem banks, or those rated poorly for financial, operational or managerial weaknesses.
Here’s the state of play, one year after the crisis:
What happened last spring?
In just a few days last March, Silicon Valley Bank fell from being a darling of the banking world. The lender, which helped venture capital clients and start-ups, loaded safe investments that had lost value as the Federal Reserve raised interest rates.
That may not exactly spell doom. But when nervous depositors — many of whom had accounts larger than the $250,000 limit for government insurance — began pulling their money out of the bank, executives failed to assuage their concerns, which leading to a bank run.
Soon after, two other lenders – cryptocurrency-focused Signature Bank and First Republic, which like Silicon Valley Bank, has many clients in the startup industry – were also taken down by regulators, which were brought down by their own banks. run. Together, those three banks are larger than the 25 that failed in the 2008 financial crisis.
What happened to the failed banks?
According to the standard procedure, government officials auctioned off failed banks, with losses covered by a fund paid by all banks. Silicon Valley Bank was purchased by First Citizens Bank. Many of Signature’s assets went to New York Community Bank (which has suffered its own problems recently), and First Republic was acquired by JPMorgan Chase, the nation’s largest bank.
No depositors lost money, even those with accounts that do not normally qualify for federal insurance.
What are regulators doing about it?
Many banking regulators at least partially blame the industry itself for lobbying for weaker rules in the years before 2023. The Federal Reserve has also taken responsibility for its own slow transition of Silicon oversight. Valley Bank. Regulators say they are paying closer supervisory attention to medium-sized banks, recognizing that problems can quickly spread between banks with different geographic footprints and customer bases. customer in an era when depositors can drain their accounts with the click of a button on a website or app.
Regulators are planning various measures to crack down on banks.
They unveiled last year the US version of an international accord called “Basel III” that would require big banks to hold more capital to offset the risks posed by loans and other obligations. Last week, the chairman of the Fed, Jerome H. Powell, signaled that regulators might take the initiative again.
In the United States, regulators are also developing so-called liquidity guidelines that focus on banks’ ability to raise money quickly in a crisis. Some of those policies, which have yet to be formally proposed but could emerge in the coming months, could take account of uninsured bank depositors, a key issue in last year’s crisis.
Why are the big banks fighting so hard?
Suffice it to say that the big banks have signaled that they think the Basel III rules, in particular, are punishing them. They have poured comment letters into regulators arguing that they helped stabilize the system last year, and that the costs of the proposed rules could hinder their lending or drive that business to less-regulated lenders. which is not a bank.
Perhaps the most visible bank chief in the US, Jamie Dimon of JPMorgan, told clients at a private conference two weeks ago that the collapse of Silicon Valley Bank could be repeated at another lender. According to a recording heard by The New York Times, Mr. Dimon said, “If rates go up and there’s a big recession, you’re going to have exactly the same problem with a different set of banks.”
He added: “I don’t think it’s going to be systemic except for that when there is a run on the bank that people are afraid. People panicked. We saw that happen. We haven’t solved that problem.”
What is the most immediate risk to banks?
Two words: real estate.
Many banks are setting aside billions of dollars to cover expected losses on loans to owners of commercial office buildings. The value of those buildings has fallen since the pandemic as more people work remotely. Such problems weigh heavily on New York Community Bank, which last week received a billion-dollar rescue package from former Treasury Secretary Steven Mnuchin, among others, to stay afloat.