News: Washington can’t stop an instant bank run

Wednesday, March 15, 2023

Washington can’t stop an instant bank run

Mar 15, 2023

Presented by Apollo Global Management

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Days after Silicon Valley Bank went bust, lawmakers are starting to roll out ideas on how to discourage similar weekend-wrecking calamities.

Progressive firebrands led by Sen. Elizabeth Warren (D-Mass) and her protégé Rep. Katie Porter (D-Calif.) pitched a bill to roll back bipartisan changes to Dodd-Frank that was a major pain point for Democrats in 2018. Sen.Jon Tester (D-Mt.) – the architect of that Dodd-Frank overhaul — wants regulators to claw back bonuses that SVB’s leadership collected before their bank went into a tailspin. Some Republicans, including Florida Gov. Ron DeSantis, are staking claims that SVB’s woes were a simple case of so-called woke bank management run amok.

But it’s hard to craft public policy for an emergency brake to halt a fast-moving bank run on uninsured deposits. It’s even harder when access to immediate information and financial services are available on the same pocket-sized screen. And that created “a more acute pain point” for this particular bank run, House Financial Services Chair Patrick McHenry (R-N.C.) told your MM host.

“200 years ago? It was measured in days. 100 years ago? It was measured in hours. And now it's in minutes or seconds,” he said. SVB’s implosion was accelerated by society’s “continuous trajectory — for everything — of faster, better, cheaper.”

For Silicon Valley Bank customers, “faster” and “better” almost sent them into a $150 billion-plus hole. McHenry said the Securities and Exchange Commission has “boatloads” of rules designed to prevent market manipulation. You can’t short bank stocks and then take to Twitter to gin up a run on deposits.

But that doesn’t doesn’t preclude people from telegraphing genuine fears about a financial institution's health to friends, colleagues or strangers. A ton of ink has been spilled in the last week about how widely used social media networks and messaging applications hastened the panic that led depositors to pull $42 billion from SVB on March 9. In a viral Twitter thread, Tyler Stambaugh — a former risk management specialist at Accenture and JPMorgan Chase who now leads the online startup Magnetiq — argued that current rules offer no protection from banks’ exposure to “social media risk.”

“These irrational types of events make it as easy as flipping open your phone and making a move,” Stambaugh said in an interview. “When you can do that en masse, that quickly, without human intervention? You can create these types of downward spirals that just don't stop.”

Is there a solution for that? Stambaugh said that banks could beef up their social media presence to head off bad information and proactively engage with customers who might take flight.

From a public policy perspective, however, there aren’t many options.

“Free speech rights are free speech rights,” McHenry said.

“In a moment of crisis like this, there are a lot of half-baked ideas,” he added. “The current one is about throttling social media around financial products — which I think is half-baked.”

IT’S WEDNESDAY — Have you seen your family this week? Have tips, gossip or scoops? Let Sam know at ssutton@politico.com and Zach at zwarmbrodt@politico.com.

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Driving The Day

The Producer Price Index will be out at 8:30 a.m. on Wednesday … The Securities and Exchange Commission has a meeting to rule changes on unauthorized access notifications at 10 a.m. … Sens. Thom Tillis (R-N.C) and John Hickenlooper (D-Colo.) will discuss crypto policy at a Bipartisan Policy Center event at 2 p.m. … House Agriculture holds a farm bill hearing at 3 p.m.

WHAT IS DEAD MAY NEVER DIE — Our Burgess Everett and Eleanor Mueller: “Five years to the day after Senate Democrats clashed bitterly over Donald Trump-backed bank deregulation, the failure of two banks is reigniting the old tension.”

While key Senate Democrats who backed the bill in 2018 said they wouldn’t change their vote if they had to do it again, Rep. Maxine Waters — the top Democrat on House Financial Services — told your MM host as Congress explores “increasing the stress testing — and other things that we have to do in order to make sure our banking system is safe — I think some of the Democrats who voted on that legislation will change their minds.” (Waters also told our colleagues that she’d return a contribution she’d receive from Silicon Valley Bank).

Even so, Senate Banking Chair Sherrod Brown (D-Ohio) says: “I don’t know how we do a legislative fix.”

BIG, IF IT MOVES AHEAD — The WSJ’s Andrew Ackerman writes that the Fed is rethinking “rules related to midsize banks following the collapse of two lenders, potentially extending restrictions that currently only apply to the biggest Wall Street firms.”

Hagerty on the FDIC auction — The FDIC’s unsuccessful auction for Silicon Valley Bank has raised the hackles of Sen. Bill Hagerty. The Tennessee Republican tells MM that he asked FDIC officials on Monday if any global systemically important banks had submitted bids and was told “no.” While the officials confirmed bids from non-GSIBs — theoretically, a more palatable option if regulators are wary of adding to big bank’s market share — they did not say why those bids were rejected.

“I think it's deeply concerning,” he said. “The notion that they're going to do better as this asset turns into a carcass? … It's hard for me to understand how that’s the best answer.”

The FDIC did not respond to a request for comment.

Pushback — Renita Marcellin, legislative and advocacy director at Americans for Financial Reform, pushed back on the Bank Policy Institute’s arguments about regulation and SVB in yesterday’s edition. Changes made after the 2018 Dodd-Frank rollback are “precisely what led to a pullback of supervision by the Fed, which went further than Congress required.”

And a walkback — Republican Rep. Blaine Luetkemeyer of Missouri told Eleanor that the government should temporarily insure every bank deposit in the country for another six months or a year. A spokesperson later said “the guarantee could be in place ‘perhaps 30 to 60 days.’”

ASK THEM MERLOT OR PINOT — From Nicholas Wu and Sam: “The Democrats vying in California’s already-heated 2024 Senate contest don’t disagree much on the response to Silicon Valley Bank’s collapse. Yet they’re still tussling over who’s taking the toughest line.”

Gruenberg cancels — Punchbowl News’s Brendan Pedersen reports that FDIC Chair Martin Gruenberg has canceled his planned appearance at Washington’s Exchequer Club later today. Given the recent brouhaha over audience questions – and, you know, the banking crisis — that’s probably not a surprise.

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Talking Points

Your MM host caught up with Sen. Shelley Moore Capito (R-W.Va.) on credit card companies’ decision to delay the introduction of a dedicated merchant code for gun stores that had been a top priority for Democratic policymakers.

“I was a bit surprised but I'm glad that it has been paused,” said Capito, who was among the policymakers who blistered the card companies late last summer. Political pressure from the Hill, along with state-level efforts on the part of Republicans to block use of the code, “just created an untenable situation for them.”

The card companies are likely to face similar pressure from blue state leaders like New York Gov. Kathy Hochul who championed the code as a potential tool for law enforcement.

“States have the right to their opinions and we do come from different avenues,” Capito said, adding that she’s taking a “wait-and-see” approach before exploring options to resolve this at the federal level. “I think it makes it very difficult for these three entities to do a state by state hodgepodge approach here.”

BANKS

ROCKY ROAD AHEAD — Our Victoria Guida: “Ratings firm Moody’s on Tuesday downgraded its outlook for the U.S. banking industry to “negative” from ‘stable,’ as firms face headwinds from the collapse of Silicon Valley Bank and Signature Bank.”

— Reuters’s Andrea Shalal: “The White House is carefully monitoring developments at First Republic and other smaller banks.”

— Bank of America “mopped up more than $15 billion in new deposits in a matter of days,” write Bloomberg’s Sridhar Natarajan and Katherine Doherty.

— The FT: “Buyout titans weigh purchases from Silicon Valley Bank loan book”

CREDIT SUISSE — WSJ’s Margot Patrick: Credit Suisse “found material weaknesses in its financial reporting over the past two years because of ineffective internal controls, the latest setback in its efforts to move past a series of costly blunders.”

HERE COME THE PROBES — Bloomberg’s Katanga Johnson, Joel Rosenblatt and Chris Dolmetsch: “Silicon Valley Bank’s lack of a chief risk officer for much of last year is being examined by the Federal Reserve as part of its probe of the bank’s failure.”

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Crypto

BUILD THE WALL — Our Declan Harty: “America's biggest banking blowup since the 2008 financial crisis is causing new headaches for crypto executives. The three banks that suddenly collapsed in the last week served the digital asset industry, and their downfall has stoked concern that crypto will be walled off from traditional finance in the U.S.”

— Crypto firms aren’t just facing banking challenges in the U.S., writes Bloomberg’s Emily Nicolle. Binance had to suspend deposits and withdrawals after one of its banking halted service, citing regulatory concerns.

— Meanwhile, Signature was being investigated for its work with crypto clients before it failed on Sunday, per Bloomberg’s Schoenberg, Benny-Morrison and Weinstein.

— Our Bjarke Smith-Meyer on “the crypto ‘contagion’ that helped bring down SVB”

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Fed File

OH YEAH, THERE’S AN FOMC MEETING NEXT WEEK — This morning’s consumer price index indicated that inflation stalled in February. Even with uncertainty in the banking sector, “as long as the Fed’s efforts to contain the crisis are effective, that leaves officials on track to continue raising rates—and holding them at high levels—in order to make further progress in reducing inflation,” writes Morningstar’s Lauren Solberg.

NOTHING CHANGES — Our Johanna Treeck: “Uncertainty following the collapse of Silicon Valley Bank looks set to call a temporary truce on a rift over policy within the European Central Bank. But it’s unlikely to substantially change its course of action.”

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