Executives at First Citizens BancShares pointed Friday to several positives following its March 2023 acquisition of the failed Silicon Valley Bank. At the same time, they warned of “headwinds” that could impact growth in that business segment, which serves startups and technology companies.
Bloomberg
Ten months after acquiring a significant portion of Silicon Valley Bank, First Citizens BancShares says it continues to retain and win back some of the failed bank’s former customers and also stabilize its deposit base, whose remarkably swift erosion last spring led to SVB’s collapse.
On Friday, executives at First Citizens — which doubled in size after the acquisition — ticked off several positives. For starters, the integration work should be finished this year, including a systems conversion of the acquired segment’s private bank that’s set to take place in the first quarter.
In addition, the loan pipeline for Silicon Valley Bank’s global fund banking unit, which serves private equity and venture capital funds, grew by about 40% during the fourth quarter, a result of attracting new and retaining existing customers, executives said. The SVB unit’s deposit base has been largely stable since April, it added 60-plus primary operating business clients between April and November, and deposits should see “modest growth” going forward, executives noted.
But there are still “headwinds” within the innovation economy that may prove to be challenging for the Silicon Valley Bank segment, they told analysts during First Citizens’ fourth-quarter earnings call.
Despite the “strong pipeline” in global fund banking, growth will continue to be “pressured” due to the ongoing slowdown in private equity and venture capital, Chief Financial Officer Craig Nix said. The company also expects “a modest decline” in technology and health care banking stemming from a reduction in venture capital fundraising and line draws as well as increased loan payoffs, he said.
While First Citizens is “very encouraged” about the coming year, there are challenges, acknowledged Marc Cadieux, president of Silicon Valley Bank’s commercial banking business.
“The innovation economy continues to go through … its own downturn,” Cadieux said on the call. We expect that’s going to continue in 2024. So our intention is to keep doing what we were doing in 2023 and hoping that 2025 and ahead [are] better.”
First Citizens, which now has $213.8 billion of assets, acquired substantially all Silicon Valley Bank’s loans and certain other assets from the Federal Deposit Insurance Corp., which acted as a receiver for Silicon Valley Bridge Bank. First Citizens decided last year to keep the Silicon Valley Bank name and brand, operating it as a division of the larger company.
In September, First Citizens launched a nationwide advertising campaign, calling it “Yes, SVB,” to raise awareness of Silicon Valley Bank’s presence and show that it is “open for business.”
The company reported fourth-quarter net income of $514 million, which was double its pre-merger total of a year earlier but fell 32% from the third quarter. Earnings per share of $34.33 fell short of the average estimate of $48.60 from analysts surveyed by FactSet Research Systems.
There were several notable items in the quarter, including $116 million of acquisition-related charges as well as a Federal Deposit Insurance Corp. special assessment of $64 million.
Noninterest expenses totaled nearly $1.5 billion, compared to $1.4 billion for the third quarter. Net charge-offs were $177 million, representing 0.53% of average loans, the same as the third quarter.
Net charge-offs are expected to be “elevated” this year in the innovation, general office and equipment finance portfolios, the company said.
The company has “taken proactive steps to help limit losses,” Nix said on the call.
First Citizens confirmed Friday that it plans to buy back shares in the second half of this year, pending regulatory approval. The company halted repurchases last year.
According to a recent survey of chief risk officers at banks, about 90% of respondents reported plans to upgrade at least one of their treasury risk management capabilities, and two-third reported plans to upgrade five or more.
Gajus – stock.adobe.com
Risks related to this year’s banking failures are taking up more space in the minds of chief risk officers at U.S. banks.
Half of chief risk officers saw treasury and asset liability-management risks as a top concern in 2023, according to a survey of 51 chief risk executives conducted by the Risk Management Association, a trade group, and consulting firm Oliver Wyman. Just 16% of executives said the same in 2022.
The survey results highlight the lasting impact that last spring’s banking crisis has had on U.S. financial institutions. The crisis saw the failure of three large banks and runs at several others. But even banks that made it through the spring with their balance sheets intact began to re-examine their own vulnerabilities after the failures.
“It was an important lesson learned: how quickly contagion risk can affect financial institutions,” one survey respondent said.
The survey drew on responses from chief risk officers at 51 U.S. financial institutions recorded in the summer of 2023. The banks included those with less than $100 billion in assets and those with more than $100 billion in assets.
About 90% of chief risk officers surveyed reported plans to upgrade at least one of their treasury risk management capabilities, and two-third reported plans to upgrade five or more. Nine in 10 banks reported wanting to improve their liquidity stress testing abilities. The improvements could include changes to the scenarios, models, methodologies or assumptions used for the test.
Improving approaches to interest-rate risk management also ranked high for the chief risk officers. About 85% of respondents listed revamping this area as a top priority moving forward, according to the survey results.
“Interest-rate risk and liquidity risk management matter — despite the fact that these areas have received limited supervisory attention in the past decade,” one chief risk officer surveyed said.
The next three treasury risk capabilities most likely to be targeted for improvement are enhancement to risk management within the securities portfolio (70%), cash flow forecasting (59%) and other liquidity-related initiatives (52%).
“The banks that have more maturation to do in their [treasury management and liquidity risk] practices probably feel a bit more nervous,” said Michael Duane, a partner in the finance and risk practice at Oliver Wyman.
Chief risk officers said they spent more time thinking about financial risks, including the increased focus on treasury risks, in 2023 than last year. In addition to that, bigger financial institutions were likely to spend more time focused on financial risks than their smaller counterparts, the survey found.
Additionally, next year is likely to bring risks beyond what was discussed in this survey, primarily with operational risk tied to the ongoing Basel capital debate. Regulators have proposed new capital rules that the banking industry has called “unprecedented.” The proposed rules would require banks with at least $100 billion in assets to boost the amount of capital set aside by an estimated 16%.
Most CROs said they expect attention from regulators to increase in 2024. About 89% of the executives anticipate an increase in liquidity-related regulatory and supervisory issues at peer banks next year. And 81% of chief risk officers expect a jump in capital-related regulatory findings in 2024.
“If you look at large regional banks, certainly on a median basis, capital has been built over the course of the year,” said Allen Tischler, senior vice president of the financial institutions group at Moody’s Investor Services.
Bill Demchak, chairman, president and CEO of PNC Financial Services Group.
Gettyimages/Drew Angerer
PNC Financial Services Group is far from the flashiest bank around. The Pittsburgh-based bank isn’t a megabank like JPMorgan Chase or Bank of America, nor is it engaged in the massive deals that those two arrange on Wall Street. It’s no laggard in technology, but it’s not the first bank that comes to mind in that regard either.
In fact, one could even say PNC is boring. But in a year of turmoil for the banking industry — which claimed the tech-obsessed Silicon Valley Bank and wealth-obsessed First Republic Bank — perhaps boring is a solid strategy.
PNC, which at $557 billion in assets is the eighth largest U.S. bank, calls itself a national Main Street bank. It focuses on middle-market businesses, ones that aren’t household names but still play a critical role in the U.S. economy. Its roots are in Pittsburgh, but it’s steadily expanded and now has a national, coast-to-coast footprint.
Leading the charge is Bill Demchak, who’s been PNC’s CEO since 2013 and has spent two decades at the bank.
Demchak, whom American Banker is naming Banker of the Year for 2023, declined an interview request. But analysts credit his steady hand for growing PNC into a strong national franchise — one that isn’t immune to industrywide pressures but often finds a way to the top of the pack.
“The investment community is willing to bet on Bill Demchak and bet on PNC, because of the track record that he and the company has had throughout multiple cycles,” said Terry McEvoy, an analyst at Stephens. “That reflects a high level of credibility. That doesn’t happen overnight within the banking sector.”
Few investors are buying bank stocks this year, but those who are often think PNC would be more resilient if a recession hits.
“Investors are looking for high-quality, defensive names … sleep-at-night stocks,” said Ebrahim Poonawala, an analyst at Bank of America. “PNC is one of those that comes up often.”
This year, as worries over regional banks popped up, PNC found itself in a stronger position than some competitors.
Dozens of banks reported deposit outflows after Silicon Valley Bank’s failure in March, but PNC registered a tiny increase as its depositors stuck with it. Its balance sheet was in decent shape too, even if its bond portfolio fell in value when a sharp rise in interest rates eroded the prices of low-yielding bonds. Critically, PNC made itself less vulnerable by buying securities with shorter durations than certain competitors — thus ensuring any pain was shorter-term — and it avoided putting too much cash into low-yielding assets.
To be sure, PNC isn’t impervious to the struggles facing the banking industry. Its profitability is down as depositors seek higher interest rates, prompting PNC to lay off 4% of its staff. Its stock price has fallen roughly 30% this year. Its capital markets business has underperformed. The regulators under the Biden administration are toughening up rules for PNC and other regional banks.
But other regional banks are facing bigger earnings pressures, or they’re needing to readjust more as regulations get tougher. PNC, in contrast, more skillfully prepared its balance sheet for whatever comes next, making sure it had more capital and thus flexibility.
“They continue to grind away one step at a time, with calculated risks, to show consistent progress,” said Wells Fargo analyst Mike Mayo.
He added that Demchak has proven to be one of the “most independent-thinking bank CEOs.”
The tougher environment has many regional banks actively looking to shrink, but PNC’s stronger position means it remains much more open for business.
Its balance sheet gave it ample room to buy a loan portfolio from Signature Bank after the crypto-heavy bank failed. The $16.6 billion in capital commitments isn’t all that large, but it helps PNC expand its work with private equity.
If the price is right, PNC may also gain valuable customers from competitors whose slimming-down campaigns are prompting them to exit some businesses. Doing so may be “pretty attractive” for PNC, Demchak told analysts Oct. 13 when asked about the possibility.
“We’re intelligent — hopefully, intelligent — takers of risk at the right price,” Demchak said. “We can evaluate what’s out there.”
Becoming a national Main Street bank
Demchak came to PNC in 2002 as chief financial officer, marking his return to his hometown of Pittsburgh after a high-profile stint on Wall Street. Demchak helped lead JPMorgan’s development of credit derivatives products, the type of financial engineering that contributed to the 2008 financial crash.
The Financial Times once called him a “whizz-kid.” Commercial lenders at JPMorgan, wary of mathematical models upending their decades-old way of doing business, called him the “prince of darkness,” according to the book “Fool’s Gold: How the Bold Dream of a Small Tribe at J.P. Morgan Was Corrupted by Wall Street Greed and Unleashed a Catastrophe.”
The idea behind those derivatives was simple. Corporations and investors could already swap the risks tied to interest rates, currencies and commodity prices. If a company feared interest rates or the price of oil would rise, they could protect themselves by swapping that risk with another entity, which took the other side of that bet.
In the mid-1990s, Demchak and the JPMorgan team were on the forefront of applying that same idea to the chance that companies may default on their loans. If used correctly, the innovation could help spread the risk of a loan turning bad — with banks swapping the risk of borrowers defaulting on their loans to investors willing to take bets on those outcomes.
The usage of credit default swaps proliferated. Demchak and the JPMorgan team had focused on using them in the corporate world, where ample data on companies’ financial health made it easier to run statistical analyses.
But other banks and Wall Street firms soon created credit default swaps based on consumer mortgages — where historical data was more sparse and lenders were becoming far too lax. The JPMorgan team had long viewed mortgage derivatives with caution, which insulated the bank when the subprime mortgage crisis hit.
Demchak stuck to that more cautious view when he joined PNC in 2002. The bank took a more conservative approach in the years leading up to the 2008 crisis and limited its exposure to dicier sectors.
At a November 2007 presentation, Demchak noted the bank stayed away from subprime mortgages, had fewer real estate loans than its peers and was cautious on corporate credit conditions. The bank had been selling loans where it could and keeping its balance sheet slim, which reduced its profits but put it in better shape for a downturn that was already starting to brew.
“We didn’t grow the balance sheet as quickly as we could because we were worried about the risk embedded in that, and it is pretty clear today that our position has been validated by the headlines and the real world outcomes,” Demchak said at the 2007 event, according to a FactSet transcript.
PNC’s healthier financial footing helped it acquire National City Corp. when the Cleveland-based bank ran into trouble in 2008. The crisis-era purchase gave PNC a strong presence in the Midwest and turned it into the country’s fifth biggest bank by deposits.
Then-CEO James Rohr, along with his heir-apparent Demchak, continued PNC’s expansion from there. The bank bought the Royal Bank of Canada’s fledgling U.S. retail operations in 2011, giving it hundreds of branches in the Southeast.
The deal-making slowed once Demchak became CEO in 2013. But he struck a major deal in November 2020, buying the U.S. bank of the Spanish giant Banco Bilbao Vizcaya Argentaria, including branches in Texas, California, Arizona and Colorado.
The BBVA USA deal finally accomplished PNC’s mission: taking the bank national. PNC branches now stretch from coast to coast, and the bank is in all 30 of the largest U.S. markets.
However, that deal followed a questionable move from PNC. In May 2020, as COVID-19 uncertainty continued to cloud the economy, PNC sold its stake in the asset-management giant BlackRock. The bank owned 22% of BlackRock, whose boom since PNC bought it in 1995 made it a stellar investment.
Had it waited a few more months, PNC would have reaped far more cash, and not prompted Barron’s to criticize the “folly” in the sale.
On the plus side, PNC was able to use the proceeds to buy BBVA’s U.S. operations a few months later. And since few banks were interested in acquisitions in 2020, PNC was able to get BBVA for fairly cheap, said Poonawala, the Bank of America analyst.
So far, the BBVA deal seems to be going well. Mayo, the Wells Fargo analyst, praised PNC for being able to integrate the two systems together quickly for customers.
But the smooth integration of BBVA is partly thanks to PNC’s long efforts to improve its data infrastructure and make the company more efficient, Mayo said. Those efforts may not be all that exciting, but the integration showed how “10-plus years of back-office restructuring and tinkering pays off,” he said. It’s yet another reason why Mayo calls PNC the “bank of steel,” a nod to its Pittsburgh roots but also the resiliency of its technology and balance sheet.
“It got a bit rusty with the sale of BlackRock for a period, but then it took some of that rust off,” Mayo said, noting PNC “made victory out of defeat” by using the BlackRock sale proceeds to buy BBVA at a great price.
Blythe Masters, who worked for Demchak at JPMorgan and rose to other top roles at the megabank, said he is “one of, if not the, most talented individuals I have worked with or for.
“He is an exceptional judge of talent, an intuitive and detail-oriented risk manager, a deeply strategic thinker and capable of playing a long game,” said Masters, who’s now founding partner of the tech investment firm Motive Partners.
“I’m delighted, but not remotely surprised, that he and his team have made PNC such a great success,” Masters added.
Executives at PNC have said they will be watching how commercial real estate loans tied to office buildings continue to fare.
Bloomberg News
Preparing for a rainy day
How PNC fares in a downturn — assuming the U.S. economy will eventually break its streak of outperforming expectations — remains to be seen.
Like any other bank, it would lose money as consumers fall behind on their payments and businesses struggle to pay back loans. But analysts point to PNC’s solid history of outperforming other banks on credit quality as a sign that its underwriting is solid.
And in the sector that’s currently the biggest source of worry — empty office buildings as some employers offer remote and hybrid work options — PNC’s exposure is relatively low.
Some 2.8% of PNC’s loans were in office-related commercial real estate as of last year, according to a Jefferies analysis of large and regional banks’ office CRE exposures.
While that was above the median of 1.7%, some competitors such as Citizens Financial Group, M&T Bank and Wells Fargo have about 4% of their total loans in office CRE. Several midsize banks that are significantly smaller than PNC have much larger exposures.
Whether office leases will be a major source of trouble in the coming months is unclear. Some argue the pain will be gradual, since office leases often stretch several years and the tenants won’t leave all at once. Others worry vacancy trends, high interest rates and other factors will lead to more stress — particularly at midsize banks that are more exposed.
PNC has been monitoring the situation closely and stashing away reserves to cover the potential souring of office loans.
“We’ll need those reserves because we do think there’s going to be problems in the office space,” Demchak told analysts in July.
For borrowers who do run into problems, PNC is working to figure out other options, such as selling buildings if needed or getting more equity from their investors.
The bank is also giving its own investors a detailed overview of its office loans — whether they’re in downtowns or suburban areas; whether they’re medical offices and thus less exposed to work-from-home trends; and whether any have seen stress thus far.
In some ways, Stephens’ McEvoy said, PNC’s moderate exposures to the office sector lines up with its history. It was less exposed to housing in 2008, but also to the energy sector when a slump there prompted charge-offs at banks around 2015.
“It just seems like PNC always ends up having less exposure to whatever problem lending category is out there,” McEvoy said.
The bank is “not immune to the operating environment,” Poonawala said. But, he added, Demchak’s leadership has instilled confidence that “PNC should be able to navigate whatever the cycle looks like.”
USAA had the best reputation among customers and noncustomers for the seventh year. Management attributed that to focusing on serving the needs of military members and their families, a key customer group.
JUSTIN BROWNELL USAA
The public perception of banks took a hit this year after a string of bank failures this spring forced many customers to take a hard look at their financial service providers.
The industry saw its biggest decline in sentiment since 2018, according to American Banker’s annual reputation survey, with regional banks accounting for the bulk of this deterioration. Sven Klingemann, senior director at RepTrak, the reputation consulting group that conducted the survey, said the findings were a “powerful” showcase of how vulnerable banks’ reputations are to periods of crisis.
“This represents a stark departure from some of the positive gains the industry had seen over the past three years, in which banks had actually gained a lot of goodwill among the public and its customers,” Klingemann said, noting that the downturn erased the positive sentiment banks enjoyed for their handling of COVID-19 as both employers and service providers.
The responses, gathered between late April and early June, also demonstrate just how much more regional banks suffered as a result of the failures than larger and more specialized banks. “Regional bank customers are much more concerned about their institution’s financial stability and five times as likely to want to switch to other banks as compared to customers of other bank types,” he said, “driven by a desire for more financial stability, but also by a desire for lower fees [and] costs, better financial advice and higher reputation.”
An eye on stability
The survey had consumers rate their own bank and others that they were highly familiar with on seven factors: products and services, innovation, workplace, conduct, citizenship, leadership and performance. It also tracked emotional sentiment toward banks and the actions consumers would take related to a given institution — including whether they would use its services, recommend it to someone else or work there. These factors were then indexed together to generate a cumulative score.
This year’s survey, which launched a little more than a month after the failures of Silicon Valley Bank and Signature Bank, also gauged how the demise of the two banks impacted customers’ views on their own banks.
More than half of regional bank customers surveyed reported having at least some concern about the stability of their bank as a result of the crisis, including 20% who reported “strong concern” about their bank. Those stability worries translated to customers docking their banks nearly 12 points on average. Overall, 15% of regional bank customers considered changing banks.
Of the 40 banks included in the survey, nearly all saw their overall reputation fall among noncustomers and more than half saw their scores fall among customers. But a select few regional banks were able to demonstrate that they were fiscally sound and had business models well suited for the moment. Pasadena, California-based East West Bank, which was not featured in the 2022 survey, registered the fifth-highest score among customers in this year’s report. Among noncustomers, it ranked third.
Irene Oh, chief financial officer of the $64 billion-asset bank, said the institution actually saw an inflow of deposits and opened thousands of accounts in the wake of Silicon Valley Bank’s collapse, thanks to its strong presence in the Bay Area. Oh credit’s East West’s ability to not only maintain but grow its business through the period of distress to the hands-on approach the bank’s executives took to address customer concerns.
“I, personally, had many, many conversations with clients who now suddenly wanted to talk about all the bank capital ratios and liquidity stress tests,” she said. “The access to people in leadership positions that can provide confidence, that matters and that’s one of the strengths of the regional banks such as East West.”
Providence-based Citizens Bank also saw its reputation trend in a positive direction, bumping its score by four points over last year to achieve the tenth highest marks among customers. Like many firms, the $160 billion-asset bank saw its standing among noncustomers fall this year, with its score in that category tumbling six points to a ranking of 28.
But, Beth Johnson, vice chair and chief experience officer at Citizens, said the bank was able to perform well and open “many new accounts.” She noted that Silicon Valley and Signature had distinct strategies — with the former focusing primarily on venture capital clients and the latter banking crypto clients — and their failures were “idiosyncratic.” They do not represent the full gamut of regional bank strategies, most of which are diversified and prudent.
“We take a thoughtful approach to how we manage our balance sheet and it has helped us navigate the rising rate environment well and continue to deliver for our customers,” Johnson said. “While we had to play strong defense in the short-term, we continue to simultaneously prioritize smart investments to drive future growth.”
Customers of the five largest banks included in the survey — Bank of America, Chase, Citibank, HSBC and Wells Fargo — remained more confident in their institutions, with 55% reporting no concerns and just 9% indicating strong concerns. Similarly, noncustomers were most confident in large banks, with 42% reporting no concern about their stability, compared to 40% for nontraditional banks and 32% for regionals.
The reputational score fell year over year for large banks, but not as steeply as the decline for regional banks. As a result, the gap between the two strata of banks — which has always favored regionals — was 2.5 points, the smallest since RepTrak began tracking the space in 2017.
Klingemann said this shift in sentiment aligns with a broadly held view that global systemically important banks are a safe harbor for deposits in excess of the Federal Deposit Insurance Corp.’s $250,000 insurance cap. But, he noted, this is also a continuation of a years-long trend of large banks making up ground on the regional counterparts. The gap between large and regional banks was 8.5 points in 2017 and has fallen annually.
“Historically we have seen large institutions get more credit as good corporate citizens, an area in which they were perceived to have the largest deficits versus regional and non-traditional banks,” he said.
Not all large banks saw their standing improve. Wells Fargo maintained its position at the bottom of the noncustomer rankings once again, after another year of hefty regulatory citations and fines. In the customer survey, it finished with the second lowest score, ahead of only fellow San Francisco-based bank First Republic, which failed in the middle of the survey period.
“When you look at the banks that are doing well in gaining share, it really does get back to an unwavering customer focus, or in our case member focus, and what banks are doing around user-centered design for their products and services,” said Paul Vincent, president of USAA Federal Savings Bank.
The winning formula
Despite the digital banking implications in the first two failures of this year — in which a crush of mobile withdrawal requests drained the banks’ liquidity in a matter of hours — online-native banks were the big reputational winners in 2023.
So-called non-traditional banks, including USAA Bank, Discover Bank, Ally Bank, Chime and Synchrony Bank, saw the highest level of customer confidence, with 60% reporting no concern and just 6% citing strong concern. As a group, they also increased their cumulative standing with their customers.
San Antonio, Texas-based USAA maintained its position as the top rated bank among both customers and noncustomers for the seventh year running. Among customers, it increased its industry-leading reputation score by 2.2 points, while only losing a tenth of a point among noncustomers.
Paul Vincent, president of USAA Federal Savings Bank, attributes the firm’s continued success to its focus on a key customer base — military members and their families — and creating products and services that appeal to their distinct needs.
Vincent said it is of little surprise that other banks that fared well in an overall down year had a similar retail centric approach.
“When you look at the banks that are doing well in gaining share, it really does get back to an unwavering customer focus, or in our case member focus, and what banks are doing around user-centered design for their products and services,” he said. “For us, our members in the military and their families are extremely mobile, whether they are stationed around the U.S. or they’re called up to deploy, that digital-first capability is something we’ve continued to build on.”
Indeed, products and services played an outsize role in shaping public opinions about banks in this year’s survey, with 19.7% of customers ranking that category as the most important for assessing their bank this year, up 1.8 percentage points from 2022.
Klingemann notes that this heightened focus on products and services is part of a broader trend of “pocketbook issues” taking higher priority for consumers. Across the board, customers are trying to make sure they get the most bang for their buck from their banking relationships, a trend he attributes to persistent inflationary pressures weighing on household balance sheets.
“As consumers are looking to get the best returns on their banking business relationships, all institutions need to make a case for why customers should stay with them or why they are the best choice for prospective clients,” he said. “Value, in that context, certainly pertains to fee structures, interest rates and investment returns, but also to the quality of services received, the willingness of banks to offer an array of products and services adapted to changing needs or to work with clients who are facing financial challenges.”
Vincent said USAA aims to provide this kind of value in several ways, including making funds from direct-deposit military paychecks available two days earlier, offering 0% balance transfer fees, 5% interest rates on certified deposits and low-cost, unsecured loans. He also noted that the bank does not charge overdraft fees.
“We’re constantly being agile, based on our members’ needs, to get what is new, current and top of mind out there and continue helping them adapt to all of life’s changes while achieving financial security,” he said.
Roger Hochschild, then-president and CEO of Discover,said in July providing relative value to consumers was a founding principle for the bank and a driving force behind its decisions to forego physical branches and establish its own payments network. The Riverwoods, Illinois-based firm’s ability to offer competitive rates and services contributed to its strong performance among customers and noncustomers alike, he said.
Discover was one of the few banks to see its reputation climb from last year among both customers and noncustomers. It ranked fourth and eighth, respectively in the two categories.
“The digital/direct model does give you, especially if you’re at scale and thrifty like us, a lower cost base that can translate into a superior value proposition for customers,” Hochschild said. That could include the bank paying customers a better rate for a savings account than an institution that must support a branch network.
“Also, because we have a proprietary network, we are able to afford cash back on debit transactions. That will be a big differentiator and further build trust with customers,” he added.
The second most important factor for respondents was conduct, ensuring that banks treat their customers, employees and broader communities with “fairness and transparency,” Klingemann said. This is an area in which banks that do offer the same value proposition as others were able to make up ground, but it was also a potential downside risk, as a poor reputation on this front could severely impact a bank’s standing with noncustomers.
Klingemann said there are several ways in which banks can achieve a “competitive advantage” through good conduct and citizenship, including “showcasing active community involvement, being environmentally responsible or highlighting their contributions as an employer of choice.”
Citizens, which has expanded its presence in the New York City area by purchasing 80 branches from HSBC Bank and adding another 150 branches by purchasing Investors Bancorp, has made an effort to engage with its new communities, Johnson said.
“Since our arrival last year, we’ve begun our work with close to 15 local organizations and multiple small businesses to launch tailored programs in our neighborhoods, from Chinatown and Ocean Bay to the East Village and Queens,” Johnson said. “All of these efforts show that Citizens is here to listen, to take in the dynamic energy that makes the city tick and put that knowledge to good use.”
Doing what’s right
The survey also explored how important other issues were to consumers, including their banks’ environmental, social and governance, or ESG, practices. Overall, it appears ESG is valued most by regional bank customers, with 49% of respondents calling it “very important,” compared to 45% of non-traditional bank customers and 39% of large bank customers.
Close to 60% of respondents favored ESG-focused investment strategies provided they generated the same or better returns. Few felt ESG should be pursued in exchange for lower returns, with just 14% favoring that approach, and even fewer felt ESG should never be considered, at just 10%. A significant number of respondents, 20%, were undecided on the matter.
Respondents were also asked whether or not it was important for their banks to address issues related to diversity, equity and inclusion. The survey found a direct correlation between a customer’s age and their likelihood of valuing their bank’s DE&I efforts, with 63% of the youngest cohort, those who were 18 to 24 years old, stating its importance, compared to just 39% of those 65 and older.
Overall, just half of respondents said they cared about their bank’s DE&I strategy, a decrease of 5 percentage points from last year. The only segment polled that showed a higher value for such considerations were Asian Americans and Pacific Islanders, which 55% said the topic was relevant, an uptick of 7 percentage points.
Oh said she was not sure how closely these findings track with her own customers, but she said “Chinese affinity” is one of the leading reasons why East West’s retail and small-business customers choose to do business with the bank. The bank was founded in 1973 to serve recent immigrants who otherwise struggled to access financial services due to language barriers and discrimination. In the decades since, it has adapted to the evolving needs of those communities, including developing services to help customers transmit funds to families overseas. Oh said many Asian Americans have been acutely aware of discrimination and other mistreatment in recent years in light of a rise in violent attacks against their communities since 2020.
“For Asian Americans, especially after the pandemic and some of what came out after that, there’s a renewed focus around DE&I,” Oh said.
The survey also delved into public sentiment on the government’s handling of the bank crisis and what steps should be taken moving forward. The most popular next step, with 55% of respondents favoring it, was to regulate investment risk within banks more heavily, while 44% said banks should be forced to hold more capital. More than a third of respondents would like to see all deposits covered by the FDIC, including those above the $250,000 cap, and 17% endorse the government providing more liquidity to the banking system, if needed.
Only 11% said the government should do nothing at all, an outcome that caught Klingemann by surprise.
“It is pretty notable that, in times of unprecedented political polarization, the overwhelming majority of respondents wants some form of governmental regulation [or] intervention, no matter their sociodemographic status or political affiliation,” he said.
Senate Banking Committee ranking member Tim Scott, R-S.C., and House Financial Services Committee chair Patrick McHenry, R-N.C., would be in a position to rescind any banking rules if they are finalized within 60 legislative days of the opening of the 119th Congress in January 2025 if Republicans win both chambers and the presidency.
Bloomberg News
WASHINGTON — As Congress stirs back to life after its August recess, regulators are now up against a looming Congressional Review Act deadline to finish their most important rulemakings.
Should Congress and the administration flip to Republican control in 2024, the incoming Congress would be able to initiate a Congressional Review Act nullification of any rules issued within the last 60 legislative days of the prior Congress. Legislative days can be tricky to predict because of unscheduled breaks, campaign breaks and emergency sessions, but with all of that being considered the deadline for Biden’s regulators to finalize rules and publish them in the Federal Register would be in May or June of 2024.
The Congressional Review Act dynamic is always present in any election year, but it’s especially important this election cycle now that regulators have proposed a slew of important regulations in the wake of this spring’s bank failures — rules that would have a big impact on bank capital, fee income and supervisory stringency.
Here are the top rules under consideration by the Biden administration that regulators will have to compete ahead of that May/June Congressional Review Act deadline.
PNC’s securities are said to have yielded 1.73 percentage points over Treasuries, compared with early pricing discussions of 1.95 percentage points.
Stefani Reynolds/Bloomberg
PNC Financial Group Services has tapped the U.S. blue-chip bond market for the second time since a regional banking crisis rattled investors earlier this year.
The Pittsburgh-based bank priced $750 million of fixed-to-floating rate notes due in 2034 on Tuesday, according to a person familiar with the matter, who asked not to be identified as the details are private. The securities yielded 1.73 percentage points over Treasuries, compared with early pricing discussions of 1.95 percentage points, the person added.
PNC’s deal is the latest in a string of recent bank bond sales. Bank of America on Monday sold $5 billion of senior unsecured notes in four parts, while Goldman Sachs Group issued $1.5 billion of notes. The regional lender Huntington Bancshares also tapped markets for $1.25 billion of bonds.
The offerings come as companies rush to raise capital before the cyclical summer slowdown that typically kicks in toward the end of August. PNC last issued in early June, when it raised $3.5 billion of bonds.
For regional banks, there’s an incentive to tap investment-grade debt markets while funding costs are relatively low. The extra yield investors demand to hold financial bonds over average blue-chip debt has been declining since April, according to data compiled by Bloomberg.
On Wall Street, focus has also shifted to proposals from U.S. regulators that would require lenders to raise more capital to protect them from market shocks. That could lead to even more issuance, especially from regional banks, as lenders anticipate stricter rules.
Jacobs Engineering Group and Alexander Funding Trust II were also in the market with deals Tuesday.
Representatives for PNC, Jacobs Engineering and Alexander Funding didn’t respond to requests for comment.
The Federal Deposit Insurance Corp. announced Friday night that Kansas-based Dream First Bank would be acquiring all deposits and most of the assets of shuttered Tri-State Bank.
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The Federal Deposit Insurance Corp. announced Friday that it had entered into a purchase and assumption agreement with Dream First Bank of Syracuse, Kan., to assume all of the deposits of Heartland Tri-State Bank of Elkhart, Kan.
The announcement came shortly after the Kansas Office of the State Bank Commissioner shuttered Heartland and appointed the FDIC as receiver. The FDIC said the agreement will cause a $54.2 million hit to the Deposit Insurance Fund, which it says is the least costly resolution.
FDIC said Heartland Tri-State Bank branches will reopen normally under the Dream First Bank name on Monday, July 31, and customer accounts will automatically transfer over to the new company.
“Customers do not need to change their banking relationship in order to retain their deposit insurance coverage,” the FDIC said in a statement. “Customers of Heartland Tri-State Bank should continue to use their existing branch until they receive notice from Dream First Bank, National Association, that it has completed system changes to allow its branch offices to process their accounts as well.”
As of March 31, 2023, FDIC said, Heartland Tri-State Bank had approximately $139 million in total assets and $130 million in deposits. Dream First Bank will assume virtually all of the failed bank’s assets as part of the agreement.
The FDIC and Dream First Bank say they have struck a loss-sharing agreement on the loans they purchased from the now-dissolved bank.
The move is the fourth time this year that the FDIC has taken control — known as receivership — of a bank to protect depositors and find a buyer, the other instances being the failures of Silicon Valley Bank, Signature Bank and First Republic Bank.
The FDIC is obligated by statute to transfer operations to a healthy bank through purchase and assumption, or, failing that, to liquidate a failed bank’s assets to repay depositors and creditors. The FDIC is required to take whatever course results in the lowest cost to the Deposit Insurance Fund.
Friday’s announcement is far less impactful on the DIF than the bank failures from earlier this year. The Silicon Valley Bank and Signature failures represented an estimated $15.8 billion loss to the DIF, while First Republic’s sale to JPMorgan Chase resulted in a $13 billion loss.
“I think for most of us, it’s become a nonevent,” Hanes said. “This year most likely won’t be as good as 2022, but we’re open for business and generally positive.”
A PacWest branch in Encino, California. It was announced on Tuesday that the Los Angeles-based institution had agreed to sell to Banc of California. The transaction is expected to close later this year or in early 2024.
Morgan Lieberman/Photographer: Morgan Lieberman/B
Banc of California in Santa Ana has agreed to purchase PacWest Bancorp in Los Angeles in an all-stock transaction valued at $1 billion.
If regulators approve the deal, Banc of California’s acquisition of PacWest would create a $36 billion-asset institution heavily concentrated in the Southern California market. The combined bank’s deposits would total $30.5 billion and its loan portfolio would total $25.3 billion, according to a Banc of California press release. Banc of California has $9.4 billion of assets at the end of the second quarter. PacWest had roughly $44 billion of assets as of the first quarter.
The merger is intended to “capitalize on the opportunities created for stronger financial institutions in the wake of the recent banking industry turmoil,” Banc of California CEO Jared Wolff said in the statement. Wolff would retain his leadership position at the bank.
The merger was announced shortly after the stock market’s close on Tuesday, though reports of the pending transaction earlier in the day drove PacWest’s stock price down by 27% while Banc of California’s stock ended the trading session up 11%.
PacWest shareholders would receive two-thirds of a share of Banc of California for each owned share of PacWest, according to the press release.
PacWest was among the beleaguered West Coast banks impacted by deposit runoff and market volatility earlier this year that began after the collapse of Silicon Valley Bank in March. In April, PacWest reported losing almost $6 billion in deposits during the first quarter.
Details of the transaction include the repayment of around $13 billion in wholesale borrowings, which will be funded by asset sales and excess cash. PacWest had already begun shedding assets, including a $3.5 billion loan portfolio sale in May.
Banc of California also announced on Tuesday a capital injection totaling $400 million from private equity firms Warburg Pincus and Centerbridge Partners. The money will allow the bank to “reposition” its balance sheet and “generate material savings,” the press release said.
Banc of California expects to have an 85% loan-to-deposit ratio and a 10% common equity Tier 1 capital ratio after the pending acquisition closes. The bank is estimating that earnings per share in 2024 would be between $1.65 and $1.80.
During a call with analysts following the deal announcement, Wolff said that the Banc of California’s acquisition of PacWest “bolsters capital and liquidity” of the combined businesses to create the third-largest commercial bank headquartered in California.
Post-merger Banc of California will target “in-market relationship banking” by focusing on treasury management services and loan growth to boost “low-cost” commercial deposits, Wolff said during the call.
“The heart of the combined company is going to be the community banking franchise,” Wolff said.
Bank merger-and-acquisition activity has been sluggish through much of the year. There have been just 34 deals announced this year from Jan. 1 to June 14, down from 81 for the same period in 2022, according to Janney Montgomery Scott analyst Brian Martin. In addition to the Banc of California-PacWest deal, Atlantic Union announced on Tuesday that it would buy American National in a transaction valued at $417 million.
A number of recent deals have struggled to close either because of market volatility or regulatory concerns. TD Bank and First Horizon called off their long-delayed merger earlier this year due to problems securing regulatory approvals, for instance.
Wolff said during the conference call that the purchase of PacWest was “previewed” with regulators and that the timeline for the deal to close later this year or in early 2024 is “achievable.”
In response to an analyst’s question about the cultural fit of combining two banks through a merger, Wolff said that he has never seen a deal with “this amount of overlap and commonality between the two players.”
The announcement led both Banc of California and PacWest to postpone their scheduled second-quarter earnings presentations.
Christopher Boswell/Christopher Boswell – stock.adob
Cross River Bank climbs past real-time payment transaction benchmark
Cross River Bank, a banking-as-a-service provider that makes loans through fintech lenders, announced this week that it had handled more than one million real-time payments. The Fort Lee, New Jersey, bank was an early participant in The Clearing House’s RTP rail, which it joined two years after its launch in 2017. It has since employed an Application Programming Interface backed infrastructure to process over nine-and-a-half million transactions in areas like health care, insurance, sports betting, wallet off-ramps, marketplace and real estate. The bank said it had reined in $500 million in RTP volume in May alone.—Charles Gorrivan
WASHINGTON — House Democrats raised concerns with Treasury Secretary Janet Yellen Tuesday about whether invoking the systemic risk exception in Silicon Valley Bank and Signature Bank’s failures was the right call.
Rep. Bill Foster, D-Ill., expressed some concern that regulators ultimately resorted to selling First Republic Bank to the already largest U.S. bank — JPMorgan Chase.
“When resolving failed banks, there can sometimes be a tension between lowest-cost resolution and the bipartisan desire to discourage further bank consolidation into a smaller number of very large banks,” he noted.
First Republic Bank was seized by regulators and sold to JPMorgan Chase on May 1, a move designated as the least-cost option by the FDIC. The acquisition of First Republic Bank by JPMorgan Chase still caused a then-estimated $13 billion hit to the Deposit Insurance Fund, inflated the balance sheet of what was already the country’s largest bank.
As Yellen noted Tuesday, banks holding more than 10% of total uninsured deposits — like JPMorgan — are generally not permitted to acquire other banks under the Riegle-Neal Act of 1994. However, this prohibition has an exception, allowing firms above the 10% limit to acquire banks which are failing if necessary to prevent crises and maintain banking stability.
Rep. Stephen Lynch, D-Mass., asked whether the biggest banks were ultimately the best suited to absorb another bank that is failing or in receivership. Yellen noted that, ultimately, the winning bidder provided the least-costly deal regardless of how large they may be.
“When the FDIC resolves a bank, it is required by law to take the best offer it gets,” Yellen said. “In this case, it was JPMorgan Chase.”
Rep. Josh Gottheimer, D-N.J., questioned whether bigger banks may have had an advantage over smaller firms in the bidding process for First Republic.
“In First Republic’s receivership, I’m concerned that the largest banks were given preference in the bidding process, just enabling the biggest banks to grow even bigger,” he said. “My understanding is that the FDIC kept certain regional banks from even bidding on First Republic.”
Democrats also inquired about why Silicon Valley Bank and Signature Bank were granted systemic risk exceptions while First Republic did not. Rep. Lynch said regulators’ willingness to invoke a systemic risk exception this year could undermine the original statutory intent of least cost resolution if the exception becomes the rule in practice.
“The problem that I see is that the least-cost resolution preference was meant to lower the costs of resolution and it’s hard for me to imagine a similar situation ever arising where a systemic risk exception would not apply,” he told Yellen. “I’m just wondering if this exception has swallowed the rule.”
Yellen pushed back, citing past instances where regulators adhered to least-cost resolutions, including during the 2008 crisis and recently with the failure of First Republic Bank.
“Hundreds of banks failed in the aftermath of the global financial crisis and the FDIC resolved most of them and they used the least cost method of resolution. This is a very unusual situation where this exception had to be invoked,” she insisted. “First Republic was resolved, and it was also done in a least-cost resolution.”
The Secretary also weighed in on ongoing debates in Congress like digital asset regulation. When asked by Gottheimer where she sees holes within the crypto regulation space, Yellen said she believed Congress should consider regulating non-security crypto and stablecoins.
“One hole pertains to the supervision of spot-markets, where digital assets are not regarded as securities — so there needs to be regulatory authority there,” Yellen said. “Stablecoins are a type of digital asset that really requires a full-blown federal regulatory framework, and I think this is an area where congressional legislation is appropriate”
Rep. Brad Sherman, D-Calif., refuted the idea that crypto needs any new framework at all, concurring with the view of Securities and Exchange Commission chair Gary Gensler that most cryptocurrencies are securities.
“Chair [Hill] talked about crypto and said we need a regulatory scheme,” he said. “I want to say, we have a regulatory scheme, we have the securities laws and thank God Gensler is enforcing them.
PacWest Bancorp has completed the first part of the sale of a $5.7 billion loan portfolio to the real estate investment company Kennedy Wilson Holdings as the U.S. regional bank takes steps to shore up liquidity.
The first tranche of loans acquired by Kennedy Wilson and its affiliate Fairfax Financial Holdings totaled $3.25 billion in commitments and $1.8 billion in principal balances, Kennedy Wilson said in a statement Friday.
Cain International and Security Benefit Life Insurance agreed to buy 10 of the loans, which are focused on rental apartments and student-housing developments in New York City and its suburbs, according to a separate statement.
PacWest is taking steps to bolster its finances after runs on deposits struck several regional lenders earlier this year, leading to the collapse of three California-based banks and one in New York. Its shares have slumped 60% this year amid the turmoil.
“This transaction will improve our liquidity and capital as we continue to implement our announced strategy to return our focus to relationship-based community banking,” Paul Taylor, chief executive officer of Beverly Hills-based PacWest, said in the statement.
The first tranche was acquired for $1.6 billion, with an additional 12 loans totaling $800 million in commitments expected to close on a rolling basis by the end of July, according to the statement. Kennedy Wilson said in May that it purchased a $2.6 billion portfolio of PacWest real estate construction loans for $2.4 billion.
The $5.7 billion total includes a $4.1 billion loan portfolio, $1.2 billion of loan commitments to be purchased by Cain and $400 million of loans subject to “further due diligence.”
“Even in times like today where the market is generally challenged and we have macro headwinds, there are still good assets and very good developments,” Matthew Rosenfeld, head of U.S. debt at Cain, said in an interview. “We think, across the country, that there’ll be other opportunities where banks seek liquidity.”
Cain, led by Chief Executive Officer Jonathan Goldstein, has originated more than $7 billion in real estate debt, including a construction loan for the luxury hotel Aman New York and financing for a life-science campus in San Diego and a Chicago residential tower.
After the collapse of Silicon Valley Bank, the public discourse has been brimming with hindsight advice on what regulators and lawmakers have missed. Yet nobody is talking about a major trend that is injecting future risk into the financial system: Big Tech’s entry into banking. Dangers are growing exponentially with the rise of decentralized finance (DeFi), but defining what tech titans should be allowed to do is tricky.
Over the last years tech giants have been racing toward financial services. Apple, Alphabet (Google’s parent company), Amazon and Meta (Facebook’s parent company) have all leaped into the payments market. Some partner with licensed banks to offer credit, while Amazon has even entered the corporate lending business. In perhaps the most ambitious initiative yet, Facebook led a group of corporations that attempted to issue a global super-currency far away from the reach of central banks. And though it eventually failed, there are already new plans to run money in the metaverse.
If you wonder how deep Big Tech can get into banking look to China. WeChat Pay and Alipay have long since dethroned credit card schemes and other incumbents. Alibaba’s interest-bearing micro-savings tool Yu’e Bao became the world’s largest money market fund in 2019. Tencent runs a licensed virtual bank together with traditional finance players. Examples abound.
Most of these forays went hand in hand with crucial innovation such as mobile payments or the proliferation of open banking. They slashed costs for consumers, boosted financial inclusion and enhanced usability. Yet these advances are also fraught with dangers.
Data privacy is a big one. Monopolistic tendencies are another. These are issues hotly debated by politicians across the globe, but what often goes unnoticed is the systemic risk Big Tech’s entry injects into the financial system.
TheInternational Monetary Fund, theFinancial Stability Board and theBank for International Settlements have all warned of the ensuing cross-sectoral, cross-border risks. Laws are not yet ready to let tech tycoons control the arteries of the global economy. And as the age of decentralized finance unfurls, the dangers are put under a magnifying glass.
While projects such as Apple or Google Pay were confined to one layer, the triumphal march of blockchain technology and digital assets lets Big Tech compete on the level of assets, settlements, gateways and applications. Facebook’s aforementioned digital currency, called Libra, is a case in point. Had it been successful, Facebook would have had a say in the issuance of the asset, the blockchain on which settlement occurred and the wallet by which users manage their money.
Digital assets are no isolated space anymore. Increasingly, real-life assets are merging with on-chain ones. This interconnectedness means that contagion can easily spread from the unregulated DeFi space to the traditional financial system.
Tech titans are already at the brink of turning into shadow banks. And if they are honest about achieving their visions, say of building the metaverse, then they will inevitably have to put their weight behind DeFi as well.
So how does all this trickle down to concrete policies? The first thing is to put competition on an equal footing, allowing technology giants, banks and fintechs to compete fairly in all areas of tomorrow’s world of finance. Laws cannot block one group from tinkering with crypto assets while giving another free rein. On- and off-chain assets will melt together, whether regulators like it or not. It is better to pen the rules early on than to sleepwalk into an inevitable future.
Unfortunately,some lawmakers are sprinting in the opposite direction. Rather than bringing the increasing DeFi activity onto regulated turf, they want to bar banks from even touching digital assets, hence leaving it to unregulated entities including Big Tech. But there is more to do.
Breaking up tech titans, as some politicians suggest, is not a viable option. Neither is banning them from financial services. Legislation such as the Keep Big Tech out of Finance Act would rob the banking sector of much-welcome innovation and competition. Yet while data giants are innovation powerhouses, they must not enjoy preferential treatment and they must not pile up risks unnoticed. The balancing act can only succeed if today’s approach of activity-based regulation yields to an entity-based one. It is not sufficient that tech titans must solely abide by isolated rules that govern, for example, payments or selling insurance. Due to their clout, tech goliaths must be designated as critical infrastructure providers and as such be regulated on the corporate level just like traditional banks, who have to abide by rules on capital requirements, corporate governance and reporting, as well as numerous restrictions on activities and exposures.
Furthermore, entity-based regulation impacts a company’s risk calculation. If regulated entities break the rules, they face losing the license to operate, not simply fines. “We’re sorry and we’re working on a solution” should not be an acceptable answer for companies dealing with data security and most certainly not for those managing money. Hence, activity-based rules can only be a supplement, not a substitute, for regulating systemically important organizations.
There will be those who argue that technology giants still make up a comparably small fraction of the financial system, yet we have seen that Big Tech is silent about its ambitions all the way up to a big bang announcement. Think Libra or Apple Pay. Due to their unparalleled consumer access, financial resources and technological know-how, these forays can upend a market overnight. And due to Big Tech’s nature of global and cross-industry operations this risk could spread through the world economy like a wildfire. Regulators and lawmakers would do well to act before another crisis ensues.
Federal Reserve vice chair for supervision Michael Barr, left, is joined by Federal Deposit Insurance Corp. chair Martin Gruenberg and Treasury under secretary for domestic finance Nellie Liang in the House Financial Services Committee earlier this month. Barr has hinted that regulators could avail themselves of so-called Pillar 2 provisions in the Basel III accords to put heightened supervisory pressure on banks in the wake of a string of bank failures this spring.
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Regulatory changes are coming to the Federal Reserve in response to this spring’s three large bank failures, and while some will take years to hash out, others can be implemented much more quickly.
For an indication of what first order changes might look like, regulatory experts and analysts say banks should look to a provision of the Basel Committee on Banking Supervision’s international framework known as Pillar 2.
“In Pillar 2, there’s a couple of really key things that regulators already can use and should have been using for decades,” said Mayra Rodriguez Valladares, managing principal of the consultancy MRV Associates.
Pillar 2 was first introduced in the second iteration of the Basel framework, known as Basel II, which was adopted by U.S. regulators in 2007. While Pillar 1 of the framework set minimum capital requirements for participating regulatory agencies, Pillar 2 established the ability for supervisors to address issues within individual banks through other means, including applying additional capital requirements to offset specific risks.
“Pillar 1 is a rule,” David Zaring, professor of legal studies and business ethics at the University of Pennsylvania’s Wharton School of Business, said. “Pillar 2 is a license for regulators to go beyond the requirements of that rule.”
Fed Vice Chair for Supervision Michael Barr has noted that some post-crisis regulatory reforms — including long-term debt requirements and the treatment of unrealized gains and losses on held-to-maturity bonds — will require yearslong notice and comment rulemaking processes. Barr is also conducting a “holistic review” of capital requirements and has indicated that the overall level of equity in the banking system could be higher.
But, Barr has also emphasized that the supervisors have unused tools at their disposal. He has not invoked the Basel framework by name, but experts say his commentary on how to improve the “speed, force and agility” of the Fed’s bank oversight reflects elements of Pillar 2.
“Today, for example, the Federal Reserve generally does not require additional capital or liquidity beyond regulatory requirements for a bank with inadequate capital planning, liquidity risk management, or governance and controls,” Barr said in his written testimony to Congress earlier this month. “I believe that needs to change in appropriate cases. Higher capital or liquidity requirements can serve as an important safeguard until risk controls improve, and they can focus management’s attention on the most critical issues.”
Adam Gilbert, senior global regulatory advisor in PricewaterhouseCoopers’ Financial Services Risk and Regulatory Practice, said Barr’s remarks to Congress and his report on the failure of Silicon Valley Bank last month should be viewed as a warning to banks that the Fed has other tools at its disposal and its not afraid to use them.
“It’s a way of saying, ‘Look, we have other levers to pull if we’re not comfortable with the way you’re managing,’” Gilbert said. “And capital is one.”
The Fed’s ability to issue capital requirements as part of its supervisory regime likely predates Pillar 2, policy experts say, as its general safety and soundness authorities were broad before the Basel Committee issued its first accord in 1988.
Meanwhile, other Basel members have gone a different way. Zaring said regulators in the U.K. have taken a more “clubby,” principle-based approach to supervision, rather than rule-based regime in the U.S.
“For better or worse,” he said, “Pillar 2 permits different approaches.”
In Europe, supervisors regularly issue firm-level capital requirements based on qualitative concerns about capital planning, risk management, governance and other factors. Chen Xu, a regulatory lawyer with firm Debevoise & Plimpton said he expects the Fed to move more in this direction after the failures of Silicon Valley Bank, Signature Bank and First Republic Bank.
“There’s nothing stopping the U.S. from taking a more European approach to supervision,” Xu said. “Barr, in his report, signals the possibility of mandatory triggers based on more qualitative factors. So, that’s what you might see in the U.S. and it wouldn’t necessarily require rulemaking depending on the nature of the consequences. But even if it does, it’s certainly within the Fed’s statutory powers to pass those types of regulations.”
Karen Petrou, managing partner of Federal Financial Analytics, said Pillar 2 was created to address safety and soundness concerns that are difficult to control uniformly via top-down, standardized capital or liquidity requirements. It grants supervisors broad jurisdiction over concerns not explicitly addressed in Pillar 1 capital framework — namely credit risk, market risk and operational risk.
“When the Basel Committee was figuring out how to handle interest rate risk in the express capital standards, they said supervisors and regulators need to do this themselves, either by express interest rate risk capital requirements suitable for their jurisdiction or supervision,” Petrou said. “Same thing with sovereign risk concentrations and a number of other governance issues. When regulators issue core principles for bank governance, those are Pillar 2 standards.”
Some regulatory and supervisory practices at the Fed already fall under Pillar 2, including its stress testing regime and resolution requirements for large banks. But analysts say some under-utilized provisions of the law are likely to be revisited.
Rodriguez Valladares pointed to the Internal Capital Adequacy Assessment Process, or ICAAP, provision of Pillar 2, which sets standards on how regulators should oversee internal stress testing at the banks they supervise. In accordance with ICAAP, she said, the Fed could exercise more control over how banks measure certain risk factors, rather than leaving it up to each individual institution.
Pillar 2 also directs supervisors to make sure banks remain sufficiently above minimum capital and liquidity ratios based on certain risks, Rodriguez Valladares said, noting that the Fed could use it to create more uniform standards for modeling risks, such as rising interest rates.
“There’s definitely room for things to be asked for under Pillar 2,” she said. “You don’t have to go through some huge notice [of] proposed rulemaking.”
Some in and around the banking sector see a risk in drifting too far away from the Fed’s rules-based tradition for capital requirements. Gilbert said the Fed should have clear policies for when supervisors can force a bank to increase capital and how those requirements can be lifted.
“If you’re going to do something like that, you need to be transparent about how it’s going to be captured, how it’s going to be measured, how it’s going to be calculated and how do I get out of it?” Gilbert said. “Is it a roach motel, where I can get into higher capital requirements idiosyncratically, but I can’t get out?”
Greg Lyons, a partner at Debevoise & Plimpton, said if the Fed takes a more discretionary stance on its capital and regulatory regime, it could lead to uncertainty in the banking industry at a time when the sector can ill afford it.
“It’s trading off consistency for an ability to find more issues on a particular basis,” Lyons said. “I worry a little bit about that because these examiners are human beings, after all. I worry there’ll be more pressure to actually find things and raise issues just to ensure people aren’t criticized afterwards.”
Roc360 has purchased the origination assets of Civic Financial, the New York-based firm said in a statement Tuesday. Excluded from the sale are previously originated, loans and loan servicing operations.
Civic Financial, which PacWest acquired in early 2021, specializes in so-called residential business-purpose loans, or mortgages explicitly made for a borrower’s investment property. Civic has lent more than $9.4 billion through its borrower-direct, broker, and correspondent channels since 2014, according to the statement.
Shares of PacWest are up 29% this week through Tuesday after it agreed to sell a $2.6 billion portfolio of real estate construction loans although the stock is still down 68% so far this year.
Morgan Lieberman/Bloomberg
Representatives for Beverly Hills-based PacWest didn’t immediately respond to a request for comment placed outside business hours. The Wall Street Journal reported the news earlier, citing Maksim Stavinsky, Roc360’s co-founder and president.
PacWest rose as much as 9.8% in premarket trading on Wednesday. Shares of PacWest are up 29% this week through Tuesday after it agreed to sell a $2.6 billion portfolio of real estate construction loans although the stock is still down 68% so far this year.
(Bloomberg) –U.S. bank deposits fell for a third week to the lowest level in nearly two years, extending a yearlong slide as customers continue seeking higher returns in money-market funds. Lending was little changed.
Deposits at commercial banks decreased by $26.4 billion in the week ended May 10 to $17.1 trillion, according to seasonally adjusted data from the Federal Reserve out Friday. The drop was mostly at large banks. On an unadjusted basis, deposits slid $57 billion after rising $66.5 billion in the prior week.
Commercial bank lending eased $3.3 billion on a seasonally adjusted basis. On an unadjusted basis, loans and leases fell $17.4 billion.
To gauge credit conditions, economists are closely monitoring the Fed’s so-called H.8 report, which provides an estimated weekly aggregate balance sheet for all commercial banks in the US. In recent months, multiple U.S. banks, with combined domestic assets exceeding $500 billion, have failed.
Deposits at large banks decreased $21.6 billion, constituting the lion’s share of the latest weekly decline.
The Fed’s report showed residential real estate loans declined a seasonally adjusted $2.6 billion, while lending for commercial properties rose slightly. Consumer loans also ticked up from the prior week, while commercial and industrial loans fell $3.5 billion.
The biggest 25 domestic banks account for almost three-fifths of lending, although in some key areas — including commercial real estate — smaller banks are the most important providers of credit.
The report is primarily based on data reported weekly by a sample of about 875 domestically chartered banks and U.S. branches of foreign-related institutions.
Michael Roffler, former chief executive officer of First Republic Bank, testified before the House Financial Services Committee Wednesday. Republicans and Democrats alike excoriated the failed bank CEOs for their mismanagement that led to their banks’ failures.
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WASHINGTON — Former Silicon Valley Bank CEO Greg Becker continued to take heat from both sides of the aisle in his second — and last — day of Congressional testimony.
Becker was joined in the House Financial Services Committee’s joint hearing between the Subcommittees on Financial Institutions and Monetary Policy and Oversight and Investigations by Signature Bank founder Scott Shay and former First Republic CEO Michael Roffler. Shay appeared alongside Becker on Tuesday before the Senate Banking Committee, while this was Roffler’s first time speaking publicly after First Republic’s failure.
Roffler blamed the collapse of First Republic on a lack of confidence sparked by the failure of Silicon Valley Bank and Signature Bank.
“While First Republic understood and disclosed the earnings risks we were facing in 2023, we could not have anticipated that Silicon Valley Bank and Signature Bank would fail, or that the failure of those banks would trigger substantial deposit outflows at our bank,” he said. “Instead of dealing with temporary decreased earnings due to interest rate pressures, First Republic was contaminated overnight by the contagion that spread from the unprecedented failures of two regional banks.”
Most lawmakers laid most of the blame for the regional banking turmoil on Silicon Valley Bank. But while Becker fielded bipartisan attacks on his compensation, particularly his bonuses, in Tuesday’s Senate hearing, Republican lawmakers appeared more interested in questioning the former CEO about Silicon Valley Bank’s interactions with the Federal Reserve, particularly the San Francisco Fed.
“We are not here to defend management at any of the banks that failed or to put anyone on trial for prosecution,” said Rep. Andy Barr, R-Ky., the chairman of the financial services subcommittee. “In looking at the recent bank failures and the continued turbulence in our banking system, it is important to acknowledge that the bank failures did not occur in a macroeconomic vacuum.”
Becker, in particular, took the brunt of lawmaker anger. His bank was the first to fail, and the high share of uninsured deposits and lack of hedging against interest rate risk took heavy criticism from lawmakers.
“Such poor mismanagement, so reckless,” said Rep. Ann Wagner, R-Mo. “I’m just disgusted.”
The ire came from both sides of the aisle.
“I think you’re going to go down in history as absolutely being the most irresponsible leader of a bank in the history of this country,” said Rep. David Scott, D-Ga. to Becker.
Roffler said that the federal government should consider changes to the deposit insurance system. He, along with Shay, spoke about the days following the failure of Silicon Valley Bank, where they tried to calm panicked investors who they said wanted to pull their money and put it in too-big-to-fail banks.
The Federal Deposit Insurance Corp., has released a report suggesting that Congress look at expanding deposit insurance in some instances, but the measure would require both sides of Congress to come together on the issue — a far fetched wish in the midst of a deeply entrenched partisan divide.
Roffler said that changes to deposit insurance system could help “calm the waters”
“At the end of the day, when the panic sets in, it’s really hard to regain confidence,” Roffler said.
Brex was one of the 20 companies that put their hat in the ring to acquire Silicon Valley Bank, or chunks of it, in March, newly-released Federal Deposit Insurance Corp. data shows.
The San Francisco-based neobank tried to buy some deposits and credit card accounts from Silicon Valley Bank when the bank was seized by the FDIC, Brex CEO Henrique Dubugras said in an interview. The deposits and card accounts were all held by early- and growth-stage startup clients.
Dubugras knew Brex’s bid was a long shot because it isn’t a bank and it wasn’t aiming to buy all of Silicon Valley Bank, but the overlap of the two companies’ focus on serving startups made the opportunity attractive to the neobank.
“We understand the community really well, and we thought we could serve it really well,” Dubugras said. “We didn’t bid for the winery or the private bank, or any of these assets that we don’t understand. We only went for the ones we thought could do a really good job and keep the ethos of SVB.”
Dubugras said that the acquisition of the early- and growth-stage portfolio would have brought customers and talent to Brex, but it would not have brought the company a bank charter.
Jonah Crane, a partner at the advisory and investment firm Klaros Group, said acquiring a portion of Silicon Valley Bank’s deposits could have been an opportunity for Brex to accelerate its growth with the company’s target customer base at a bargain price.
Raleigh, North Carolina-based First Citizens BancShares ultimately won the auction for Silicon Valley Bank, assuming $72 billion of loans and all $56.5 billion of deposits. The FDIC published all 25 bids and the 20 firms that submitted them on Wednesday, but it didn’t disclose which company submitted each bid. Although nearly half the bidders were nonbanks, including Blackstone, Apollo Global Management and Sixth Street Partners, Brex was the only neobank.
Brex declined to disclose financial details of its offer, but Dubugras said the company planned to use cash on its balance sheet to buy the deposits and card accounts. He added that Brex was never in contact with the FDIC about the bid. The company decided to submit its pitch at the recommendation of a Brex customer who was also a customer at Silicon Valley Bank, Dubugras said. Brex’s executive team put together the proposal, which was approved by its board.
Neobanks that serve startups saw a massive influx in business following Silicon Valley Bank’s failure as venture-backed businesses looked for ways to safely, quickly stash their capital. Since the bank’s collapse, Brex said it has added $2 billion of deposits. The company has also added to some products and features, including raising the amount of deposits it could protect through money sweep programs and expanding travel booking. Brex’s main strategy going forward is still focused on its expense management software.
“We’re not trying to win all the deposits,” Dubugras said. “We want to be your operating account. We want to make all your payments, run your payroll and pay your bills because our software is really good at doing that. And if you want to keep a lot of money in our treasury, too, we have a product for that. But we really excel at simpler treasury use cases where you just want a money market fund, or day-to-day operation, like bill pay, wires, checks.”
The CEO added Brex isn’t interested in acquiring a bank charter the way some fintechs that focus on online lending like SoFi and LendingClub have done in recent years.
Klaros Group’s Crane said it could make sense for Brex to try to acquire a bank charter, depending on its long-term strategy. When fintechs try to buy banks, they usually look for small, healthy community banks.
“Brex is offering banking services to customers as a nonbank, and they found some relatively creative structures to do that,” Crane said. “But ultimately, they’re not going to be able to be the core operational account or core banking relationship with their customers without a banking license. I think it’s just too hard to run a core treasury and payments function for sizable commercial businesses as a nonbank.”
Dubugras said that Brex is still open to other potential acquisitions but is prioritizing internal investments. He added that distressed Silicon Valley Bank was a “very unique” situation because of its customer base’s overlap with Brex’s. There aren’t many banks that have similar portfolios, except First Republic Bank, which was also based in San Francisco and served similar startup clients but failed Monday following a steep drop in deposit, he said. JPMorgan Chase bought all of First Republic’s deposits and “substantially all” of its $229.1 billion of assets. Dubugras said Brex didn’t have a chance to look at submitting a bid for First Republic.
Bloomberg News and Reuters reported at the time that the FDIC had asked banks to place bids the day prior, including PNC Financial Services Group, U.S. Bancorp, Bank of America and Citizens Financial Group. JPMorgan Chairman and CEO Jamie Dimon said his company had 800 people working to assess First Republic’s books.
“Our government invited us and others to step up, and we did,” Dimon said in a news release at the time. “Our financial strength, capabilities and business model allowed us to develop a bid to execute the transaction in a way to minimize costs to the Deposit Insurance Fund.”
Crane said finding nonbanks able to take assets out of failed, or even healthy, banks could help the banking industry shore up capital positions. He added that he thinks if more banks fail, it will be easier for a nonbank to get in on the purchase action.
“Even if the vast majority of banks are reasonably healthy, they’re all looking at the balance sheet, and they’re all looking at the economic environment, and they’re all getting a little risk-averse right now,” Crane said. “It makes sense that you would want to attract capital from outside the banking system to provide part of the solution here. … JPMorgan can’t buy everybody.”
Federal Reserve Gov. Michelle Bowman said in a speech Friday in Frankfurt, Germany that calls for “fundamental” reforms in the banking system following the collapse of Silicon Valley Bank, Signature Bank and First Republic Bank “are incompatible with the fundamental strength of the banking system.”
“This would be a logical next step in holding ourselves accountable and would help to eliminate the doubts that may naturally accompany any self-assessment prepared and reviewed by a single member of the Board of Governors,” Bowman said in a speech Friday morning during a closed event hosted by the Program on International Financial Systems in Frankfurt, Germany.
Bowman said the bank runs that toppled Silicon Valley Bank, Signature Bank and First Republic Bank were caused by poor bank management and insufficient supervisory oversight. Because of this, she said, the Fed should focus its efforts on ensuring its supervisors identify critical risks within banks and take the appropriate steps to compel bank executives to address them.
She also supported targeted changes to regulation if further review identifies specific shortcomings, noting deposit insurance and treatment of uninsured deposits as potential areas of change. But she said that the banking system is well capitalized and any changes to standards should be capital-neutral, arguing that recent failures should not be used as a “pretext to push for other, unrelated changes to banking regulation.”
“The unique nature and business models of the banks that recently failed, in my view, do not justify imposing new, overly complex regulatory and supervisory expectations on a broad range of banks,” Bowman said. “If we allow this to occur, we will end up with a system of significantly fewer banks serving significantly fewer customers. Those who will likely bear the burden of this new banking system are those at the lower end of the economic spectrum, both individuals and businesses.”
In her speech, Bowman made scant mention of Fed Vice Chair for Supervision Michael Barr’s report on the failure of Silicon Valley Bank, which was completed at the end of last month and released broadly two weeks ago. But her remarks were, in many ways, a rebuttal to his review.
Barr’s report cites both regulatory changes enacted by the Fed in 2019 and an overall shift in supervisory sentiment under the leadership of former Vice Chair for Supervision Randal Quarles as factors contributing to Silicon Valley Bank’s demise.
Barr’s report, which was compiled by the Fed’s top regulatory advisor Kevin Stiroh and included interviews with supervisory staffers, does not propose new policy changes but suggests that several preexisting proposals could be beneficial moving forward. These include changes to stress testing, a long-term debt requirement for large regional banks and a revision of capital standards.
While Bowman did not address Barr’s findings directly, she noted that there has been a “drumbeat calling for broad, fundamental reforms for the past several years.” She added that any efforts to shift away from the tailored approach to regulation — which reserves the strictest standard for the largest, most complex banks — or risk-based supervision is “the wrong direction for any conversation about banking reform.”
“Calls for radical reform of the bank regulatory framework — as opposed to targeted changes to address identified root causes of banking system stress — are incompatible with the fundamental strength of the banking system,” she said. “I am extremely concerned about calls for casting aside tiering expectations for less-complex institutions, given the clear statutory direction to provide for appropriately calibrated requirements for these banks.”
During her speech, Bowman also highlighted changes to banking culture to which supervisors must adapt. The emphasis on innovation in the banking space and the rise of banking-as-a-service, she said, led to an influx of “non-bankers” from less regulated industries, namely tech.
Bowman, the former banking commissioner of Kansas, said some of these new entrants do not regard the shared risk management relationship of banks and supervisors as highly as those who have spent their whole careers in banking. Many, she said, “espouse an ‘ask for forgiveness, not permission’ mentality when it comes to regulation and compliance.”
Moving forward, she said, supervisors should use all their tools to make sure these newcomers understand the risks they are taking, especially if they are core issues that could threaten a bank’s solvency.
“These include concentration risk, liquidity risk and interest rate risk,” Bowman said. “We have the tools to address these issues, but we need to ensure that examiners focus on these core risks and are not distracted by novel activity or concepts.”
Bowman also said the recent crisis and speed at which it played out are reasons for reevaluating the technology at its disposal to mitigate bank runs. She said tools, such as the discount window, are “important but not effective mechanisms to rescue troubled institutions.” She noted that such tools are not available 24 hours a day, seven days a week and in some cases rely on outdated technology.
“These tools must be nimble and flexible to support the banking system during times of stress,” she said. “I think it is important that we understand how well these tools functioned in early March as two U.S. banks experienced stress and ultimately failed, and what can be improved regarding timeliness or effectiveness of fulfilling the lender-of-last-resort function.”
After acquiring the remains of Silicon Valley Bank in March, First Citizens BancShares is counting on higher rates at its direct bank — as well as outreach to the failed bank’s customers, many of whom have moved their funds elsewhere — to shore up its deposit base.
The good news is that after Silicon Valley Bank deposits declined by roughly $12 billion in the first two-and-a-half weeks after the acquisition, they appear to be stabilizing. In the past four weeks, deposits from the collapsed bank have hovered in the $41 billion range.
“We continue to focus on client outreach,” Peter Bristow, the bank’s president, told analysts during its first-quarter earnings call. He expressed confidence that some of Silicon Valley Bank’s old clients will move their money back as they realize their deposits are safe at First Citizens.
But First Citizens does not believe the outflows are over, either. It expects another $8 billion of deposits to run off between now and the end of the year. That’s because SVB clients — including fast-growing startups and technology companies — keep spending more venture capital investment dollars than they are collecting, First Citizens said.
To counteract the outflows, First Citizens is using its nationwide online bank, CIT Bank, to “quickly add balances through competitive offerings,” Bristow said. Excluding deposits tied to Silicon Valley Bank, the company’s deposits have increased by about $2.6 billion since the end of March, in large part because of higher rates being offered at CIT Bank.
On Wednesday, CIT Bank was offering a 5% annual percentage yield on a six-month certificate of deposit, among the highest rates available at Bankrate.com.
First Citizens expects that additional Silicon Valley Bank outflows will be offset by approximately $10 billion of deposit growth at its direct bank, Chief Financial Officer Craig Nix said during the call.
It’s been just over six weeks since Raleigh, North Carolina-based First Citizens purchased all of SVB’s customer deposits, substantially all its loans and certain other assets of the failed bank from the Federal Deposit Insurance Corp. The FDIC had set up a bridge bank to protect depositors following SVB’s swift and turmoil-inducing collapse.
The deal expanded the scale and geographic reach of First Citizens, which has now completed two major acquisitions in less than 15 months. It also offers additional capital and growth opportunities, and deepens the bank’s presence in the technology sector, the company said Wednesday.
In total, the acquisition included $106 billion of assets, doubling the size of First Citizens, which had $214.7 billion of assets as of March 31. First Citizens bought $68.5 billion of loans, $35.3 billion of cash and interest-earnings deposits at banks and nearly $57 billion of customer deposits, which shrunk to $41.4 billion by May 5, the company said.
Like New York Community Bancorp, which purchased most of Signature Bank’s deposits and certain loan portfolios after the latter was shut down by regulators in mid-March, and has similarly warned about further deposit runoff, First Citizens is hoping that some of its lost deposits will return.
“While it is early, we have seen initial positive results in the first clients we have contacted,” Nix said Wednesday. He said the company is “cautiously optimistic” that deposit and loan runoff won’t be as steep as predicted.
Growing core funding is one of First Citizens’ top priorities going forward. So too is the retention of Silicon Valley Bank employees, especially “key revenue-generating employees and the staff to support them,” said CEO Frank Holding Jr.
He acknowledged that there has been some turnover since the deal was announced, but expressed confidence that Silicon Valley Bank “has one of the deepest and most experienced benches of any financial institution serving the innovation economy.” And he said that First Citizens is “committed to maintaining and growing [the bank’s] market by leveraging this deep-seated talent and strength …”
Though the Silicon Valley Bank acquisition has posed some funding challenges for First Citizens, it gave a large boost to the bank’s profits during the first quarter.
First Citizens reported net income of $9.5 billion, up from $271 million during the year-ago period. The increase was the result of a preliminary gain on acquisition of $9.8 billion.
The bank reported $28 million of acquisition-related expenses during the quarter, with overall noninterest expenses totaling $855 million, up from $810 million during the first quarter of 2022. The company expects to incur expenses of between $4.2 billion and $4.3 billion for the full year, it said.
Before Silicon Valley Bank failed, its own noninterest expenses were about $2.6 billion annually, First Citizens said. Between 25% and 30% of that total is expected to fall off as a result of combining the two companies, including the consolidation of certain duplicate back-office operations, the company said.
First Citizens is still in the early stages of integrating Silicon Valley Bank, but it did report some progress on Wednesday. Company executives have held initial meetings with SVB leaders and innovation economy clients, and they have arranged firmwide town hall meetings and training sessions, First Citizens said in its first-quarter earnings presentation.
Analysts wanted to know if First Citizens is planning to use some of its capital, which now tops its targeted range, for share repurchases. The common equity Tier 1 ratio of the combined company is 12.53%, well above First Citizens’ target of 9% to 10%.
Executives said it’s too early to say whether they will use excess capital for buybacks. They are preparing a new capital plan that they expect to share with the board of directors in late July.
Policies enacted under former Federal Reserve Vice Chair for Supervision Randal Quarles took center stage in the Fed’s recent report on the failures of its supervisory practices. But he and experts say the issues date back much further.
Anna Moneymaker/Bloomberg
Last month’s Federal Reserve report on the failure of Silicon Valley Bank has put the policy objectives of former Vice Chair for Supervision Randal Quarles back under the microscope.
Many factors contributed to what was then the second-largest bank failure in U.S. history, according to the report, but one finding, in particular, places blame directly at Quarles’s feet. Though he is not named in the report, it states that his office directed a shift in supervisory practices that made supervisors reluctant to elevate issues and take decisive action against banks.
“In the interviews for this report, staff repeatedly mentioned changes in expectations and practices, including pressure to reduce burden on firms, meet a higher burden of proof for a supervisory conclusion, and demonstrate due process when considering supervisory actions,” the report states. “There was no formal or specific policy that required this, but staff felt a shift in culture and expectations from internal discussions and observed behavior that changed how supervision was executed.”
But former Fed officials, supervisory policy experts and bank lawyers say the cultural deficiencies at play in the supervision of Silicon Valley Bank are nothing new for the central bank. They say the heavy focus on gathering evidence and building “consensus” before taking decisive action on lingering issues has been endemic in the institution for years.
There are differing opinions on why this is the case. Some say it is tied to supervision being a secondary consideration for the monetary policy-focused institution. Others call it a focus on the wrong issues.
Quarles argues the Fed’s long-running modus operandi has been to cast a wide net in its supervision, a practice that he said prioritizes the volume of citations over the risk they present to individual banks or financial stability broadly.
Quarles said he tried to do away with this manner of supervision, insisting that his directive was for supervisors to forgo small infractions in favor of hitting hard on major issues. He said the report on Silicon Valley Bank — which notes that 31 supervisory findings were issued to the bank — is evidence that his advice was not heeded.
“I wasn’t able to do much on supervision and it’s evident that I really didn’t get much done on changing the culture, because the objective was to stop distracting both the institutions and ourselves with excessive attention to routine administrative matters and focus on what’s really important – like interest rate and liquidity risk,” he said. “I would often use the phrase, ‘And if they won’t do what’s really important, smite them hip and thigh.’”
The 31 matters requiring attention and matters requiring immediate attention, commonly known as MRAs and MRIAs, raised with Silicon Valley Bank touched on a wide range of issues, according to the supervisory documents released alongside the report last month. These included matters that played no apparent role in the bank’s collapse, including the management of third-party vendors, the granularity of its loan risk rating system and its governance around lending procedures.
Some MRAs and MRIAs focused on broad topics relevant to the bank’s ultimate demise, including funding concentration, deposit segmentation, liquidity management and interest rate modeling for internal stress tests. Still, the two central factors in Silicon Valley Bank’s collapse, a reliance on uninsured deposits and a lack of hedges on its long-dated bond investments, were not singled out in the materials released.
“Where’s the specific MRA about SVB’s excessive exposure to uninsured deposits? Where’s the MRA about SVB’s specific interest rate risk?” Randall Guynn, a bank regulatory lawyer with Davis Polk, said. “They had 31 supervisory findings, but they couldn’t have raised those issues in the 15 months after Quarles left or eight months after Barr got on the job? Unless there’s more that hasn’t been disclosed, it just doesn’t make any sense.”
Clifford Stanford, a regulatory lawyer with Alston & Bird and a former attorney in the Federal Reserve Bank of Atlanta’s supervision division, said the matter speaks to a long-running complaint by many bankers that having to address a litany of minor issues saps them of time and resources needed to remedy major concerns.
“There is a sense that when a bank’s chief risk officer is looking at dedicating resources and they are inundated with dozens of MRAs, the impact of the emphasis on any one MRA could be diluted,” he said.
Yet, Stanford said, supervision is largely a matter of judgment and it is difficult to know which potential threats will ultimately play out. Had another issue proved ruinous for Silicon Valley Bank, he said, the issues highlighted by the Fed could have proven more prescient.
The Silicon Valley Report report, commissioned by Quarles’s successor Michael Barr, notes that it is difficult to pinpoint a specific catalyst for the culture shift. But it points to a 2018 “guidance on guidance” and a 2021 rule spelling out appropriate activities for supervisors as key moments. Others have said Quarles’s focus on transparency and consistency in the supervisory process carried the implication that bank examiners would have their actions held to a higher standard.
At face value, these efforts were all aimed at making bank supervision more effective, but the report states that they “also led to slower action by supervisory staff and a reluctance to escalate issues.”
Last month, a senior Fed official told reporters that Barr had undertaken efforts to change the culture of supervision in the Federal Reserve System, including meeting with supervisors and holding town halls and conferences to encourage them to be more aggressive in their oversight. But implementing changes across the entirety of the Fed’s supervisory apparatus — which includes thousands of staffers spread through the 12 regional reserve banks and the Board of Governors in Washington — is no simple task.
Quarles had a similar experience when he joined the Fed. In 2018 and 2019, he held town halls at each reserve bank in hopes of spelling out his vision to every supervisor directly. Still, he said, there seems to have been a disconnect between what he wanted and what those beneath him thought he wanted.
“There are changes to supervisory culture that need to be made,” he said. “My message to the supervisors was that they needed to be focused on stuff that really matters, and that they needed to draw the attention of the institutions to stuff that really matters. No doubt with the best of intentions, they clearly did the exact opposite of that here.”
Supervisory culture at the Fed has been a work in progress for more than a decade. After the subprime mortgage crisis of 2008 and the passage of the Dodd-Frank Act in 2010, Fed leadership sought to consolidate supervisory standards to the board, particularly for large institutions. Previously, each reserve bank had more discretion over how they supervised the banks in their regions, leading to discrepancies from one district to another in terms of supervisory priorities and outcomes.
Brookings Institution fellow and former Treasury official Aaron Klein said the cultural issues around supervision are deeply ingrained in the institution. He has argued in favor of stripping the Fed of its regulatory mandate.
The emphasis on forming a consensus before acting stems from the Fed’s approach to monetary policy, he said, noting that the Fed has had unanimity on all of its rate-setting decisions for 18 years straight. He added that while this aversion to dissent has advanced an agenda of lighter regulation in recent years, it is only the latest episode in a long-running saga.
“Did the Trump-appointed Governors promote a culture of deregulation? Yes. Did they create a culture of consensus? No,” he said. “That culture stems from monetary policy which is the Fed’s telos, its core objective.”
Karen Petrou, managing partner of Federal Financial Analytics, has a less hardlined view on the Fed’s future as a regulator, but she agrees that the primacy of monetary policy making within the organization has contributed to its supervisory weaknesses.
Petrou said supervisors are rarely blindsided by failures; it’s more the case that the regulators identify critical issues that go unchecked. For Fed-supervised banks, she blames this disconnect on supervisors receiving insufficient support from leadership.
“Supervisors need to be rewarded for and given the tools, which they don’t have, to cut problematic action short,” she said. “What we see constantly in supervision is a negative feedback loop in which banks fail to do what they’re told and sometimes even double down to try and do as much of what’s making them money as fast as they can before they think they have to stop.”
