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Tag: bank failures

  • Big banks are bidding for troubled First Republic as FDIC deadline looms | CNN Business

    Big banks are bidding for troubled First Republic as FDIC deadline looms | CNN Business


    New York
    CNN
     — 

    Federal regulators are holding an auction for ailing regional bank First Republic, a person familiar with the matter tells CNN.

    Final bids are due for First Republic Bank at 4 p.m. ET on Sunday, the source said.

    The Federal Deposit Insurance Corporation, the independent government agency that insures deposits for bank customers, is running the auction.

    Neither First Republic nor the FDIC were immediately available for comment.

    Shares of First Republic

    (FRC)     plunged from $122.50 on March 1 to around $3 a share as of Friday on expectations that the FDIC would step in by end of day and take control of the San Francisco-based bank, its deposits and assets. But that never happened.

    The FDIC had already done so with two other similar sized banks just last month — Silicon Valley Bank and Signature Bank — when runs on those banks by their customers left the lenders unable to cover customers’ demands for withdrawals.

    The Wall Street Journal previously reported that JPMorgan Chase and PNC Financial are among the big banks bidding on First Republic in a potential deal that would follow an FDIC seizure of the troubled regional bank.

    PNC declined to comment. JPMorgan did not respond to requests for comment.

    “We are engaged in discussions with multiple parties about our strategic options while continuing to serve our clients,” First Republic said in a statement Friday night.

    If there is a buyer for First Republic, the FDIC would likely be stuck with some money-losing assets, as was the case after it found buyers for the viable portions of SVB and Signature after it took control of those banks.

    A kind of shotgun marriage, arranged by regulators who didn’t want a significant bank to end up in the hands of the FDIC before it was sold, occurred several times during the financial crisis of 2008 that sparked the Great Recession. Notably, JPMorgan bought Bear Stearns for a fraction of its earlier value in March of 2008, and then in September bought savings and loan Washington Mutual, soon after Bank of America bought Merrill Lynch.

    The failure of Washington Mutual in 2008 was the nation’s largest bank failure ever. First Republic, which is bigger than either SVB or Signature Bank, would be the second largest.

    Soon after collapses of SVB and Signature in March, First Republic received a $30 billion lifeline in the form of deposits from a collection of the nation’s largest banks, including JPMorgan Chase

    (JPM)    , Bank of America

    (BAC)    , Wells Fargo

    (WFC)    , Citigroup

    (C)     and Truist

    (TFC)    , which came together after Treasury Secretary Janet Yellen intervened.

    The banks agreed to take the risk and work together to keep First Republic flush with the cash in the hopes it would provide confidence in the nation’s suddenly battered banking system. The banks and federal regulators all wanted to reduce the chance that customers of other banks would suddenly start withdrawing their cash.

    But while the cash allowed First Republic to make it through the last six weeks, its quarterly financial report Monday evening, with the disclosure of massive withdrawals by the end of March, spurred new concerns about its long-term viability.

    The financial report showed depositors had withdrawn about 41% of their money from the bank during the first quarter. Most of the withdrawals were from accounts with more than $250,000 in them, meaning those excess funds were not insured by the FDIC.

    Uninsured deposits at the bank fell by $100 billion during the course of the first quarter, a period during which total net deposits fell by $102 billion, not including the infusion of deposits from other banks.

    The uninsured deposits stood at 68% of its total deposits as of December 31, but only 27% of its non-bank deposits as of March 31.

    In its earnings statement, the bank said insured deposits declined moderately during the quarter and have remained stable from the end of last month through April 21.

    Banks never have all the cash on hand to cover all deposits. They instead take in deposits and use the cash to make loans or investments, such as purchasing US Treasuries. So when customers lose confidence in a bank and rush to withdrawal their money, what is known as a “run on the bank,” it can cause even an otherwise profitable bank to fail.

    First Republic’s latest earnings report showed it was still profitable in the first quarter — its net income was $269 million, down 33% from a year earlier. But it was the news on the loss of deposits that worried investors and, eventually, regulators.

    While some of those who had more than $250,000 in their First Republic accounts were likely wealthy individuals, most were likely businesses that often need that much cash just to cover daily operating costs. A company with 100 employees can easily need more than $250,000 just to cover a biweekly payroll.

    First Republic’s annual report said that as of December 31, 63% of its total deposits were from business clients, with the rest from consumers.

    First Republic started operations in 1985 with a single San Francisco branch. It is known for catering to wealthy clients in coastal states.

    It has 82 branches listed on its website, spread across eight states, in high-income communities such as Beverly Hills, Brentwood, Santa Monica and Napa Valley, California; in addition to San Francisco, Los Angeles and Silicon Valley. Outside of California, branches are in other high-income communities such as Palm Beach, Florida; Greenwich, Connecticut; Bellevue, Washington; and Jackson, Wyoming.

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  • Here’s what we know about First Republic Bank | CNN Business

    Here’s what we know about First Republic Bank | CNN Business

    A version of this story first appeared in CNN Business’ Before the Bell newsletter. Not a subscriber? You can sign up right here. You can listen to an audio version of the newsletter by clicking the same link.


    New York
    CNN
     — 

    First Republic Bank has been teetering on the edge for weeks. It may be finally falling.

    The San Francisco-based lender could be next in the line to collapse, following in the footsteps of former competitors Silicon Valley Bank and Signature Bank.

    It certainly fits the bill: First Republic

    (FRC)    , like SVB, is a mid-sized regional bank with a highly concentrated customer base, outsized amounts of uninsured deposits and loads of unrealized losses on the bonds and treasuries it holds.

    Rumors swirled on Wednesday as publications rushed out reports from unnamed sources saying that the bank was looking to cut a deal to sell assets, that the White House wasn’t interested in facilitating a bailout (there were also reports that it is) and that the Federal Deposit Insurance Corporation is considering downgrading the bank’s debt, which would limit its access to essential Federal Reserve loans.

    The FDIC, Federal Reserve, White House and First Republic did not respond to requests for comment about those reports. But the damage has been done.

    Shares of the stock fell by nearly 30% on Wednesday, after plunging by 49% on Tuesday. The stock’s trading was halted numerous times both days as its rapid decline triggered volatility-triggered timeouts by the New York Stock Exchange.

    But what’s actually happening here?

    The reality of the situation: What we do know for certain is that First Republic reported on Monday that its total deposits fell 41% in the first quarter of 2023 to $104.5 billion, even after a consortium of banks stepped in with $30 billion to prevent the lender from failing. Without that cash infusion, deposits would have fallen by over 50%.

    But, importantly, the bank said that while it saw a sharp drop in deposit activity after the collapse of SVB and Signature Bank last month, activity began to stabilize at the end of March and has since remained steady.

    We also know that First Republic’s net interest income, which shows how much money the bank earned from lending and borrowing, was down 19.4% year-over-year at the end of the first quarter.

    On top of all that, the bank is vulnerable to liquidity problems.

    When the banking crisis erupted in mid-March, about two-thirds of First Republic’s deposits were uninsured with the FDIC. That’s lower than the 94% at Silicon Valley Bank — but at the end of last year, First Republic had an exceptionally high ratio of 111% for loans and long-term investments to deposits, according to S&P Global — meaning it has loaned and invested more money than it has in deposits.

    In short: The outlook for the bank is not good.

    “It’s becoming clearer each day” that First Republic is “toast,” said Don Bilson at Gordon Haskett, in a note Wednesday. “The only question that really needs to be answered is whether the [Federal Deposit Insurance Corporation] moves in before the weekend or during the weekend, which is when it usually does its thing.”

    Possible solutions: We also know that it’s not over until it’s over, and that the bank is still operating. There are still some narrow paths forward.

    There’s a small chance that First Republic stays the course and “muddles along as a standalone company,” said David Chiaverini, managing director of equity research at Wedbush Securities.

    What’s more likely is that the company will try to sell some of its loans and securities at the same cost they bought them for. In exchange, the buyer would receive a preferred equity interest in the company.

    That will be a tough sell since those assets would probably sell for well above market rate. First Republic’s bonds maturing in 2046 are currently trading at just 43 cents on the dollar. But the bank has been lucky before. First Republic has stayed afloat since March largely thanks to a $30 billion bailout from a conglomerate of large US banks and a $70 billion line of credit from JPMorgan.

    The third option is the worst for shareholders: the bank could go into receivership. When a struggling bank goes into receivership it means that a regulatory authority or government agency takes control of the bank and its assets, usually with the goal of liquidating those assets to repay the bank’s creditors.

    Investors in First Republic would most likely see their money wiped out in that scenario.

    Coming next: First Republic is in a very tricky situation. Investors will be crossing their fingers and holding their breath until Friday at 4 p.m. ET. That’s when newly-collapsed banks have admitted defeat in the past.

    Facebook-parent Meta on Wednesday reported that it grew sales by 3% during the first three months of the year, reversing a trend of three consecutive quarters of revenue declines and far exceeding Wall Street analysts’ expectations, reports my colleague Clare Duffy.

    Meta shares jumped as much as 12% in after-hours trading following the report, continuing the company’s strong trajectory since CEO Mark Zuckerberg announced that 2023 would be a “year of efficiency.”

    Another bright spot: user growth was relatively strong compared to recent quarters. The number of monthly active people on Meta’s family of apps grew 5% from the prior year to more than 3.8 billion and Facebook daily active users increased 4% to more than 2 billion.

    Still, Meta has a big hill ahead of it. The company also reported that profits declined by nearly a quarter to $5.7 billion compared to the same period in the prior year. Price per advertisement — an indicator of the health of the company’s core digital ad business — also decreased by 17% from the year prior.

    Meta has been in the midst of a massive restructuring, as it attempts to recover from a perfect storm of heightened competition, lingering recession fears resulting in fewer ad dollars and a multibillion dollar effort to build a future version of the internet it calls the metaverse.

    Meta said in November it would eliminate 11,000 jobs, the single largest round of cuts in its history. And in March, Zuckerberg announced Meta would lay off another 10,000 employees. All told, the cuts will shrink Meta’s workforce by a quarter.

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  • Credit Suisse outflows topped $68 billion as the bank veered towards collapse | CNN Business

    Credit Suisse outflows topped $68 billion as the bank veered towards collapse | CNN Business


    London
    CNN
     — 

    Credit Suisse suffered outflows of 61.2 billion Swiss francs ($68.7 billion) in the first three months of the year and customers are still pulling their money from the bank as UBS races to complete a rescue of its stricken rival.

    “Credit Suisse experienced significant net asset outflows, in particular in the second half of March 2023. These outflows have moderated but have not yet reversed as of April 24, 2023,” the lender said in a statement Monday. Outflows in the first quarter amounted to 5% of assets under management, it added.

    Credit Suisse’s first-quarter earnings could be its last after it was bought last month by UBS

    (UBS)     in an emergency rescue deal orchestrated by the Swiss government.

    Swiss authorities judged that a tie-up with its larger rival offered the best chance of restoring stability in the banking sector globally, which had been rattled by the failure of two American banks.

    Credit Suisse

    (CS)     reported a 1.3 billion franc ($1.3 billion) loss for the first quarter, extending a losing streak that began in 2021. The bank posted a loss of 7.3 billion Swiss francs ($7.9 billion) in 2022, its biggest annual loss since the financial crisis in 2008.

    -— This is a developing story and will be updated.

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  • Retail spending fell in March as consumers pull back | CNN Business

    Retail spending fell in March as consumers pull back | CNN Business


    Washington, DC
    CNN
     — 

    Spending at US retailers fell in March as consumers pulled back after the banking crisis fueled recession fears.

    Retail sales, which are adjusted for seasonality but not for inflation, fell by 1% in March from the prior month, the Commerce Department reported on Friday. That was steeper than an expected 0.4% decline, according to Refinitiv, and above the revised 0.2% decline in the prior month.

    Investors chalk up some of the weakness to a lack of tax returns and concerns about a slowing labor market. The IRS issued $84 billion in tax refunds this March, about $25 billion less than they issued in March of 2022, according to BofA analysts.

    That led consumers to pull back in spending at department stores and on durable goods, such as appliances and furniture. Spending at general merchandise stores fell 3% in March from the prior month and spending at gas stations declined 5.5% during the same period. Excluding gas station sales, retail spending retreated 0.6% in March from February.

    However, retail spending rose 2.9% year-over-year.

    Smaller tax returns likely played a role in last month’s decline in retail sales, along with the expiration of enhanced food assistance benefits, economists say.

    “March is a really important month for refunds. Some folks might have been expecting something similar to last year,” Aditya Bhave, senior US economist at BofA Global Research, told CNN.

    Credit and debit card spending per household tracked by Bank of America researchers moderated in March to its slowest pace in more than two years, which was likely the result of smaller returns and expired benefits, coupled with slowing wage growth.

    Enhanced pandemic-era benefits provided through the Supplemental Nutrition Assistance Program expired in February, which might have also held back spending in March, according to a Bank of America Institute report.

    Average hourly earnings grew 4.2% in March from a year earlier, down from the prior month’s annualized 4.6% increase and the smallest annual rise since June 2021, according to figures from the Bureau of Labor Statistics. The Employment Cost Index, a more comprehensive measure of wages, has also shown that worker pay gains have moderated this past year. ECI data for the first quarter of this year will be released later this month.

    Still, the US labor market remains solid, even though it has lost momentum recently. That could hold up consumer spending in the coming months, said Michelle Meyer, North America chief economist at Mastercard Economics Institute.

    “The big picture is still favorable for the consumer when you think about their income growth, their balance sheet and the health of the labor market,” Meyer said.

    Employers added 236,000 jobs in March, a robust gain by historical standards but smaller than the average monthly pace of job growth in the prior six months, according to the Bureau of Labor Statistics. The latest monthly Job Openings and Labor Turnover Survey, or JOLTS report, showed that the number of available jobs remained elevated in February — but was down more than 17% from its peak of 12 million in March 2022, and revised data showed that weekly claims for US unemployment benefits were higher than previously reported.

    The job market could cool further in the coming months. Economists at the Federal Reserve expect the US economy to head into a recession later in the year as the lagged effects of higher interest rates take a deeper hold. Fed economists had forecast subdued growth, with risks of a recession, prior to the collapses of Silicon Valley Bank and Signature Bank.

    For consumers, the effects of last month’s turbulence in the banking industry have been limited so far. Consumer sentiment tracked by the University of Michigan worsened slightly in March during the bank failures, but it had already shown signs of deteriorating before then.

    The latest consumer sentiment reading, released Friday morning, showed that sentiment held steady in April despite the banking crisis, but that higher gas prices helped push up year-ahead inflation expectations by a full percentage point, rising from 3.6% in March to 4.6% in April.

    “On net, consumers did not perceive material changes in the economic environment in April,” Joanne Hsu, director of the surveys of consumers at the University of Michigan, said in a news release.

    “Consumers are expecting a downturn, they’re not feeling as dismal as they were last summer, but they’re waiting for the other shoe to drop,” Hsu told Bloomberg TV in an interview Friday morning.

    This story has been updated with context and more details.

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  • Silicon Valley Bank collapse renews calls to address disparities impacting entrepreneurs of color | CNN Business

    Silicon Valley Bank collapse renews calls to address disparities impacting entrepreneurs of color | CNN Business



    CNN
     — 

    When customers at Silicon Valley Bank rushed to withdraw billions of dollars last month, venture capitalist Arlan Hamilton stepped in to help some of the founders of color who panicked about losing access to payroll funds.

    As a Black woman with nearly 10 years of business experience, Hamilton knew the options for those startup founders were limited.

    SVB had a reputation for servicing people from underrepresented communities like hers. Its failure has reignited concerns from industry experts about lending discrimination in the banking industry and the resulting disparities in capital for people of color.

    Hamilton, the 43-year-old founder and managing partner of Backstage Capital, said that when it comes to entrepreneurs of color, “we’re already in the smaller house. We already have the rickety door and the thinner walls. And so, when a tornado comes by, we’re going to get hit harder.”

    Established in 1983, the midsize California tech lender was America’s 16th largest bank at the end of 2022 before it collapsed on March 10. SVB provided banking services to nearly half of all venture-backed technology and life-sciences companies in the United States.

    Hamilton, industry experts and other investors told CNN the bank was committed to fostering a community of minority entrepreneurs and provided them with both social and financial capital.

    SVB regularly sponsored conferences and networking events for minority entrepreneurs, said Hamilton, and it was well known for funding the annual State of Black Venture Report spearheaded by BLK VC, a nonprofit organization that connects and empowers Black investors.

    “When other banks were saying no, SVB would say yes,” said Joynicole Martinez, a 25-year entrepreneur and chief advancement and innovation officer for Rising Tide Capital, a nonprofit organization founded in 2004 to connect entrepreneurs with investors and mentors.

    Martinez is also an official member of the Forbes Coaches Council, an invitation-only organization for business and career coaches. She said SVB was an invaluable resource for entrepreneurs of color and offered their clients discounted tech tools and research funding.

    Minority business owners have long faced challenges accessing capital due to discriminatory lending practices, experts say. Data from the Small Business Credit Survey, a collaboration of all 12 Federal Reserve banks, shows disparities on denial rates for bank and nonbank loans.

    In 2021, about 16% of Black-led companies acquired the total amount of business financing they sought from banks, compared to 35% of White-owned companies, the survey shows.

    “We know there’s historic, systemic, and just blatant racism that’s inherent in lending and banking. We have to start there and not tip-toe around it,” Martinez told CNN.

    Asya Bradley is an immigrant founder of multiple tech companies like Kinley, a financial services business aiming to help Black Americans build generational wealth. Following SVB’s collapse, Bradley said she joined a WhatsApp group of more than 1,000 immigrant business founders. Members of the group quickly mobilized to support one another, she said.

    Immigrant founders often don’t have Social Security numbers nor permanent addresses in the United States, Bradley said, and it was crucial to brainstorm different ways to find funding in a system that doesn’t recognize them.

    “The community was really special because a lot of these folks then were sharing different things that they had done to achieve success in terms of getting accounts in different places. They also were able to share different regional banks that have stood up and been like, ‘Hey, if you have accounts at SVB, we can help you guys,’” Bradley said.

    Many women, people of color and immigrants opt for community or regional banks like SVB, Bradley says, because they are often rejected from the “top four banks” — JPMorgan Chase, Bank of America, Wells Fargo and Citibank.

    In her case, Bradley said her gender might have been an issue when she could only open a business account at one of the “top four banks” when her brother co-signed for her.

    “The top four don’t want our business. The top four are rejecting us consistently. The top four do not give us the service that we deserve. And that’s why we’ve gone to community banks and regional banks such as SVB,” Bradley said.

    None of the top four banks provided a comment to CNN. The Financial Services Forum, an organization representing the eight largest financial institutions in the United States has said the banks have committed millions of dollars since 2020 to address economic and racial inequality.

    Last week, JPMorgan Chase CEO Jamie Dimon told CNN’s Poppy Harlow that his bank has 30% of its branches in lower-income neighborhoods as part of a $30 billion commitment to Black and Brown communities across the country.

    Wells Fargo specifically pointed to its 2022 Diversity, Equity, and Inclusion report, which discusses the bank’s recent initiatives to reach underserved communities.

    The bank partnered last year with the Black Economic Alliance to initiate the Black Entrepreneur Fund — a $50 million seed, startup, and early-stage capital fund for businesses founded or led by Black and African American entrepreneurs. And since May 2021, Wells Fargo has invested in 13 Minority Depository Institutions, fulfilling its $50 million pledge to support Black-owned banks.

    Black-owned banks work to close the lending gap and foster economic empowerment in these traditionally excluded communities, but their numbers have been dwindling over the years, and they have far fewer assets at their disposal than the top banks.

    OneUnited Bank, the largest Black-owned bank in the United States, manages a little over $650 million in assets. By comparison, JPMorgan Chase manages $3.7 trillion in assets.

    Because of these disparities, entrepreneurs also seek funding from venture capitalists. In the early 2010s, Hamilton intended to start her own tech company — but as she searched for investors, she saw that White men control nearly all venture capital dollars. That experience led her to establish Backstage Capital, a venture capital fund that invests in new companies led by underrepresented founders.

    “I said, ‘Well, instead of trying to raise money for one company, let me try to raise for a venture fund that will invest in underrepresented — and now we call them underestimated — founders who are women, people of color, and LGBTQ specifically,’ because I am all three,” Hamilton told CNN.

    Since then, Backstage Capital has amassed a portfolio of nearly 150 different companies and has made over 120 diversity investments, according to data from Crunchbase.

    But Bradley, who is also an ‘angel investor’ of minority-owned businesses, said she remains “really hopeful” that community banks, regional banks and fintechs “will all stand up and say, ‘Hey, we are not going to let the good work of SVB go to waste.’”

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  • IMF: Banking crisis boosts risks and dims outlook for world economy | CNN Business

    IMF: Banking crisis boosts risks and dims outlook for world economy | CNN Business


    London
    CNN
     — 

    At the start of the year, economists and corporate leaders expressed optimism that global economic growth might not slow down as much as they had feared. Positive developments included China’s reopening, signs of resilience in Europe and falling energy prices.

    But a crisis in the banking sector that emerged last month has changed the calculus. The International Monetary Fund downgraded its forecasts for the global economy Tuesday, noting “the recent increase in financial market volatility.”

    The IMF now expects economic growth to slow from 3.4% in 2022 to 2.8% in 2023. Its estimate in January had been for 2.9% growth this year.

    “Uncertainty is high, and the balance of risks has shifted firmly to the downside so long as the financial sector remains unsettled,” the organization said in its latest report.

    Fears about the economic outlook have increased following the failures in March of Silicon Valley Bank and Signature Bank, two regional US lenders, and the loss of confidence in the much-larger Credit Suisse

    (CS)    , which was sold to rival UBS in a government-backed rescue deal.

    Already, the global economy was grappling with the consequences of high and persistent inflation, the rapid rise in interest rates to fight it, elevated debt levels and Russia’s war in Ukraine.

    Now, concerns about the health of the banking industry join the list.

    “These forces are now overlaid by, and interacting with, new financial stability concerns,” the IMF said, noting that policymakers trying to tame inflation while averting a “hard landing,” or a painful recession, “may face difficult trade-offs.”

    Global inflation, which the IMF said was proving “much stickier than anticipated,” is expected to fall from 8.7% in 2022 to 7% this year and to 4.9% in 2024.

    Investors are looking for additional pockets of vulnerability in the financial sector. Meanwhile, lenders may turn more conservative to preserve cash they may need to deal with an unpredictable environment.

    That would make it harder for businesses and households to access loans, weighing on economic output over time.

    “Financial conditions have tightened, which is likely to entail lower lending and activity if they persist,” said the IMF, which hosts its spring meeting alongside the World Bank this week.

    If another shock to the world’s financial system results in a “sharp” deterioration in financial conditions, global growth could slow to 1% this year, the IMF warned. That would mean “near-stagnant income per capita.” The group put the probably of this happening at about 15%.

    The IMF acknowledged forecasting was difficult in this climate. The “fog around the world economic outlook has thickened,” it said.

    And it warned that weak growth would likely persist for years. Looking ahead to 2028, global growth is estimated at 3%, the lowest medium-term forecast since 1990.

    The IMF said this sluggishness was attributable in part to scarring from the pandemic, aging workforces and geopolitical fragmentation, pointing to Britain’s decision to leave the European Union, economic tensions between the United States and China and Russia’s invasion of Ukraine.

    Interest rates in advanced economies are likely to revert to their pre-pandemic levels once the current spell of high inflation has passed, the IMF also said.

    The body’s forecast for global growth this year is now closer to that of the World Bank. David Malpass, the outgoing World Bank president, told reporters Monday that the group now saw a 2% expansion in output in 2023, up from 1.7% predicted in January, Reuters has reported.

    In a separate report published Tuesday, the IMF said that while the rapid increase in interest rates was straining banks and other financial firms, there were fundamental differences from the 2008 global financial crisis.

    Banks now have much more capital to be able to withstand shocks. They also have curbed risky lending due to stricter regulations.

    Instead, the IMF pointed to similarities between the latest banking turmoil and the US savings and loan crisis in the 1980s, when trouble at smaller institutions hurt confidence in the broader financial system.

    So far, investors are “pricing a fairly optimistic scenario,” the IMF noted in a blog based on the report, adding that access to credit was actually greater now than it had been in October.

    “While market participants see recession probabilities as high, they also expect the depth of the recession to be modest,” the IMF said.

    Yet those expectations could be quickly upended. If inflation rises further, for example, investors could judge that interest rates will stay higher for longer, the group wrote in the blog.

    “Stresses could then reemerge in the financial system,” it noted.

    That bolsters the need for decisive action by policymakers, the IMF said. It called for gaps in supervision and regulation to “be addressed at once,” citing the need in many countries for stronger plans to wind down failed banks and for improvements to deposit insurance programs.

    — Olesya Dmitracova contributed to this report.

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  • What the OPEC cuts mean for Putin and Russia | CNN Business

    What the OPEC cuts mean for Putin and Russia | CNN Business

    A version of this story first appeared in CNN Business’ Before the Bell newsletter. Not a subscriber? You can sign up right here. You can listen to an audio version of the newsletter by clicking the same link.


    New York
    CNN
     — 

    Some of the world’s largest oil exporters shocked markets over the weekend by announcing that they would cut oil production by more than 1.6 million barrels a day.

    OPEC+, an alliance between the Organization of the Petroleum Exporting Countries (OPEC) and a group of non-OPEC oil-producing countries, including Russia, Mexico, and Kazakhstan, said on Sunday that the cuts would start in May, running through the end of the year. The news sent both Brent crude futures — the global oil benchmark — and WTI — the US benchmark — up about 6% in trading Monday.

    OPEC+ was formed in 2016 to coordinate and regulate oil production and stabilize global oil prices. Its members produce about 40% of the world’s crude oil and have a significant impact on the global economy.

    What it means for Putin: OPEC+’s decision to cut oil production could have big implications for Russia.

    After Russia invaded Ukraine last year, the United States and United Kingdom immediately stopped purchasing oil from the country. The European Union also stopped importing Russian oil that was sent by sea.

    Members of the G7 — an organization of leaders from some of the world’s largest economies: Canada, France, Germany, Italy, Japan, the United Kingdom and the United States — have also imposed a price cap of $60 per barrel on oil exported by Russia, keeping the country’s revenues artificially low. If oil prices continue to rise, some analysts have speculated that the US and other western nations may have to loosen that price cap.

    US Treasury Secretary Janet Yellen said Monday that the changes could lead to reassessing the price cap — though not yet. “Of course, that’s something that, if we’ve decided that it’s appropriate to revisit, could be changed, but I don’t see that that’s appropriate at this time,” she told reporters.

    “I don’t know that this is significant enough to have any impact on the appropriate level of the price cap,” she added.

    Russia also recently announced that it would lower its oil production by 500,000 barrels per day until the end of this year.

    Just last week Putin admitted that western sanctions could deal a blow to Russia’s economy.

    “The illegitimate restrictions imposed on the Russian economy may indeed have a negative impact on it in the medium term,” Putin said in televised remarks Wednesday reported by state news agency TASS.

    Putin said Russia’s economy had been growing since July, thanks in part to stronger ties with “countries of the East and South,” likely referring to China and some African countries.

    Russia, China and Saudi Arabia: The OPEC+ announcement came as a surprise this week. The group had already announced it would cut two million barrels a day in October of 2022 and Saudi Arabia previously said its production quotas would stay the same through the end of the year.

    “The move to reduce supply is fairly odd,” wrote Warren Patterson, head of commodities strategy at ING in a note Monday.

    “Oil prices have partly recovered from the turmoil seen in financial markets following developments in the banking sector,” he wrote. “Meanwhile, oil fundamentals are expected to tighten as we move through the year. Prior to these cuts, we were already expecting the oil market to see a fairly sizable deficit over the second half or 2023. Clearly, this will be even larger now.”

    Saudi Arabia stated that the cut is a “precautionary measure aimed at supporting the stability of the oil market,” but Patterson says it will likely “lead to further volatility in the market,” later this year as less available oil will add to inflationary feats.

    Still, the changes signal shifting global alliances with Russia, China and Saudi Arabia around oil prices, said analysts at ClearView Energy Partners. Higher-priced oil could help Russia pay for its war on Ukraine and also boosts revenue in Saudi Arabia.

    The White House, meanwhile, has spoken out against OPEC’s decision. “We don’t think cuts are advisable at this moment given market uncertainty – and we’ve made that clear,” National Security Council spokesman John Kirby said Monday.

    – CNN’s Paul LeBlanc and Hanna Ziady contributed to this report

    The crisis triggered by the recent collapses of Silicon Valley Bank and Signature Bank is not over yet and will ripple through the economy for years to come, said JPMorgan Chase CEO Jamie Dimon on Tuesday.

    In his closely watched annual letter to shareholders, the chief executive of the largest bank in the United States outlined the extensive damage the financial system meltdown had on all banks and urged lawmakers to think carefully before responding with regulatory policy.

    “These failures were not good for banks of any size,” wrote Dimon, responding to reports that large financial institution benefited greatly from the collapse of SVB and Signature Bank as wary customers sought safety by moving billions of dollars worth of money to big banks.

    In a note last month, Wells Fargo banking analyst Mike Mayo wrote “Goliath is winning.” JPMorgan in particular, he said, was benefiting from more deposits “in these less certain times.”

    “Any crisis that damages Americans’ trust in their banks damages all banks – a fact that was known even before this crisis,” said Dimon. “While it is true that this bank crisis ‘benefited’ larger banks due to the inflow of deposits they received from smaller institutions, the notion that this meltdown was good for them in any way is absurd.”

    The failures of SVB and Signature Bank, he argued, had little to do with banks bypassing regulations and that SVB’s high Interest rate exposure and large amount of uninsured deposits were already well-known to both regulators and to the marketplace at large.

    Current regulations, Dimon argued, could actually lull banks into complacency without actually addressing real system-wide banking issues. Abiding by these regulations, he wrote, has just “become an enormous, mind-numbingly complex task about crossing t’s and dotting i’s.”

    And while regulatory change will be a likely outcome of the recent banking crisis, Dimon argued that, “it is extremely important that we avoid knee-jerk, whack-a-mole or politically motivated responses that often result in achieving the opposite of what people intended.” Regulations, he said, are often put in place in one part of the framework but have adverse effects on other areas and just make things more complicated.

    The Federal Deposit Insurance Corporation has said it will propose new rule changes in May, while the Federal Reserve is currently conducting an internal review to assess what changes should be made. Lawmakers in Congress, like Democratic Sen. Sherrod Brown, have suggested that new legislation meant to regulate banks is in the works.

    But, wrote Dimon, “the debate should not always be about more or less regulation but about what mix of regulations will keep America’s banking system the best in the world.”

    Dimon’s letter to shareholders touched on a number of pressing issues, including climate change. “The window for action to avert the costliest impacts of global climate change is closing,” he wrote, expressing his frustration with slow growth in clean energy technology investments.

    “Permitting reforms are desperately needed to allow investment to be done in any kind of timely way,” he wrote.

    One way to do that? “We may even need to evoke eminent domain,” he suggested. “We simply are not getting the adequate investments fast enough for grid, solar, wind and pipeline initiatives.”

    Eminent domain is the government’s power to take private property for public use, so long as fair compensation is provided to the property owner.

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  • JPMorgan’s Jamie Dimon warns banking crisis will be felt for ‘years to come’ | CNN Business

    JPMorgan’s Jamie Dimon warns banking crisis will be felt for ‘years to come’ | CNN Business


    New York
    CNN
     — 

    The banking crisis triggered by the recent collapses of Silicon Valley Bank and Signature Bank is not over yet and will ripple through the economy for years to come, said JPMorgan Chase CEO Jamie Dimon on Tuesday.

    In his closely watched annual letter to shareholders, the chief executive of America’s largest bank outlined the extensive damage the financial system meltdown had on all banks — large and small — and urged lawmakers to think carefully before responding with increased regulation.

    “These failures were not good for banks of any size,” wrote Dimon, responding to reports that large financial institution benefited greatly from the collapse of SVB and Signature Bank as wary customers sought safety by moving billions of dollars worth of money to big banks.

    In a note last month, Wells Fargo banking analyst Mike Mayo wrote “Goliath is winning.” JPMorgan in particular, he said, was benefiting from more deposits “in these less certain times.”

    “Any crisis that damages Americans’ trust in their banks damages all banks — a fact that was known even before this crisis,” he wrote. “While it is true that this bank crisis ‘benefited’ larger banks due to the inflow of deposits they received from smaller institutions, the notion that this meltdown was good for them in any way is absurd.”

    The failures of SVB and Signature Bank, he argued, had little to do with banks bypassing regulations. He said that SVB’s high Interest rate exposure and large amount of uninsured deposits were already well-known to both regulators and to the marketplace at large.

    Current regulations, he argued, could actually lull banks into complacency without actually addressing real system-wide banking issues. Abiding by these regulations, he wrote, has just “become an enormous, mind-numbingly complex task about crossing t’s and dotting i’s.”

    And while regulatory change will almost certainly follow the recent banking crisis, Dimon argued that, “it is extremely important that we avoid knee-jerk, whack-a-mole or politically motivated responses that often result in achieving the opposite of what people intended.” Regulations, he said, are often put in place in one part of the framework but have adverse effects on other areas and just make things more complicated.

    The Federal Deposit Insurance Corporation has said it will propose new rule changes in May, while the Federal Reserve is currently conducting an internal review to assess what changes should be made. Lawmakers in Congress, including Democratic Sen. Sherrod Brown of Ohio, have suggested that new legislation meant to regulate banks is in the works.

    But, wrote Dimon, “the debate should not always be about more or less regulation but about what mix of regulations will keep America’s banking system the best in the world.”

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  • Who will end up paying for the banking crisis: You | CNN Business

    Who will end up paying for the banking crisis: You | CNN Business

    A version of this story first appeared in CNN Business’ Before the Bell newsletter. Not a subscriber? You can sign up right here. You can listen to an audio version of the newsletter by clicking the same link.


    New York
    CNN
     — 

    It cost the Federal Deposit Insurance Corporation about $23 billion to clean up the mess that Silicon Valley Bank and Signature Bank left in the wake of their collapses earlier this month.

    Now, as the dust clears and the US banking system steadies, the FDIC needs to figure out where to send its invoice. While regional and mid-sized banks are behind the recent turmoil, it appears that large banks may be footing the bill.

    Ultimately, that means higher fees for bank customers and lower rates on their savings accounts.

    What’s happening: The FDIC maintains a $128 billion deposit insurance fund to insure bank deposits and protect depositors. That fund is typically supplied by quarterly payments from insured banks in the United States. But when a big, expensive event happens — like the FDIC making uninsured customers whole at Silicon Valley Bank — the agency is able to assess a special charge on the banking industry to recover the cost.

    The law also gives the FDIC the authority to decide which banks shoulder the brunt of that assessment fee. FDIC Chairman Martin Gruenberg said this week that he plans to make the details of the latest assessment public in May. He has also hinted that he would protect community banks from having to shell out too much money.

    The fees that the FDIC assesses on banks tend to vary. Historically, they were fixed, but 2010’s Dodd-Frank act required that the agency needed to consider the size of a bank when setting rates. It also takes into consideration the “economic conditions, the effects on the industry, and such other factors as the FDIC deems appropriate and relevant,” according to Gruenberg.

    On Tuesday and Wednesday, members of the Senate Banking Committee and the House Financial Services Committee grilled Gruenberg about his plans to charge banks for the damage done by SVB and others, and repeatedly implored him to leave small banks alone.

    Gruenberg appeared receptive.

    “Will you commit to using your authority…to establish separate risk-based assessment systems for large and small members of the Deposit Insurance Fund so that these well-managed banks don’t have to bail out Silicon Valley Bank?” asked the US Rep. Andy Barr, a Republican who represents of Kentucky’s 6th district.

    “I’m certainly willing to consider that,” replied Gruenberg.

    “if smaller community banks in Texas will be left responsible for bailing out the failed banks in California and New York?” asked US Rep. Roger Williams, a Republican who represents Texas’ 25th district.

    “Let me just say, without forecasting what our board is going to vote, we’re going to be keenly sensitive to the impact on community banks,” replied Gruenberg.

    Representatives Frank Lucas, John Rose, Ayanna Pressley, Dan Meuser, Nikema Williams, Zach Nunn and Andy Ogles all asked similar questions and received similar responses. As did US Sens. Sherrod Brown and Cynthia Lummis.

    “I don’t doubt he’s still fielding a lot of phone calls,” from politicians pressuring him to place the burden on large banks, former FDIC chairman Bill Isaac told CNN.

    Smaller banks are saying that they’re unable to pick up this tab and didn’t have anything to do with the failure of “these two wild and crazy banks,” said Isaac. “They’re arguing to put the assessment on larger banks and as I understand it, the FDIC is thinking seriously about it,” he added.

    A spokesperson from the FDIC told CNN that the agency “will issue in May 2023 a proposed rulemaking for the special assessment for public comment.” In regard to Greunberg’s testimony they added that “when the boss says something, we defer to the boss.”

    Big banks: “We need to think hard about liquidity risk and concentrations of uninsured deposits and how that’s evaluated in terms of deposit insurance assessments,” said Gruenberg to the Senate Banking Committee, indicating that smaller banks that are operating carefully could be asked to bear less of the assessment.

    A larger assessment on big banks would add to what will already be a multi-billion dollar payment from the nation’s largest banks like JPMorgan Chase

    (JPM)    , Citigroup

    (C)    , Bank of America

    (BAC)     and Wells Fargo

    (WFC)    .

    The argument is that the largest US banks will be able to shoulder extra payments without collapsing under it. Those large banks also benefited greatly from the collapse of SVB and Signature Bank as wary customers sought safety by moving billions of dollars worth of money to big banks. 

    Passing it on: Regardless of who’s charged, the fees will eventually get passed on to bank customers in the end, said Isaac. “It’s going to be passed on to all customers. I have no doubts that banks will make up for these extra costs in their pricing — higher fees for services, higher prices for loans and less compensation for deposits.”

    It’s hard out there for a Wall Street banker. Or harder than it was.

    The average annual Wall Street bonus fell to $176,700 last year, a 26% drop from the previous year’s average of $240,400, according to estimates released Thursday by New York State Comptroller Thomas DiNapoli.

    While that’s a big decrease, the 2022 bonus figure is still more than twice the median annual income for US households, reports CNN’s Jeanne Sahadi.

    All in, Wall Street firms had a $33.7 billion bonus pool for 2022, which is 21% smaller than the previous year’s record of $42.7 billion — and the largest drop since the Great Recession.

    For New York City and New York State coffers, bonus season means a welcome infusion of revenue, since employees in the securities industry make up 5% of private sector employees in NYC and their pay accounts for 22% of the city’s private sector wages. In 2021, Wall Street was estimated to be responsible for 16% of all economic activity in the city.

    DiNapoli’s office projects the lower bonuses will bring in $457 million less in state income tax revenue and $208 million less for the city compared to the year before.

    Beleaguered retailed Bed Bath & Beyond will attempt to $300 million of its stock to repay creditors and fund its business as it struggles to avoid bankruptcy, reports CNN’s Nathaniel Meyersohn.

    If it’s not able to raise sufficient money from the offering, the home furnishings giant said Thursday it expects to “likely file for bankruptcy.”

    Bed Bath & Beyond was able to initially avoid bankruptcy in February by completing a complex stock offering that gave it both an immediate injection of cash and a pledge for more funding in the future to pay down its debt. That offering was backed by private equity group Hudson Bay Capital.

    But on Thursday, Bed Bath & Beyond said it was terminating the deal with Hudson Bay Capital for future funding and is turning to the public market.

    Shares of Bed Bath & Beyond dropped more than 26% Thursday. The stock was trading around 60 cents a share.

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  • This is why SVB imploded, says top Fed official | CNN Business

    This is why SVB imploded, says top Fed official | CNN Business


    New York
    CNN
     — 

    Silicon Valley Bank imploded due to mismanagement and a sudden panic among depositors, a top Federal Reserve official plans to tell lawmakers at a hearing on Tuesday.

    In prepared testimony released on Monday, Michael Barr, the Fed’s vice chair for supervision, details how SVB leadership failed to effectively manage interest rate and liquidity risk.

    “SVB’s failure is a textbook case of mismanagement,” Barr says in testimony to be delivered before the Senate Banking Committee.

    The Fed official points out that SVB’s belated effort to fix its balance sheet only made matters worse.

    “The bank waited too long to address its problems and, ironically, the overdue actions it finally took to strengthen its balance sheet sparked the uninsured depositor run that led to the bank’s failure,” said Barr, adding that there was “inadequate” risk management and internal controls.

    Depositors yanked $42 billion from SVB on March 9 alone in a bank run, a panic that appeared to be fueled in part by venture capitalists urging tech startups to pull their funds.

    “Social media saw a surge in talk about a run, and uninsured depositors acted quickly to flee,” said Barr.

    The Fed official echoed comments from other top regulators in assuring the public about the safety of banks.

    “Our banking system is sound and resilient, with strong capital and liquidity,” Barr said. “We are committed to ensuring that all deposits are safe. We will continue to closely monitor conditions in the banking system and are prepared to use all of our tools for any size institution, as needed, to keep the system safe and sound.”

    Facing questions over how regulators — including at the Fed itself — missed red flags at SVB, the Fed has launched a review of oversight of the bank. Barr, who is leading that review, promised to take an “unflinching look” at the supervision and regulation of SVB. He said the review will be thorough and transparent and officials welcome and expert external reviews as well.

    In his testimony, Barr discloses that near the end of 2021, bank supervisors found “deficiencies” in the bank’s liquidity risk management. That resulted in six supervisory findings linked to SVB’s liquidity stress testing, contingency funding and liquidity risk management.

    Then, in May 2022, supervisors issued three findings related to “ineffective” board oversight, risk management weaknesses and internal audit function lapses, Barr said. Bank supervisors took further steps last year that show regulators were aware of problems at SVB.

    Barr’s testimony indicates the Fed’s review will examine how the 2018 rollback of Dodd-Frank may have contributed to SVB’s failure. That rollback, under then-President Donald Trump, allowed SVB to avoid tougher stress testing and rules on liquidity, funding, leverage and capital.

    Barr said the Fed will weigh whether the applying those tougher rules to SVB would have helped the bank manage the risks that led to its failure.

    Looking ahead, Barr said the recent events have underscored how regulators must enhance rules applying to banks and study banking has been changed by social media, customer behavior, rapid growth and other developments.

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  • Small US banks see record drop in deposits after SVB collapse | CNN Business

    Small US banks see record drop in deposits after SVB collapse | CNN Business

    Deposits at small US banks dropped by a record amount following the collapse of Silicon Valley Bank on March 10, data released on Friday by the Federal Reserve showed.

    Deposits at small banks fell $119 billion to $5.46 trillion in the week ended March 15, which was more than twice the previous record drop and the biggest decline as a percent of overall deposits since the week ended March 16, 2007.

    Borrowings at small banks, defined as all but the biggest 25 commercial US banks, increased by $253 billion to a record $669.6 billion, the Fed’s weekly data showed.

    “As a result, small banks had $97 billion more in cash on hand at the end of the week, suggesting that some of the borrowing was to build war chests as a precautionary measure in case depositors asked to redeem their money,” Capital Economics’ analyst Paul Ashworth wrote.

    SVB collapsed after it was unable to meet a swift and massive run by depositors who took out tens of billions of dollars in a matter of hours.

    Deposits at large US banks rose $67 billion in the week to $10.74 trillion, the Fed data showed.

    Overall US bank deposits have been in decline after sharply rising in the wake of pandemic aid in 2020 and early 2021.

    The reversal in the trend for large banks was notable. The rise equates to about half as much as the deposit decline at small banks, suggesting some of the cash may have gone into money market funds or other instruments.

    Large banks also increased borrowings in the week, by $251 billion.

    It was unclear if the shift in deposits out of small banks will persist.

    “Deposit flows in the banking system have stabilized over the last week,” Fed Chair Jerome Powell said on Wednesday.

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  • What the banking crisis means for mortgage rates | CNN Business

    What the banking crisis means for mortgage rates | CNN Business


    Washington
    CNN
     — 

    Mortgage rates have taken would-be buyers on a ride this year — and it’s only March.

    Generally, home buyers can anticipate mortgage rates to move down through the rest of this year as the banking crisis drags on, which could cool down inflation.

    But there are bound to be some bumps along the way. Here’s why rates have been bouncing around and where they could end up.

    After steadily rising last year as a result of the Federal Reserve’s historic campaign to rein in inflation, the average rate for a 30-year fixed-rate mortgage topped out at 7.08% in November, according to Freddie Mac. Then, with economic data suggesting inflation was retreating, the average rate drifted down through January.

    But a raft of robust economic reports in February brought concerns that inflation was not cooling as quickly or as much as many had hoped. As a result, after falling to 6.09%, average mortgage rates climbed back up, rising half a percentage point over the month.

    Then in March banks began collapsing. That sent rates falling again.

    Neither the actions of the Federal Reserve nor the bank failures directly impact mortgage rates. But rates are indirectly impacted by actions that the Fed takes or is expected to take, as well as the health of the broader financial system and any uncertainty that may be percolating.

    On Wednesday, the Federal Reserve announced it would raise interest rates by a quarter point as it attempts to fight stubbornly high inflation while taking into account recent risks to financial stability.

    While the bank failures made the Fed’s work more complicated, analysts have said that, if contained, the banking meltdown may have actually done some work for the Fed, by bringing down prices without raising interest rates. To that point, the Fed suggested on Wednesday that it may be at the end of its rate hike cycle.

    Mortgage rates tend to track the yield on 10-year US Treasury bonds, which move based on a combination of anticipation about the Fed’s actions, what the Fed actually does and investors’ reactions. When Treasury yields go up, so do mortgage rates; when they go down, mortgage rates tend to follow.

    Following the Fed’s announcement on Wednesday, bond yields — and the mortgage rates that usually follow them — fell.

    But the relationship between mortgage rates and Treasurys has weakened slightly in recent weeks, said Orphe Divounguy, senior economist at Zillow.

    “The secondary mortgage market may react to speculation that more financial entities may need to sell their long-term investments, like mortgage backed securities, to get more liquidity today,” he said.

    Even as Treasurys decline, he said, tighter credit conditions as a result of bank failures will likely limit any dramatic plunging of mortgage rates.

    “This could restrict mortgage lenders’ access to funding sources, resulting in higher rates than Treasuries would otherwise indicate,” Divounguy said. “For borrowers, lending standards were already quite strict, and tighter conditions may make it more difficult for some home shoppers to secure funding. In turn, for home sellers, the time it takes to sell could increase as buyers hesitate.”

    Inflation is still quite high, but it is slowing and analysts are anticipating a much slower economy over the next few quarters — which should further bring down inflation. This is good for mortgage borrowers, who can expect to see rates retreating through this year, said Mike Fratantoni, Mortgage Bankers Association senior vice president and chief economist.

    “Homebuyers in 2023 have shown themselves to be quite sensitive to any changes in mortgage rates,” Fratantoni said.

    The MBA forecasts that mortgage rates are likely to trend down over the course of this year, with the 30-year fixed rate falling to around 5.3% by the end of the year.

    “The housing market was the first sector to slow as the result of tighter monetary policy and should be the first to benefit as policymakers slow — and ultimately stop — hiking rates,” said Fratantoni.

    In second half of the year, the inflation picture is expected to improve, leading to mortgage rates that are more stable.

    “Expectations for slower economic growth or even a recession should bring inflation down and help mortgage rates decline,” said Divounguy.

    That’s good news for home buyers since it improves affordability, bringing down the cost to finance a home. It also benefits sellers, since it reduces the intensity of an interest-rate lock-in.

    Lower rates could also convince more homeowners to list their home for sale. With the inventory of homes for sale near historic lows, this would add badly needed inventory to an extremely limited pool.

    “Mortgage rates are steering both supply and demand in today’s costly environment,” said Divounguy. “Home sales picked up in January when rates were relatively low, then slacked off as they ramped back up.”

    But with cooling inflation comes a higher risk of job losses, which is typically bad for the housing market.

    “Of course, much uncertainty surrounding the state of inflation and this still-evolving banking turmoil remains,” said Divounguy.

    In his remarks on Wednesday, Fed Chair Jerome Powell said estimates of how much the recent banking developments could slow the economy amounted to “guesswork, almost, at this point.”

    But regardless of the tack the economy and banking concerns take, their impact will quickly be seen in mortgage rates.

    “Evidence — in either direction — of spillovers into the broader economy or accelerating inflation would likely cause another policy shift, which would materialize in mortgage rates,” said Divounguy.

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  • Too big for Switzerland? Credit Suisse rescue creates bank twice the size of the economy | CNN Business

    Too big for Switzerland? Credit Suisse rescue creates bank twice the size of the economy | CNN Business


    London
    CNN
     — 

    The last-minute rescue of Credit Suisse may have prevented the current banking crisis from exploding, but it’s a raw deal for Switzerland.

    Worries that Credit Suisse’s downfall would spark a broader banking meltdown left Swiss regulators with few good options. A tie-up with its larger rival, UBS

    (UBS)    , offered the best chance of restoring stability in the banking sector globally and in Switzerland, and protecting the Swiss economy in the near term.

    But it leaves Switzerland exposed to a single massive financial institution, even as there is still huge uncertainty over how successful the mega merger will prove to be.

    “One of the most established facts in academic research is that bank mergers hardly ever work,” said Arturo Bris, a professor of finance at Swiss business school IMD.

    There are also concerns that the deal will lead to huge job losses in Switzerland and weaken competition in the country’s vital financial sector, which overall employs more than 5% of the national workforce, or nearly 212,000 people.

    Taxpayers, meanwhile, are now on the hook for up to 9 billions Swiss francs ($9.8 billion) of future potential losses at UBS arising from certain Credit Suisse assets, provided those losses exceed 5 billion francs ($5.4 billion). The state has also explicitly guaranteed a 100 billion Swiss franc ($109 billion) lifeline to UBS, should it need it, although that would be repayable.

    Switzerland’s Social Democratic party has already called for an investigation into what went wrong at Credit Suisse, arguing that the newly created “super-megabank” increases risks for the Swiss economy.

    The demise of one of Switzerland’s oldest institutions has come as a shock to many of its citizens. Credit Suisse is “part of Switzerland’s identity,” said Hans Gersbach, a professor of macroeconomics at ETH university in Zurich. The bank “has been instrumental in the development of modern Switzerland.”

    Its collapse has also tainted Switzerland’s reputation as a safe and stable global financial center, particularly after the government effectively stripped shareholders of voting rights to get the deal done.

    Swiss authorities also wiped out some bondholders ahead of shareholders, upending the traditional hierarchy of losses in a bank failure and dealing another blow to the country’s reputation among investors.

    “The repercussions for Switzerland are terrible,” said Bris of IMD. “For a start, the reputation of Switzerland has been damaged forever.”

    That will benefit other wealth management centers, including Singapore, he told CNN. Singaporeans are “celebrating… because there is going to be a huge inflow of funds into other wealth management jurisdictions.”

    At roughly $1.7 trillion, the combined assets of the new entity amount to double the size of Switzerland’s annual economic output. By deposits and loans to Swiss customers, UBS will now be bigger than the next two local banks combined.

    With a roughly 30% market share in Swiss banking, “we see too much concentration risk and market share control,” JPMorgan analysts wrote in a note last week before the deal was done. They suggested that the combined entity would need to exit or IPO some businesses.

    The problem with having one single large bank in a small economy is that if it faces a bank run or needs a bailout — which UBS did during the 2008 crisis — the government’s financial firepower may be insufficient.

    At 333 billion francs ($363 billion), local deposits in the new entity equal 45% of GDP — an enormous amount even for a country with healthy public finances and low levels of debt.

    On the other hand, UBS is in a much stronger financial position than it was during the 2008 crisis and it will be required to build up an even bigger financial buffer as a result of the deal. The Swiss financial regulator, FINMA, has said it will “very closely monitor the transaction and compliance with all requirements under supervisory law.”

    UBS chairman Colm Kelleher underscored the health of UBS’s balance sheet Sunday at a press conference on the deal. “Having been chief financial officer [at Morgan Stanley] during the last global financial crisis, I’m well aware of the importance of a solid balance sheet. UBS will remain rock-solid,” he said.

    Kelleher added that UBS would trim Credit Suisse’s investment bank “and align it with our conservative risk culture.”

    Andrew Kenningham, chief Europe economist at Capital Economics, said “the question of market concentration in Switzerland is something to address in future.” “30% [market share] is higher than you might ideally want but not so high that it’s a major problem.”

    The deal has “surgically removed the most worrying part of [Switzerland’s] banking system,” leaving it stronger, Kenningham added.

    The deal will have an adverse affect on jobs, though, likely adding to the 9,000 cuts that Credit Suisse already announced as part of an earlier turnaround plan.

    For Switzerland, the threat is acute. The two banks collectively employ more than 37,000 people in the country, about 18% of the financial sector’s workforce, and there is bound to be overlap.

    “The Credit Suisse branch in the city where I live is right in front of UBS’s, meaning one of the two will certainly close,” Bris of IMD wrote in a note Monday.

    In a call with analysts Sunday night, UBS CEO Ralph Hamers said the bank would try to remove 8 billion francs ($8.9 billion) of costs a year by 2027, 6 billion francs ($6.5 billion) of which would come from reducing staff numbers.

    “We are clearly cognizant of Swiss societal and economic factors. We will be considerate employers, but we need to do this in a rational way,” Kelleher told reporters.

    The Credit Suisse headquarters in Zurich

    Not only does the deal, done in a hurry, fail to protect jobs in Switzerland, but it contains no special provisions on competition issues.

    UBS now has “quasi-monopoly power,” which could increase the cost of banking services in the country, according to Bris.

    Although Switzerland has dozens of smaller regional and savings banks, including 24 cantonal banks, UBS is now an even more dominant player. “Everything they do… will influence the market,” said Gersbach of ETH.

    Credit Suisse’s Swiss banking arm, arguably its crown jewel, could have been subject to a future sale as part of the terms of the deal, he added.

    A spinoff of the domestic bank now looks unlikely, however, after UBS made clear that it intended to hold onto it. “The Credit Suisse Swiss bank is a fine asset that we are very determined to keep,” Kelleher said Sunday.

    At $3.25 billion, UBS got Credit Suisse for 60% less than the bank was worth when markets closed two days prior. Whether that ultimately turns out to be a steal remains to be seen. Large mergers are notoriously fraught with risk and often don’t deliver the promised returns to shareholders.

    UBS argues that by expanding its global wealth and asset management franchise, the deal will drive long-term shareholder value. “UBS’s strength and our familiarity with Credit Suisse’s business puts us in a unique position to execute this integration efficiently and effectively,” Kelleher said. UBS expects the deal to increase its profit by 2027.

    The transaction is expected to close in the coming months, but fully integrating the two institutions will take three to five years, according to Phillip Straley, the president of data analytics company FNA. “There’s a huge amount of integration risk,” he said.

    Moody’s on Tuesday affirmed its credit ratings on UBS but changed the outlook on some of its debt from stable to negative, judging that the “complexity, extent and duration of the integration” posed risks to the bank.

    It pointed to challenges retaining key Credit Suisse staff, minimizing the loss of overlapping clients in Switzerland and unifying the cultures of “two somewhat different organizations.”

    According to Kenningham of Capital Economics, the “track record of shotgun marriages in the banking sector is mixed.”

    “Some, such as the 1995 purchase of Barings by ING, have proved long-lasting. But others, including several during the global financial crisis, soon brought into question the viability of the acquiring bank, while others have proven very difficult to implement.”

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  • Biden White House closely watching Federal Reserve following bank failures | CNN Politics

    Biden White House closely watching Federal Reserve following bank failures | CNN Politics



    CNN
     — 

    All eyes are trained on the Federal Reserve as it prepares to announce another potential interest rate hike Wednesday afternoon – exactly 10 days after the Biden administration stepped in with dramatic emergency actions to contain the fallout from two bank failures.

    Biden White House officials will be closely watching the highly anticipated rate decision – and monitoring every word of Fed Chairman Jerome Powell’s public comments – for any telling clues on how the central bank is processing what has emerged one of the most urgent economic crises of Joe Biden’s presidency.

    The moment creates a complex, if carefully observed, dynamic for the administration’s top economic officials who have spent much of the last two weeks engaged in regular discussions and consultations with Powell and Fed officials as they’ve navigated rapid and acute risks to the banking system.

    The Fed’s central role in not only supervising US banks and the stability of the financial system, but also in serving as a liquidity backstop in moments of systemic risk, has once again thrust the central bank back to center stage in the government’s effort to stabilize rattled markets.

    But Biden has made the central bank’s independence on monetary policy an unequivocal commitment – and has repeatedly underscored that he has confidence in the Fed’s central role in navigating inflation that has weighed on the US economy for more than a year and remained stubbornly persistent.

    Even as some congressional Democrats have directed fire at Powell for the rapid increase in interest rates and the risks the effort poses to a robust post-pandemic economic recovery, White House officials have taken pains not to shed light on their views publicly.

    Officials stress nothing in the last week has changed that mandate from Biden – and note that the widespread uncertainty about what action the Fed will take on rates only serves to underscore that reality.

    It’s a reality that comes at a uniquely inopportune time for a banking system that has shown clear signs of stabilizing in the last several days, but is still facing a level of anxiety among market participants and depositors about the durability of that shift.

    “I do believe we have a very strong and resilient banking system and all of us need to shore up the confidence of depositors that that’s the case,” Treasury Secretary Janet Yellen said during remarks Tuesday in Washington.

    Yellen said a new emergency lending facility launched by the Fed, along with its existing discount window, are “working as intended to provide liquidity to the banking system.”

    But prior to the closures of Silicon Valley Bank and Signature Bank, analysts had widely predicted that the Fed would unveil a half-point rate hike. But after the sudden collapse of the two banks that sent shockwaves across the global economy, there has been a growing belief among Wall Street analysts that the central bank will pull back, and only raise rates by a quarter-point – in part to try to alleviate concerns that the Fed’s historically aggressive rate hikes over the past year were precisely to blame for this month’s financial turmoil.

    But there are also concerns that a dramatic pullback, like choosing to forgo any rate increases altogether until a later meeting, would bring its own risks of signaling to the market that there are deeper systemic problems.

    It’s a conundrum top Fed officials started grappling with in the first of their two-day Federal Open Market Committee meeting on Tuesday. How they choose to navigate the path ahead will remain behind closed doors until their policy statement is released Wednesday afternoon.

    Powell is scheduled to speak to reporters shortly after.

    For officials inside the Biden White House, Wednesday is poised to offer critical insight into how the central bank is grappling with its urgent priority of bringing down inflation, while at the same time, minimizing the risk of additional dominoes falling in the US banking sector.

    Those two imperatives – bringing prices down and maintaining stability across the US financial sector – are urgent priorities for the Biden White House, particularly as the president moves closer to a widely expected reelection announcement and the health of the economy remains the top issue for voters.

    Yet the Fed’s decision will come at a moment of accelerating political pressure on the Fed itself – and Powell specifically.

    Massachusetts Democratic Sen. Elizabeth Warren, a member of the Senate Banking Committee, slammed Powell, saying he has failed at two of his main jobs, citing raising interest rates and his support of bank deregulation.

    “I opposed Chair Powell for his initial nomination, but his re-nomination. I opposed him because of his views on regulation and what he was doing to weaken regulation, but I think he’s failing in both jobs, both as oversight manager of these big banks which is his job and also what he’s doing with inflation,” Warren said on NBC’s “Meet the Press.”

    White House officials have made clear – with no hesitation – that Biden’s long-stated confidence in Powell is unchanged. Powell, who was confirmed for his second four-year term as Fed chair last year, announced last week that the Fed would launch a review into the failure of Silicon Valley Bank.

    Treasury and Fed officials, along with counterparts at other federal regulators and their international counterparts, have continued regular discussions this week as they’ve monitored the system in the wake of the weekend collapse, and eventual sale, of European banking giant Credit Suisse.

    US officials viewed the Credit Suisse collapse as unrelated to the crisis that took down the US banks a weekend prior, although they acknowledged it posed broader risks tied to confidence, or the potential lack thereof, in the system.

    In recent days, White House officials have begun to cautiously suggest that they see signs of the US economy stabilizing, following the turbulent aftermath of the closures of Silicon Valley Bank and Signature Bank. Biden, for his part, has credited the sweeping steps his administration announced – namely, the backstopping of all depositors’ funds held at the two institutions and the creation of an emergency lending program by the Federal Reserve – as having prevented a broader financial meltdown.

    He has also called on US regulators and lawmakers to strengthen financial regulations, though it is not yet clear what specific actions the president may ultimately throw his weight behind.

    Press secretary Karine Jean-Pierre declined to comment Tuesday afternoon at the White House press briefing on how she and other officials were watching the Fed’s upcoming decision.

    “The Fed is indeed independent. We want to give them the space to make those monetary decisions and I don’t want to get ahead of that,” Jean-Pierre said. “I don’t even want to give any thoughts to what Jerome Powell might say tomorrow.”

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  • Silicon Valley Bank left a void that won’t easily be filled | CNN Business

    Silicon Valley Bank left a void that won’t easily be filled | CNN Business

    A version of this story first appeared in CNN Business’ Before the Bell newsletter. Not a subscriber? You can sign up right here. You can listen to an audio version of the newsletter by clicking the same link.


    New York
    CNN
     — 

    It’s difficult to overstate the influence that Silicon Valley Bank had over the startup world and the ripple effect its collapse this month had on the global tech sector and banking system.

    While SVB was largely known as a regional bank to those outside of the tight-knit venture capital sphere, within certain circles it had become an integral part of the community – a bank that managed the idiosyncrasies of the tech world and helped pave the way for the Silicon Valley-based boom that has consumed much of the economy over the past three decades.

    SVB’s collapse was the largest bank failure since the 2008 financial crisis: It was the 16th largest bank in the country, holding about $342 billion in client funds and $74 billion in loans.

    At the time of its collapse, about half of all US venture-backed technology and life science firms were banking with SVB. In total, it was the bank for about 2,500 venture firms including Andreessen Horowitz, Sequoia Capital, Bain Capital and Insight Partners.

    But the influence of SVB went beyond lending and banking – former CEO Gregory Becker sat on the boards of numerous tech advocacy groups in the Bay Area. He chaired the TechNet trade association and the Silicon Valley Leadership Group, was a director of the Federal Reserve Bank of San Francisco and served on the United States Department of Commerce’s Digital Economy Board of Advisors.

    There’s no doubt that the failure of Silicon Valley Bank left a large void in tech. The question is how that gap will be filled.

    To find out, Before the Bell spoke with Ahmad Thomas, president and CEO of the Silicon Valley Leadership Group. The influential advocacy group is working to convene its hundreds of member companies – including Amazon, Bank of America, BlackRock, Google, Microsoft and Meta – to discuss what happens next.

    This interview has been edited for length and clarity.

    Before the Bell: What’s the feeling on the ground with tech and VC leadership in Silicon Valley?

    Ahmad Thomas: Silicon Valley Bank has been a key part of our fabric here for four decades. SVB was truly a pillar of the community and the innovation economy. The absence of SVB – that void – and coalescing leaders to fill that void is where my energy is focused and that is not a small task.

    I would say there was a fairly high level of unease a few days ago, and I believe the swift steps taken by leaders in Washington have helped quell a fair amount of that unease, but looking at Credit Suisse and First Republic just over the last couple of days, clearly we are in a situation that is going to continue to develop in the weeks and months ahead.

    So how do you fill it?

    We’re working to be a voice around stability, particularly about the fundamentals of the innovation economy. We can acknowledge the void given the absence of Silicon Valley Bank, but I do think we need voices out there to be very clear in highlighting that the fundamentals and the innovation infrastructure remains robust here in Silicon Valley.

    This is a moment where I think people need to take a step back, let cooler heads prevail, and understand that there are opportunities both from an investment standpoint, a community engagement standpoint and corporate citizenship standpoint for new leaders in Silicon Valley to step up.

    Are you working to advocate for more permanent regulation in DC?

    It’s far too early for that. But if there are opportunities to enhance access to capital to entrepreneurs to founders of color or in marginalized communities and if there are opportunities to try and drive innovation and economic growth, we will always be at the table for those conversations.

    Do you have any ideas about how long this crisis will continue for? What’s your outlook?

    The problem is twofold: A crisis of confidence and the set of economic conditions on the ground. The economic conditions remain volatile for a variety of reasons: The softening economy, inflationary pressures and the interest rate environment. But I think right now we need to focus on stabilizing confidence in the investor community, in our business executive community and in the broader set of stakeholders around the strength of the innovation economy. That is something we need to shore up near term.

    From CNN’s Mark Thompson

    Switzerland’s biggest bank, UBS, has agreed to buy its ailing rival Credit Suisse (CS) in an emergency rescue deal aimed at stemming financial market panic unleashed by the failure of two American banks earlier this month.

    “UBS today announced the takeover of Credit Suisse,” the Swiss National Bank said in a statement. It said the rescue would “secure financial stability and protect the Swiss economy.”

    UBS is paying 3 billion Swiss francs ($3.25 billion) for Credit Suisse, about 60% less than the bank was worth when markets closed on Friday. Credit Suisse shareholders will be largely wiped out, receiving the equivalent of just 0.76 Swiss francs in UBS shares for stock that was worth 1.86 Swiss francs on Friday.

    Extraordinarily, the deal will not need the approval of shareholders after the Swiss government agreed to change the law to remove any uncertainty about the deal.

    Credit Suisse had been losing the trust of investors and customers for years. In 2022, it recorded its worst loss since the global financial crisis. But confidence collapsed last week after it acknowledged “material weakness” in its bookkeeping and as the demise of Silicon Valley Bank and Signature Bank spread fear about weaker institutions at a time when soaring interest rates have undermined the value of some financial assets.

    Read more here.

    From CNN’s David Goldman

    A week after Signature Bank failed, the Federal Deposit Insurance Corporation said it has sold most of its deposits to Flagstar Bank, a subsidiary of New York Community Bank.

    On Monday, Signature Bank’s 40 branches will begin operating as Flagstar Bank. Signature customers won’t need to make any changes to do their banking Monday.

    New York Community Bank bought substantially all of Signature’s deposits and a total of $38.4 billion worth of the company’s assets. That includes $12.9 billion of Signature’s loans, which New York Community Bank purchased at a steep discount -— it paid just $2.7 billion for them. New York Community Bank also paid the FDIC stock that could be worth up to $300 million.

    At the end of last year, Signature had more than $110 billion worth of assets, including $88.6 billion of deposits, showing how the run against the bank two weeks ago led to a massive decline in deposits.

    Not included in the transaction is about $60 billion in other assets, which will remain in the FDIC’s receivership. It also doesn’t include $4 billion in deposits from Signature’s digital bank business.

    Read more here.

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  • FDIC sells most of failed Signature Bank to Flagstar | CNN Business

    FDIC sells most of failed Signature Bank to Flagstar | CNN Business


    New York
    CNN
     — 

    A week after Signature Bank failed, the Federal Deposit Insurance Corporation said it has sold most of its deposits to Flagstar Bank, a subsidiary of New York Community Bank.

    On Monday, Signature Bank’s 40 branches will begin operating as Flagstar Bank. Signature customers won’t need to make any changes to do their banking Monday.

    New York Community Bank bought substantially all of Signature’s deposits and a total of $38.4 billion worth of the company’s assets. That includes $12.9 billion of Signature’s loans, which New York Community Bank purchased at a steep discount -— it paid just $2.7 billion for them. New York Community Bank also paid the FDIC stock that could be worth up to $300 million.

    At the end of last year, Signature had more than $110 billion worth of assets, including $88.6 billion of deposits, showing how the run against the bank two weeks ago led to a massive decline in deposits.

    Not included in the transaction is about $60 billion in other assets, which will remain in the FDIC’s receivership. It also doesn’t include $4 billion in deposits from Signature’s digital bank business.

    As the banking crisis spreads, banks have grown increasingly wary of taking on risk. That’s likely why New York Community Bank was unwilling to take on all Signature’s assets.

    “We are unsurprised the FDIC retained loans as we would expect banks to be cautious on quickly buying loans without liability and loss protections,” said Jaret Seiberg, analyst at TD Cowan. “More broadly, we see it as positive for consumer confidence for the branches to be opening Monday as NYCB branches.”

    The FDIC said Sunday it expects to sell off those assets over time, and the total cost to the government will ultimately be about $2.5 billion.

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  • UBS is buying Credit Suisse in bid to halt banking crisis | CNN Business

    UBS is buying Credit Suisse in bid to halt banking crisis | CNN Business


    London
    CNN
     — 

    Switzerland’s biggest bank, UBS, has agreed to buy its ailing rival Credit Suisse in an emergency rescue deal aimed at stemming financial market panic unleashed by the failure of two American banks earlier this month.

    “UBS today announced the takeover of Credit Suisse,” the Swiss National Bank said in a statement. It said the rescue would “secure financial stability and protect the Swiss economy.”

    UBS is paying 3 billion Swiss francs ($3.25 billion) for Credit Suisse, about 60% less than the bank was worth when markets closed on Friday. Credit Suisse shareholders will be largely wiped out, receiving the equivalent of just 0.76 Swiss francs in UBS shares for stock that was worth 1.86 Swiss francs on Friday.

    Extraordinarily, the deal will not need the approval of shareholders after the Swiss government agreed to change the law to remove any uncertainty about the deal.

    Credit Suisse

    (CS)     had been losing the trust of investors and customers for years. In 2022, it recorded its worst loss since the global financial crisis. But confidence collapsed last week after it acknowledged “material weakness” in its bookkeeping and as the demise of Silicon Valley Bank and Signature Bank spread fear about weaker institutions at a time when soaring interest rates have undermined the value of some financial assets.

    Shares in the 167-year-old bank fell 25% over the week, money poured from investment funds it manages and at one point account holders were withdrawing deposits of more than $10 billion per day, the Financial Times reported. An emergency loan of nearly $54 billion from the Swiss National Bank failed to stop the bleeding.

    But it did “build a bridge” to the weekend, to allow the rescue to be pieced together, Swiss officials said Sunday night.

    “This acquisition is attractive for UBS shareholders but, let us be clear, as far as Credit Suisse is concerned, this is an emergency rescue,” UBS chairman Colm Kelleher told reporters.

    “It is absolutely essential to the financial structure of Switzerland and … to global finance,” he told reporters.

    Desperate to prevent the meltdown spreading through the global financial system on Monday, Swiss authorities initiated the search for a private sector solution, with limited state support, while reportedly considering Plan B — a full or partial nationalization.

    “Given recent extraordinary and unprecedented circumstances, the announced merger represents the best available outcome,” Credit Suisse chairman Axel Lehmann said in a statement.

    “This has been an extremely challenging time for Credit Suisse and while the team has worked tirelessly to address many significant legacy issues and execute on its new strategy, we are forced to reach a solution today that provides a durable outcome.”

    The emergency takeover was agreed to after a days of frantic negotiations involving financial regulators in Switzerland, the United States and United Kingdom. UBS

    (UBS)     and Credit Suisse rank among the 30 most important banks in the global financial system, and together they have almost $1.7 trillion in assets.

    Financial market regulators around the world cheered UBS’ action to take over Credit Suisse.

    US authorities said they supported the action and worked closely with the Swiss central bank to assist the takeover.

    “We welcome the announcements by the Swiss authorities today to support financial stability,” said US Treasury Secretary Janet Yellen and Federal Reserve Chair Jerome Powell, in a joint statement. “The capital and liquidity positions of the US. banking system are strong, and the US financial system is resilient.”

    Christine Lagarde, President of the European Central Bank, said the banking sector remains resilient but the ECB stands at the ready to help banks maintain enough cash on hand to fund their operations if the need arises.

    “I welcome the swift action and the decisions taken by the Swiss authorities,” Lagarde said. “They are instrumental for restoring orderly market conditions and ensuring financial stability.

    The Bank of England said it welcomed the measures taken by the Swiss authorities “to support financial stability.”

    “We have been engaging closely with international counterparts throughout the preparations for today’s announcements and will continue to support their implementation,” it said in a statement. “The UK banking system is well capitalized and funded, and remains safe and sound.”

    The global headquarters of UBS and Credit Suisse are just 300 yards apart in Zurich but the banks’ fortunes have been on very different paths recently. Shares of UBS have climbed 15% in the past two years, and it booked a profit of $7.6 billion in 2022. It had a stock market value of about $65 billion on Friday, according to Refinitiv.

    Credit Suisse shares have lost 84% of their value over the same period, and last year it posted a loss of $7.9 billion. It was worth just $8 billion at the end of last week.

    Dating back to 1856, Credit Suisse has its roots in the Schweizerische Kreditanstalt (SKA), which was set up to finance the expansion of the railroad network and industrialization of Switzerland.

    In addition to being Switzerland’s second biggest bank, it looks after the wealth of many of the world’s richest people and offers global investment banking services. It had more than 50,000 employees at the end of 2022, 17,000 of those in Switzerland.

    The Swiss National Bank said it would provide a loan of 100 billion Swiss francs ($108 billion) to UBS and Credit Suisse to boost liquidity.

    UBS Chief Executive Ralph Hamers will be CEO of the combined bank, and Kelleher will serve as chairman.

    The takeover will reinforce the position of UBS as the world’s leading wealth manager with $5 trillion of invested assets, and boost its ambition to grow in the Americas and Asia. UBS said it expects to generate cost savings of $8 billion per year by 2027. Credit Suisse’s investment bank is in the crosshairs.

    “Let me be clear. UBS intends to downsize Credit Suisse’s investment banking business and align it with our conservative risk culture,” Kelleher said.

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  • Opinion: The SVB collapse doesn’t have to be the first in a chain of many | CNN

    Opinion: The SVB collapse doesn’t have to be the first in a chain of many | CNN

    Editor’s Note: Lanhee J. Chen is a regular contributor to CNN Opinion and the David and Diane Steffy fellow in American Public Policy Studies at the Hoover Institution. He was a candidate for California state controller in 2022. He has played senior roles in both Republican and Democratic presidential administrations and has been an adviser to four presidential campaigns, including as policy director of 2012 Mitt Romney-Paul Ryan campaign. The views expressed in this commentary are his own. View more opinion on CNN.



    CNN
     — 

    When Silicon Valley Bank collapsed this month, analysts and policymakers quickly began considering how to prevent similar failures from happening in the future. While there are changes that lawmakers should consider, when it comes to financial regulation, history shows us that politicians are usually reacting to the last crisis and one step behind the next one.

    The savings and loan crisis of the 1980s led to passage of the Financial Institutions Reform, Recovery, and Enforcement Act of 1989, which closed insolvent financial institutions, created new regulatory agencies and implemented restrictions on how savings and loan (or thrift) institutions could invest deposited funds.

    The 2007-2008 financial crisis led to passage of the sweeping Dodd-Frank Act in 2010, which revamped federal regulation of the financial services sector and placed restrictions on how banks do business. Amid criticism that Dodd-Frank had gone too far in regulating banks, a bipartisan coalition in Congress passed, and then-President Donald Trump signed into law in 2018, some rollbacks of Dodd-Frank’s requirements pertaining to small and midsize financial institutions.

    Democrats have largely blamed this rollback of regulations for SVB’s demise. Many Republicans, for their part, have focused their aim on whether the bank’s leadership spent too much time pursuing “woke” policies on diversity and sustainability rather than ensuring depositors were protected.

    The fact that there is so little overlap between Republican and Democrat critiques in the wake of SVB’s collapse illuminates the challenging road ahead for bipartisan policy solutions to avert a future similar failure. If the two sides can’t even agree on the principal cause of the bank’s failure, it’s unlikely there will be consensus on the policies needed to shore up the financial system for the future.

    But they should. While Democrats generally favor more aggressive oversight of the financial system and Republicans largely argue that the current regulatory scheme is sufficient, the right answer looking ahead is somewhere in between.

    In the wake of SVB’s failure, some regulatory interventions have come into focus and could form the basis of policy discussions in the coming weeks and months as Congress considers how to respond to the current banking crisis.

    First, SVB’s demise came when a lack of liquidity (or a shortfall of cash on hand) left it unable to pay out depositors when they came looking for their money. The bank had invested a disproportionate amount of assets in long-term debt that was purchased at a time when interest rates were much lower than they are today. When the bank attempted to liquidate this debt over the last few weeks, it was forced to do so at a significant loss. SVB failed to hedge against risk by diversifying its investments.

    When depositors tried to withdraw $42 billion in cash from the bank on a single day, SVB’s cash shortfall generated a panic among those who had deposits at the bank and raised concerns about the health of the US banking system more broadly.

    Just as individual investors are often advised to diversify their investment strategies to minimize risk, so too might politicians look to requirements that banks ensure that they have proper diversification in how they are investing their assets.

    Further, some Republicans and many Democrats are also calling for expanded deposit insurance so that bank deposits over the current federal cap of $250,000 are also insured. Democratic Sen. Elizabeth Warren of Massachusetts, a vocal supporter of increased financial sector regulation, has called for increased deposit insurance that would be paid for by banks. Democratic Rep. Ro Khanna of California is expected soon to introduce legislation that raises or removes the insurance cap entirely, such that deposits of all amounts will be protected.

    Some Republicans have joined them in addressing the insurance cap. Republican Sen. J.D. Vance of Ohio, for example, has argued that lifting the cap (for example, by ensuring the cap keeps up with inflation) would equalize the playing field between large banks and smaller local and regional ones. Republican Sen. Mitt Romney of Utah has suggested that larger depositors might be insured up to the entire amount of their deposits in exchange for a small fee.

    If Congress moves toward increasing or eliminating the deposit insurance cap entirely, it should do so carefully. Depending on how the policy is constructed, such changes could disproportionately benefit wealthier institutional depositors or encourage bad behavior by banks if they know an open-ended bailout is waiting on the other end of risky investment decisions.

    Finally, some changes will undoubtedly come through the Federal Reserve, rather than Congress. This is probably a good thing, as these policymakers have some insulation from the political forces that directly affect lawmakers.

    The Federal Reserve, for example, will likely examine the extent of both capital and liquidity requirements at banks based on their total assets. A bank’s capital is the difference between its assets and liabilities or, put another way, the resources a bank has to ultimately absorb losses. Liquidity, by comparison, is a measure of the cash and assets a bank has immediately on hand to pay obligations (such as money that depositors might ask for).

    America’s central bank may also look at the content of “stress tests” created by the Dodd-Frank Act and designed to regularly assess the health of large financial institutions across the country. For nearly a decade, tests have been benchmarked to a low-interest rate environment, which is not reflective of recent conditions.

    But ultimately, the Federal Reserve is not blameless in the collapse of SVB as it created a fertile environment for the bank’s failure by keeping interest rates as low as they were for as long as they were. Lawmakers should do their part to make sure people understand that monetary policy has far-reaching impacts.

    While the best way to prevent the next SVB is likely to be viewed by policymakers through partisan-tinted glasses, there are avenues for Democrats and Republicans to work together. But the window to do so is narrow and closing. This time next year, we’ll be in the throes of presidential primary elections, and neither party will be particularly interested in compromise — even if that’s what our financial system needs.

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  • Confused about the bank meltdown? Here’s how to speak Wall Street | CNN Business

    Confused about the bank meltdown? Here’s how to speak Wall Street | CNN Business


    New York
    CNN
     — 

    Wall Street can seem bewildering, given its sheer amount of jargon, banking terms, and acronyms.

    But headlines this week, from the collapse of Silicon Valley Bank to Credit Suisse’s need for a lifeline to instability at First Republic, have made the business of finance a national concern.

    So when you hear the FDIC is taking over, a Treasury portfolio is sinking or a bank was backstopped and bailed out, what exactly does that mean?

    Here’s a guide to all the key terms you’ve been hearing.

    It’s an acronym for the Federal Deposit Insurance Corporation, an independent government agency that protects depositors in banks. It’s one of the main names as banking failures play out because it can step in and make sure the institutions are operating properly.

    When a bank fails, the standard insurance amount is $250,000 per depositor, per insured bank, for each account ownership category.

    Providing financial support to an institution that would otherwise collapse. Bailouts are associated with government intervention, as it so famously did during the 2008 financial crisis.

    It’s important to note that though a government dispatched a rescue mission for SVB and First Republic, they were not bailed out by it.

    How easily a company or bank can turn an asset to cash without losing a ton of its value. Liquidity can be used to gauge the ability to pay off short-term loans or other bills. People feel comfortable in liquid markets because it’s generally fast and easy to buy and sell.

    The most “liquid” asset, as you can probably guess, is cash.

    Deposits are cash you put into your bank account, and withdrawals are money that’s taken out. A bank run is when a rush of clients withdraw money all at once, often due to rumor or panic.

    If a bank has a ratio above 100% (like First Republic), then it loans out more money than it has deposits. That’s not a good situation to be in.

    Investments backed by the US government – and known to be one of the safest ones out there. They include Treasury Bills, Treasury Bonds and Treasury Notes. However, Treasuries are sensitive to broader economic conditions like inflation and changing interest rates.

    The value of SVB’s Treasuries portfolio sank as interest rates rose.

    Anything that could be used to generate cash flow. That could be tangible assets like stocks and buildings, or intangible assets like brand recognition.

    Inflow is the money going into a business – think from product sales and from smart investments. Outflow is cash leaving the business.

    Technically, it’s alternative steps a business takes to meet its goals. That could include strategies like diversifying and product development.

    But what does it really mean? The company might be thinking about putting itself up for sale.

    A rapid and mass selling of a stock based on an upcoming fear – like rumors of a bank collapse.

    Cash or other rewards companies gift to their shareholders.

    An action that lets a company keep surviving. For example, Credit Suisse just got a $54 billion lifeline from the Swiss central bank, though that hasn’t entirely quelled investor fears yet. Another bank that benefited from a lifeline is First Republic, when 11 banks deposited $30 billion.

    This term is used widely in the financial sector to describe a last-resort financial protection, almost like an insurance policy. It’s a secondary source of funds through either credit support or guaranteed payment for unsubscribed shares.

    A system used by the FDIC that lets it take action on a bank crisis that could drag down the entire sector with it. Though it’s pretty rare to enact it, the FDIC used this exception to take over SVB and Signature Bank last week.

    This is the Fed’s main way to directly lend money to banks and provide them more liquidity and stability. The loans last up to 90 days. Many banks are utilizing this tool right now because the Fed made it easier to borrow from the discount window in the wake of SVB to avoid further bank runs.

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  • China’s Andon Health says it has full access to funds parked at collapsed lender SVB | CNN Business

    China’s Andon Health says it has full access to funds parked at collapsed lender SVB | CNN Business


    Hong Kong
    CNN
     — 

    China’s Andon Health, a maker of medical devices, says it has full access to funds parked at Silicon Valley Bank, after the US government intervened to backstop all the deposits at the failed lender.

    The Tianjin-based company, which manufactures consumer health devices and supplied Covid test kits to the United States during the pandemic, has cash deposits at SVB worth 5% of its total cash and cash equivalents.

    That amounts to approximately 675 million yuan ($98 million), according to calculations based on its most recent earnings report.

    “Our deposits at Silicon Valley Bank can be used in full and have not suffered any losses,” the company said in a Tuesday filing to the Shenzhen Stock Exchange.

    The announcement comes after the US government took extraordinary measures on Sunday to avert a potential banking crisis following the collapse of SVB. Those measures include guaranteeing that customers of the bank will have access to all their money starting Monday.

    By doing that, US regulators aimed to prevent more bank runs and to help companies that deposited large sums with affected banks to continue to make payroll and fund their operations

    The collapse of SVB, which courted Chinese start-ups, has caused widespread concern in China, where a string of founders and companies rushed to appease investors by saying their exposure was insignificant or nonexistent.

    So far, more than a dozen of firms have issued statements trying to pacify investors or clients, saying that their exposure to SVB was limited. Most were biotech companies.

    SVB, which worked with nearly half of all venture-backed tech and healthcare companies in the United States before it was taken over by the government, has a Chinese joint venture, which was set up in 2012 and targeted the country’s tech elite.

    The SPD Silicon Valley Bank, which was owned 50-50 owned by SVB and local partner Shanghai Pudong Development Bank, said Saturday that its operations were “sound.”

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