Of about 4,000 U.S. banks analyzed by the Klaros Group, 282 banks face stress from commercial real estate exposure and higher interest rates. The majority of those banks are categorized as small banks with less than $10 billion in assets. “Most of these banks aren’t insolvent or even close to insolvent. They’re just stressed,” Brian Graham, Klaros co-founder and partner at Klaros. “That means there’ll be fewer bank failures. But it doesn’t mean that communities and customers don’t get hurt.”
It has been a blockbuster year for investors, with the Dow Jones Industrial Average, the S&P 500 and the Nasdaq Composite all up with double-digit gains. However, the Federal Reserve battled the worst inflation in decades with several rate hikes, and 2023 marked the worst banking crisis since 2008, with three major institutions collapsing. Astrid Martinez reports.
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A bill that would take back pay from executives whose banks fail appears likely to advance in the Senate, several months after Silicon Valley Bank’s implosion rattled the tech industry and tanked financial institutions’ stocks.
The Senate Banking Committee on Wednesday heard the bipartisan proposal, co-sponsored by Sens. Sherrod Brown (D-Ohio) and Tim Scott (R-S.C.)
Dubbed the Recovering Executive Compensation Obtained from Unaccountable Practices Act of 2023, or RECOUP Act, the bill would impose fines of up to $3 million on top bankers and bank directors after an institution collapses. It would also authorize the Federal Deposit Insurance Commission to revoke their compensation, including stock sale proceeds and bonuses, from up to two years before the bank crash.
“Shortly after the collapse of SVB, CEO Greg Becker fled to Hawaii while the American people were left holding the bag for billions,” Scott said during the hearing, adding, “these bank executives were completely derelict in their duties.”
The proposal is policymakers’ latest push to stave off a potential banking crisis months after a series of large bank failures rattled the finance industry.
In March, Democratic Sens. Elizabeth Warren of Massachusetts and Catherine Cortez-Masto of Nevada teamed up with Republican Sens. Josh Hawley of Missouri and Mike Braun of Indiana to propose the Failed Bank Executive Clawback Act. The bill — a harsher version of the RECOUP Act —would require federal regulators to claw back all or part of the compensation received by bank executives in the five years leading up to a bank’s failure.
Silicon Valley Bank fell in early March following a run on its deposits after the bank revealed major losses in its long-term bond holdings. The collapse triggered a domino effect, wiping out two regional banks — New York-based Signature Bank and California’s First Republic.
A push to penalize executives gained steam after it emerged that SVB’s CEO sold $3.6 million in the financial institution’s stock one month before its collapse. The Justice Department and the Securities and Exchange Commission are investigating the timing of those sales, the Wall Street Journal reported.
Tight grip on compensation
Recouping bank officials’ pay could prove difficult given that regulators have not changed the rules regarding clawbacks by the FDIC. Under the Dodd-Frank Act, the agency has clawback authority over the largest financial institutions only, in a limited number of special circumstances.
In a hearing before the Senate Banking Committee on Tuesday, FDIC Chair Martin Gruenberg signaled a need for legislation to claw back compensation.
“We do not have under the Federal Deposit Insurance Act explicit authority for clawback of compensation,” Gruenberg said in response to a question by Cortez-Masto. “We can get to some of that with our other authorities. We have that specific authority under Title II of the Dodd-Frank Act. If you were looking for an additional authority, specific authority under the FDI Act for clawbacks, it would probably have some value there.”
Shares of PacWest, a small regional bank based in Los Angeles, plunged almost 40% Thursday after the company confirmed it may put itself up for sale. Anxiety over potential bank runs has sent shares of smaller banks tumbling. A bank run is when large numbers of people withdraw their money from a bank all at once.
Since March, three regional banks have failed — Silicon Valley Bank, Signature Bank and First Republic Bank. If the recent bank collapses have you worried about the safety of your money, here’s what you need to know:
Is my money safe?
Yes, if your money is in a U.S. bank insured by the Federal Deposit Insurance Corp. and you have less than $250,000 there. If the bank fails, you’ll get your money back.
Nearly all banks are FDIC insured. You can look for the FDIC logo at bank teller windows or on the entrance to your bank branch.
If you have over $250,000 in individual accounts at one bank, which most people don’t, the amount over $250,000 is considered uninsured and experts recommend that you move the remainder of your money to a different financial institution, said Caleb Silver, editor in chief of Investopedia, a financial media website.
If you have multiple individual accounts at the same bank, for example a savings account and certificate of deposit, those are added together and the total is insured up to $250,000. (Read on for more about how joint accounts are protected.)
Federal officials have been taking steps to make sure other banks aren’t impacted.
“People who have their money in insured accounts have nothing to worry about,” said Mark Hamrick, senior economic analyst at Bankrate.com. “Simply make sure that deposits fall within the guaranteed limits, whether it’s FDIC or the credit union equivalent.”
Customers of banks that have been sold will have access to their money from the new owner, according to the FDIC. For example, JPMorgan Chase acquired First Republic Bank when it failed earlier this week and customers are able to access all of their money from JPMorgan.
Are there red flags I should look for with my bank?
If you are worried about your bank closing in the near future, there are some things you can watch out for, according to Silver:
— If it is publicly listed, watch the stock price.
— Keep an eye on the quarterly and annual reports from your bank.
— Start a Google alert for your bank in case there are news stories about it.
You want to make sure you pay close attention to the way your bank is behaving, Silver said.
“If they’re trying to raise money through a share offering or if they’re trying to sell more stock, they might have trouble on their balance sheet,” said Silver.
Public companies, including banks, do sell shares or issue new ones for various reasons, so context matters. First Republic did so this year when the hazards it faced were well known, and it kicked off an exodus of investors and depositors.
Should I look for alternatives?
If you have more than $250,000 in your bank, there are a few things you can do:
— Open a joint account
You can protect up to $500,000 by opening a joint account with someone else, such as your spouse, said Greg McBride, chief financial analyst at Bankrate.
“A married couple can easily protect a million dollars at the same bank by each having an individual account and together having a joint account,” McBride said.
— Move to another financial institution
Moving your money to other financial institutions and having up to $250,000 in each account will ensure that your money is insured by the FDIC, McBride said.
Despite the recent uncertainty, experts don’t recommend withdrawing cash from your account. Keeping your money in financial institutions rather than in your home is safer, especially when the amount is insured.
“It’s not a time to pull your money out of the bank,” Silver said.
Even people with uninsured deposits usually get nearly all of their money back.
“It takes time, but generally all depositors — both insured and uninsured — get their money back,” said Todd Phillips, a consultant and former attorney at the FDIC. “Uninsured depositors may have to wait some time, and may have to take haircut where they lose 10 to 15% of their savings, but it’s never zero.”
How long does it take for insured money to be available if a bank fails?
Historically, the FDIC says it has returned insured deposits within a few days of a bank closing. The FDIC will either provide that amount in a new account at another insured bank or issue a check.
How much money can be insured in joint accounts?
If you have a joint account, the FDIC covers each individual up to $250,000. You can have both joint and single accounts at the same bank and be insured for each.
So if a couple each has individual accounts and a joint account where they have equal withdrawal rights, they can each have up to $250,000 insured in their single accounts and up to $250,000 in their joint accounts. That means each of them will have up to $500,000 insured.
What about other investments?
Customers should take a close look at the types of investments they have in their bank to know how much of their assets are insured by the FDIC. The FDIC offers an Electronic Deposit Insurance Estimator, a tool to know how much of your money is insured per financial institution.
FDIC deposit insurance covers: — Checking accounts — Negotiable Order of Withdrawal (NOW) accounts — Savings accounts — Money Market Deposit Accounts (MMDAs) — Certificates of Deposit (CDs) — Cashier’s checks — Money orders — Other official items issued by an insured bank
FDIC deposit insurance doesn’t cover: — Stock investments — Bond investments — Mutual funds — Life insurance policies? — Annuities — Municipal securities — Safe deposit boxes or their contents — U.S. Treasury bills, bonds, or notes — Crypto assets
Both credit unions and banks allow customers to open savings and checking accounts, among other financial products.
The key difference is that credit unions are not-for-profit institutions, which tends to translate into lower fees and lower balance requirements, while banks are for-profit. Sometimes it also means that it’s easier for credit union customers to be approved for loans, McBride said.
Usually, customers are allowed to join credit unions based on where they live or work.
Credit unions serve a smaller number of customers, which also allows for a more personalized experience. The tradeoff is that banks tend to have larger staff, more physical branches and newer technology.
When it comes to the safety of customer’s money, both banks and credit unions insure up to $250,000 per individual customer. While banks are insured by the FDIC, credit unions are insured by the NCUA.
“Whether at a bank or a credit union, your money is safe. There’s no need to worry about the safety or access to your money,” McBride said.
The Associated Press receives support from Charles Schwab Foundation for educational and explanatory reporting to improve financial literacy. The independent foundation is separate from Charles Schwab and Co. Inc.
Financial institutions are looking to risk mitigation and regulatory compliance technology following the industry turbulence brought on by the recent collapses of Silicon Valley Bank, Signature Bank and First Republic Bank. The events of the past two months have banks asking, “What do they have in place to, one, protect themselves but also earn the […]
The future of PacWest Bancorp hangs in the balance as investors pull back from regional lenders following the sudden collapse of three prominent banks in a matter of weeks.
Shares of the $44 billion bank continued to slide Thursday, tumbling 60% to an all-time low of $2.57 and with trading briefly halted due to volatility. The latest dive in the stock, which has fallen 89% this year, followed a report by Bloomberg News on Wednesday that PacWest is weighing its strategic options, including a possible sale.
In a statement issued late Wednesday, PacWest confirmed that it has “explored strategic asset sales” and has recently “been approached by several potential partners and investors.” Those talks continue, the company added.
Although PacWest’s stock has tanked in recent weeks, the company hasn’t faced the kind of massive capital flight that crippled Silicon Valley Bank, noted analyst Adam Crisafulli of Vital Knowledge. In reporting its first-quarter earnings on April 25, PacWest said its total deposits had increased $1.1 billion to $28.2 billion.
PacWest also has far less in uninsured deposits — client funds in excess of the $250,000 account cap guaranteed by the U.S. — than SVB did when it capsized in March. CEO Paul Taylor noted last month that the bank’s total insured deposits had risen from 48% of total deposits at the end of 2022 to 71% as of March 31.
“It’s important to remember that Silicon Valley and First Republic were unique, and investors shouldn’t simply extrapolate what happened to them to the whole regional landscape,” Crisafulli said in a report.
The problem with interest rates
Although a range of factors have hurt regional banks, the main problem stems from the sharp increase in interest rates, which have shot up 5% since the Federal Reserve started raising the cost of borrowing in March of 2022. Higher rates increase lenders’ funding costs while also forcing them to boost the returns they offer to customers, which reduces bank profits.
At the same time, when rates were still low and money was cheap, institutions like SVB gorged on long-duration Treasury and mortgage securities. But as interest rates soared last year, the price of those bonds fell sharply, exposing the banks to potentially large losses. Some banks had to sell the investments and book the losses on their balance sheets.
Banks like SVB and First Republic were also hurt because they catered to wealthier clients with account balances exceeding the Federal Deposit Insurance Corporation’s $250,000 deposit insurance limit. Panicked customers rushed to pull their funds, causing a classic “run” on the banks.
Meanwhile, even lenders with a large share of insured deposits face the challenge of retaining customers lured by the higher rates available in money-market funds, high-yield savings accounts and other investments. Smaller and midsize banks, which also focus on issuing loans to local businesses, are also more vulnerable to the recent downturn in commercial real estate, such as malls and office parks.
The upshot for many banks: Higher costs for doing business, capital flight and mounting losses.
Other banks under pressure
Wall Street has grown increasingly wary of midsize lenders since the March 10 collapse of Silicon Valley Bank (SVB) and the failure only days later of Signature Bank after depositors rushed to withdraw their money.
Shares of Western Alliance Bancorporation plunged 58% Thursday even as it sought to reassure investors that its financial position remains solid. The selloff came after the Financial Times reported that the $65 billion Phoenix-based bank was exploring a sale. Western Alliance denied the report, calling it “categorically false in all respects” and accusing the newspaper of allowing itself to be used by investors who bet against a company’s stock.
The bank said late Wednesday that it hasn’t experienced unusual deposit outflows amid the turbulence buffeting the banking sector, noting that its deposits have risen $1.2 billion this quarter to $48.8 billion. As of May 2, 74% of its total deposits were insured.
As investors soured on $229 billion First Republic, federal financial regulators were forced to arrange a shotgun marriage with JPMorgan Chase, which agreed this week to buy most of the company’s assets.
In announcing the deal on Monday, JPMorgan CEO Jamie Dimon said that absorbing First Republic would help stabilize the banking industry, while warning that the turmoil affecting midsize and small lenders could continue.
Federal Reserve Chair Jerome Powell, speaking Wednesday after the central bank moved to hike its benchmark rate for a 10th consecutive time, expressed confidence in the U.S. banking industry, saying it remains “sound and resilient.”
In what is by now a familiar pattern, the fate of another regional lender hangs in the balance as investors bail from the sector following the sudden collapse of three prominent banks in a matter of weeks.
Shares of PacWest Bancorp crumbled after the close of trading on Wednesday, diving 55% to $2.88 amid a report by Bloomberg News that the $44 billion bank is weighing its strategic options, including a possible sale. The market drop followed a 28% plunge in Los Angeles-based PacWest’s stock price the previous day.
PacWest, whose shares are down 78% over the last three months, has hired a financial adviser and is also considering a breakup or trying to raise capital, according to Bloomberg.
Wall Street has grown increasingly wary of midsize lenders since the March 10 collapse of Silicon Valley Bank (SVB) and the failure only days later of Signature Bank after depositors rushed to withdraw their money.
As investors soured on $229 billion First Republic, federal financial regulators were forced to arrange a shotgun marriage with JPMorgan Chase, which agreed this week to buy most of the company’s assets.
In announcing the deal on Monday, JPMorgan CEO Jamie Dimon said that absorbing First Republic would help stabilize the banking industry, while warning that the turmoil affecting midsize and small lenders could continue.
Other regional bank stock also continued to reel on Wednesday. Western Alliance sank 4% before tumbling another 29% in after-hours trading, while Comerica and Zions Bancorporation also fell sharply. The KBW regional bank index has lost 29% this year.
Although PacWest’s stock has tanked in recent weeks, the company hasn’t faced the kind of massive capital flight that crippled Silicon Valley Bank, noted analyst Adam Crisafulli of Vital Knowledge. In reporting its first-quarter earnings on April 25, PacWest said its total deposits had increased $1.1 billion to $28.2 billion.
PacWest also has far less in uninsured deposits — client funds in excess of the $250,000 account cap guaranteed by the U.S. — than SVB did when it capsized in March. CEO Paul Taylor noted last month that the bank’s total insured deposits had risen from 48% of total deposits at the end of 2022 to 71% as of March 31.
“It’s important to remember that Silicon Valley and First Republic were unique, and investors shouldn’t simply extrapolate what happened to them to the whole regional landscape,” Crisafulli said in a report.
Silicon Valley Bank’s dramatic failure in early March was the product of mismanagement and supervisory missteps, compounded by a dose of social media frenzy, the Federal Reserve concluded in a highly anticipated report released Friday.
Michael S. Barr, the Fed’s vice chair for supervision appointed by President Joe Biden, said in the exhaustive probe of the March 10 collapse of SVB that myriad factors coalesced to bring down what had been the nation’s 17th-largest bank.
Among them were bank executives who committed “textbook” failures in managing interest rate risk, Fed regulators who failed to understand the depth of SVB’s problems and then were too slow to react, and a social media frenzy that may have accelerated the institution’s demise.
Barr called for broad changes in the way regulators approach the nation’s complex and interwoven financial system.
“Following Silicon Valley Bank’s failure, we must strengthen the Federal Reserve’s supervision and regulation based on what we have learned,” he said.
“As risks in the financial system continue to evolve, we need to continuously evaluate our supervisory and regulatory framework and be humble about our ability to assess and identify new and emerging risks,” Barr added.
A senior Fed official said increased capital and liquidity might have helped SVB survive. Central bank officials likely will turn their attention to cultural changes, noting that risks at SVB were not thoroughly examined. Future changes could see standardized liquidity requirements to a broader range of banks, and tighter supervision of compensation for bank managers.
Bank stocks were higher following the report’s release, with the SPDR S&P Bank ETF up about 1.3%.
In a stunning move that continues to reverberate across the banking system and through financial markets, regulators shuttered SVB following a run on deposits triggered by liquidity concerns. To meet capital requirements, the bank was forced to sell long-dated Treasury notes at a loss incurred as rising interest rates ate into principal value.
Barr noted that SVB’s deposit run was exacerbated by fear spread on social media outlets that the bank was in trouble, combined with the ease of withdrawing deposits in the digital age. The phenomenon is something that regulators need to note for the future, he said.
“[T]he combination of social media, a highly networked and concentrated depositor base, and technology may have fundamentally changed the speed of bank runs,” Barr said in the report. “Social media enabled depositors to instantly spread concerns about a bank run, and technology enabled immediate withdrawals of funding.”
He used a broad brush in discussing the Fed’s failures, not mentioning San Francisco Federal Reserve President Mary Daly, under whose jurisdiction SVB sat. Senior Fed officials, speaking on condition of anonymity in order to speak frankly, said regional presidents aren’t generally responsible for direct supervision of the banks in their districts.
Fed Chairman Jerome Powell said he welcomed the Barr probe and its internal criticism of Fed actions during the crisis.
“I agree with and support his recommendations to address our rules and supervisory practices, and I am confident they will lead to a stronger and more resilient banking system,” Powell said in a statement.
SVB was a darling of the tech industry as a place to turn to for high-flying companies in need of growth financing. In turn, the bank used billions in uninsured deposits as a base for lending.
The collapse, which happened over the matter of just a few days, sparked fears that depositors would lose their money as many of the accounts were above the $250,000 threshold for Federal Deposit Insurance Corp. insurance. Signature Bank, which used a similar business model, also failed.
As the crisis unfolded, the Fed rolled out emergency lending measures while guaranteeing that depositors wouldn’t lose their money. While the moves have largely stemmed the panic, they spurred comparisons to the 2008 financial crisis and have led to calls for reversing some of the deregulatory measures taking in recent years.
Senior Fed officials said changes to the Dodd-Frank reforms helped spur the crisis, though they also acknowledge that the SVB case also was a failure of supervision. A change approved in 2018 reduced the stringency of stress testing for banks with less than $250 billion, a category in which SVB fell.
“We need to develop a culture that empowers supervisors to act in the face of uncertainty,” Barr wrote. “In the case of SVB, supervisors delayed action to gather more evidence even as weaknesses were clear and growing. This meant that supervisors did not force SVB to fix its problems, even as those problems worsened.”
Areas the Fed is likely to focus on include the types of uninsured deposits that raised concerns during the SVB drama, as well as a general focus on capital requirements and the risk of unrealized losses that the bank had on its balance sheet.
Barr noted that supervisory and regulatory changes likely won’t take effect for years.
The General Accountability Office also released a report Friday on the bank failures that noted “risky business strategies along with weak liquidity and risk management” that contributed to the collapse of SVB and Signature.
Correction: The General Accountability Office also released a report Friday. An earlier version misstated the name of the agency.
First Republic Bank’s stock plunged on Tuesday after it said depositors withdrew more than $100 billion during last month’s crisis, with fears swirling that it could be the third bank to fail after the collapse of Silicon Valley Bank and Signature Bank.
The San Francisco bank said late Monday that it was only able to staunch the bleeding after a group of large banks stepped in to save it by injecting $30 billion in uninsured deposits.
Shares of First Republic plummeted more than 49% on Tuesday to close $8.10 share.
First Republic had roughly $290 billion in assets as of March 31, making it larger than SVB at the time of its failure. The troubled bank said it now plans to sell off assets and restructure its balance sheet, and lay off as much as a quarter of its workforce, which totaled about 7,200 employees at the end of 2022.
“With still a large level of uncertainty in outcomes and expected losses beyond the next year, we recommend investors sell shares as the outlook appears largely unclear,” Citi analyst Arren Cyganovich said in a note to clients.
Other regional banks were under pressure in a down day for markets. The S&P 500 lost 1.2% early Tuesday afternoon. The Dow fell 0.8% and the tech-heavy Nasdaq fell 1.5%.
Before the failure of Silicon Valley Bank, First Republic had a banking franchise that was the envy of most of the industry. Its clients, mostly the rich and powerful, rarely defaulted on their loans. The bank made much of its money making low-cost loans to the rich, which reportedly included Meta Platforms CEO Mark Zuckerberg.
But its franchise became a liability when bank customers and analysts noted that the vast majority of First Republic’s deposits, like those in Silicon Valley and Signature Bank, were uninsured — that is, above the $250,000 limit set by the FDIC. If First Republic were to fail, its depositors would be at risk of not getting all their money back.
First Republic reported first-quarter results Monday that showed it had $173.5 billion in deposits before Silicon Valley Bank failed on March 9. On April 21, it had deposits of $102.7 billion, which included the $30 billion the big banks deposited. It said since late March, its deposits have been relatively stable.
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At a press conference in Washington on Thursday, Das said at the global level, the recent developments in the banking system in the US and in Switzerland, have once again brought into focus the importance of financial stability and banking sector stability, said a PTI report.
“So far as India is concerned, the Indian banking system remains completely insulated from the developments that have taken place in the US or in Switzerland. Our banking system is resilient, stable and healthy,” Das said.
“The parameters related to banking, whether it is capital adequacy, or it is the percentage of stressed assets or it is the liquidity coverage ratio of individual banks both at individual level as well as at the systemic level or issues like provision coverage ratio, aspects like net interest margin of banks, profitability of banks, whichever parameter you take into consideration, the Indian banking system continues to be very healthy,” he said.
Das said as far as the Reserve Bank of India (RBI) is concerned, over the last few years, “We have significantly improved and tightened our regulation and supervision of the entire banking system, including the non-banking financial companies”. The focus of supervision is on early identification of any buildup of vulnerabilities and not waiting for the crisis to build up, he said.
In his monetary policy statement last week, Das observed that with the fight against inflation far from over, the global economy is now confronted with serious financial stability challenges from the recent banking sector developments in some advanced economies.
“This calls for a reappraisal of the responsibilities of the regulators and the regulated entities world over and their collective role in safeguarding the stability of the financial system. While regulators need to identify potential vulnerabilities and take proactive regulatory and supervisory measures, it is incumbent upon the regulated institutions to exercise due diligence in their risk management and corporate governance practices,” he had said.
They need to pay close attention to asset-liability mismatches and profile of their deposit base, while building up adequate capital buffers and conducting periodic stress tests, he added.
Citigroup reported rising net income and better-than-expected revenue for the first quarter, boosting its stock Friday even as the bank’s executives expressed caution about the path of the U.S. economy.
Here is how Citigroup’s key metrics compared with expectations.
$4.6 billion in net income vs. $4.3 billion in the same period last year
$21.45 billion in revenue vs. $19.99 billion expected, according to Refinitiv.
Citigroup reported earnings of $2.19 per share for the quarter. It was not clear how comparable that number is to estimates, but it appeared to be a solid beat, based on both GAAP and adjusted earnings per share.
Shares of the bank rose about 4.8%.
Citi’s stock rose after the bank reported better-than-expected results for the first quarter.
The results were fueled in part by personal banking revenue rising 18% year over year, reflecting higher interest rates. Fixed income markets revenue rose 4% year over year, though that was offset by declines in investment banking and equity market revenue.
One key area for investors is how Citi adjusts its buffer for loan losses given the uncertain outlook for the economy. Citigroup reported a total provision for loan losses of $1.98 billion, slightly above the $1.89 billion provision for credit losses expected by analysts, according to StreetAccount, and up 7% from the prior quarter.
The outlook for the economy has been muddled by the failure of Silicon Valley Bank and Signature Bank last month, which could potentially slow loan growth throughout the economy.
“We are in a strong position to navigate whatever environment we face, which is particularly relevant given the degree of uncertainty today. … We expect the recent events to be disinflationary and credit to contract. We believe it is now more likely that the U.S. will enter into a shallow recession later this year,” Citigroup CEO Jane Fraser said on an investor call.
The CEO added that Citi saw a “notable softening” in consumer spending over the course of the quarter.
The bank kept its full-year guidance the same despite the strong first quarter, and CFO Mark Mason cited the uncertainty around the economy and the path of interest rates as the reason.
Citigroup reported that its deposits at the end of March were down 3% quarter over quarter to $1.33 trillion, but Mason said on the investor call that the bank did see about $30 billion of deposit inflows over the last three weeks of March. After the collapse of the two regional banks, many analysts expected the larger U.S. banks to see deposit inflows.
Fraser said she feels “very comfortable” with the diversity of Citi’s deposit base.
As part of a broader restructuring plan away from international retail banking, Citigroup closed two divestitures during the first quarter, including its consumer business in India that generated a gain on the sale. Net income was down 19% year over year when excluding the impact of the sales.
Revenue rose 12% year over year, and 6% when excluding the impact of those sales.
Fraser, who has spearheaded the sales since taking over as CEO in 2021, said Friday that the bank will exit its remaining retail markets in Asia later this year.
Entering Friday, Citigroup’s stock was up more than 4% year to date, outperforming key peers including JPMorgan Chase and Bank of America. Shares of JPMorgan rose more than 7% on Friday following its quarterly report.
The banking crisis triggered by the recent collapses of Silicon Valley Bank and Signature Bank is not over yet and will ripple through the economy for years to come, said JPMorgan Chase CEO Jamie Dimon on Tuesday.
In his closely watched annual letter to shareholders, the chief executive of America’s largest bank outlined the extensive damage the financial system meltdown had on all banks — large and small — and urged lawmakers to think carefully before responding with increased regulation.
“These failures were not good for banks of any size,” wrote Dimon, responding to reports that large financial institution benefited greatly from the collapse of SVB and Signature Bank as wary customers sought safety by moving billions of dollars worth of money to big banks.
In a note last month, Wells Fargo banking analyst Mike Mayo wrote “Goliath is winning.” JPMorgan in particular, he said, was benefiting from more deposits “in these less certain times.”
“Any crisis that damages Americans’ trust in their banks damages all banks — a fact that was known even before this crisis,” he wrote. “While it is true that this bank crisis ‘benefited’ larger banks due to the inflow of deposits they received from smaller institutions, the notion that this meltdown was good for them in any way is absurd.”
The failures of SVB and Signature Bank, he argued, had little to do with banks bypassing regulations. He said that SVB’s high Interest rate exposure and large amount of uninsured deposits were already well-known to both regulators and to the marketplace at large.
Current regulations, he argued, could actually lull banks into complacency without actually addressing real system-wide banking issues. Abiding by these regulations, he wrote, has just “become an enormous, mind-numbingly complex task about crossing t’s and dotting i’s.”
And while regulatory change will almost certainly follow the recent banking crisis, Dimon argued that, “it is extremely important that we avoid knee-jerk, whack-a-mole or politically motivated responses that often result in achieving the opposite of what people intended.” Regulations, he said, are often put in place in one part of the framework but have adverse effects on other areas and just make things more complicated.
The Federal Deposit Insurance Corporation has said it will propose new rule changes in May, while the Federal Reserve is currently conducting an internal review to assess what changes should be made. Lawmakers in Congress, including Democratic Sen. Sherrod Brown of Ohio, have suggested that new legislation meant to regulate banks is in the works.
But, wrote Dimon, “the debate should not always be about more or less regulation but about what mix of regulations will keep America’s banking system the best in the world.”
The sudden failures of Silicon Valley Bank and Signature Bank last month created a nervous waiting game for options investors, showing that even winning trades can be risky in the derivatives market.
The closures of SVB on March 10 and Signature on March 12 led to halts for the stocks — at $106 per share for SVB and $70 per share for Signature.
This halt, and how regulators and brokerage firms handled the outstanding options contracts, turned simple trades into a big headache for retail investors. In some cases, traders had to put up additional cash and take on potential risk or see their timely bets expire worthless.
This was a problem for even more sophisticated retail traders such as Shaun William Davies, an associate professor of finance at the University of Colorado-Boulder, who had purchased Signature put options on brokerage platform Robinhood with a $50 strike price as a hedge against market volatility.
A put option gives the holder the right to sell the stock at the strike price and serves as a bet that the stock will go down. A put contract is also attractive because it has limited downside for the holder.
Logically, that trade should have been a big winner, but Davies’ options were technically out of the money, based on the last traded price — that is, the share price at the time was above his $50 strike price — and the stocks were now illiquid. The put options were set to expire March 17.
Shares of Signature Bank were halted for about two weeks in March.
Davies said that usually he would sell his winning options trades before expiration, so he does not have to deal with the settlement process. But the halt meant that he had to convince Robinhood to open a short position to exercise his options and then allow him to close out the short position whenever the stock began to trade again.
The brokerage firm originally told Davies that it would not allow him to open a short position, according to messages with customer support viewed by CNBC. He said there was no mention in the options agreement with Robinhood that highlighted this risk if stocks were halted.
“In hindsight, I should have bought puts on First Republic or something … First Republic traded all day on Monday [March 13]. I just happened to trade the one that was shut down — which should have been the best hedge, but it turned out to be the worst hedge,” Davies said March 15, when he thought his options would expire before he could exercise them.
Robinhood later allowed Davies to create the naked short position and therefore to exercise his option. A Robinhood spokesperson told CNBC that the firm was reaching out to customers individually to help work through the issues.
However, there was still a uneasy waiting period for Davies and other traders in his position. The naked short positions showed an on-paper loss in his account until the stock began trading over the counter on March 28. While he had enough cash in his account to cover margin requirements, Davies said he was restricted from doing further trades until the short position was covered.
While some of Davies’ confusion may have been related to Robinhood, the broader issues were not limited to one broker. The Options Clearing Corporation declared that the options should be closed on a broker-to-broker basis, sending investors digging through their options agreements to figure out next steps.
Scott Sheridan, the CEO of tastytrade, said the OCC’s decision meant the firm had to work with customers individually to help close out their positions.
“It’s unusual to see the OCC kind of wash their hands of a situation. They are the judge, the jury and execution for all options-related matters,” he said.
Similarly, in a post on Reddit, Fidelity explained that investors who held put options would likely need to call a company representative in order to exercise the put option. Creating the necessary short position would require posting a cash margin of $10 per share, even though Fidelity had marked the price of Signature and SVB down to zero.
The trades with simple put options were relatively easier to figure out, but some accounts had put-spread positions that include multiple options and were trickier to unwind, Sheridan said. Some others had short put positions, requiring them to buy the stock at the strike price, which resulted in losses for the traders.
Additionally, Sheridan said, there are regulatory minimums for margins that brokerages have to impose on short positions and sometimes additional margin is necessary for risk management for the firms — not a way to generate more profit.
“Customers never want to hear from a risk margins department, because that means something doesn’t look good to the firm. But there’s a reason firms have risk margins department. You just have to control the business. We had a couple of accounts that were debit, but from my perspective, it was a minor wound for us relative to what was out there,” Sheridan said.
Another wrinkle is that some types of accounts, including retirement accounts, are not allowed to hold short positions, which created additional steps for traders and brokers to close out the trade.
Even once Davies was able to enter his short position against Signature Bank, the stress of the trade did not go away. He said there was concern about whether the stock would begin trading at a higher price as options traders rushed to close out their positions, leaving him with only a small gain or even, in theory, a loss on the trade.
“I was super nervous about that, that they would close it out at some ridiculous GameStop-sort of price,” Davies said, referencing the meme-stock craze that caught some retail brokerages off guard in 2021.
Eventually, Davies was able to cover his short position at just 20 cents per share — netting a nice profit. But the ordeal made him think back to the basics he preaches to his college students.
“I have to admit I had my tail between my legs, because I teach derivative securities at CU-Boulder and I teach my students not to trade derivatives and to be passive investors,” Davies said.
The recent collapse of Silicon Valley Bank, Signature Bank and Credit Suisse is a harsh reminder of how quickly a trusted institution could fail, putting billions of dollars at risk. Over 550 banks have failed since 2001, according to the Federal Deposit Insurance Corp. So what exactly causes a bank to fail? And what are the broader implications on the U.S. economy?
Like any other trusted institutions, banks are capable of failing. Over 550 banks have collapsed since 2001, according to the Federal Deposit Insurance Corp.
Nonetheless, the recent collapse of Silicon Valley Bank, Signature Bank and Credit Suisse was a harsh reminder of how quickly a trusted institution could fail, putting billions of dollars at risk.
But experts say these financial disasters could have been prevented.
“Silicon Valley Bank’s failure could and should have been prevented by better regulation and supervision by the Federal Reserve,” said Aaron Klein, a senior fellow of economic studies at the Brookings Institution. “The Federal Reserve needed to be the one saying, ‘Wait a second, you have some serious interest rate risk that you need to hedge against.’ And they failed [to do that].”
Experts say the focus should be on ensuring that the rules are being enforced.
“As recently as 2019 and more recently even, there were warnings that things needed to be changed here, that they’re taking on additional interest rate risk, and that they’re going to have some potential liquidity problems in the event that interest rates begin to rise,” said William T. Chittenden, an associate professor of finance and economics at Texas State University.
The collapse of SVB also revealed the danger of deregulation. Several politicians and researchers have pointed to the rollback of Dodd-Frank regulations by the Trump administration as one of the main reasons for the bank’s failure.
“What happened in Dodd-Frank was they said that all banks over $50 billion would be subject to enhanced prudential standards,” explained Klein. “The rollback said nobody’s subject to that between $50 billion and $100 billion, and between $100 billion and $250 billion, it is optional.”
“SVB happened to fall in that category of between $50 billion and $250 billion so when they raised that, they weren’t subject to this great scrutiny,” said Chittenden.
Watch the video to find out more about why banks fail in the U.S.
“What I want to do is get banking back where it ought to be, and that is boring,” Warren, D-Mass., said Friday morning on CNBC’s “Squawk on the Street.” “Banking is supposed to be there for putting your money in and you can count on it’s going to be there, and that’s true if you’re a family, that’s true if you’re a small business.”
Warren said the problem started under the Trump administration, when bank CEOs lobbied Congress to weaken regulation for regional and midsized banks. Silicon Valley Bank was among those who lobbied for the changes, Warren pointed out, noting the bank’s profits surged in the years regulations were loosened.
During a hearing this week, Warren, a longtime critic of the financial industry, pressed the nation’s top banking regulators on how SVB and Signature were able to fail practically overnight earlier this month. Financial regulators shuttered the two banks, citing systematic contagion fears, after negative news triggered bank runs. The failed banks disproportionately serviced startup and cryptocurrency companies.
The incident marked the largest U.S. banking failures since the 2008 financial crisis, and the second- and third-biggest bank failures in U.S. history.
In the weeks since the collapse of the banks, Warren has authored or sponsored three new bills related to bank oversight.
The first would reverse a Trump-era bill that weakened oversight of medium-sized banks. The second would create an inspector general position within the Federal Reserve, and the third would prohibit executives at publicly traded companies from selling stock options for three years.
U.S. Senator Elizabeth Warren (D-MA) is interviewed on the trading floor at the New York Stock Exchange (NYSE) in New York City, U.S., March 31, 2023.
Andrew Kelly | Reuters
“What we want to do is align the incentives,” Warren said Friday. “I have a bipartisan bill for clawbacks and the whole idea is to say to these CEOs going forward ‘hey if you load this bank up on risk and the bank explodes, you’re going to lose that fancy bonus, you’re going to lose that big salary, you’re going to lose those stock options.'”
Banking should not be an industry that attracts risk-takers, Warren said.
“I really want to say to bank CEOs, if you’re the kind of guy or gal who wants to roll those dice and take big risks, don’t go into banking,” Warren said. “Banking is about steady profits. Banks should absolutely be able to make profits, but when banks load up on risks, they put depositors at risk, they put small businesses at risk, and ultimately as we’ve learned with these million-dollar banks, they put our whole economy at risk.”
Warren chided banking regulators for not doing enough and called on Congress to join her in putting safeguards back into place.
“You’ve got to look at everything that broke here,” Warren said. “We permitted the regulators to take their eye off the ball. Banking is a regulated industry for a reason because of its impact on the rest of the economy. Just as Joe Biden said yesterday – they need to start tightening those regulations down right now.”
nCino continues to invest in technology and expand its customer base following the collapse of two of its clients earlier this month, Silicon Valley Bank and Signature Bank. THE BIG PICTURE: Following the failures of SVB and Signature, and the announcement that First Citizens and New York Community Bank would acquire those assets, nCino continues […]
House lawmakers tore into top U.S. bank regulators Wednesday, questioning their competency and saying examiners were asleep at the wheel, at a second day of congressional hearings this week about how Silicon Valley Bank and Signature Bank collapsed practically overnight on March 10 and March 12.
“We need competent financial supervisors, but Congress can’t legislate competence,” House Financial Services Chairman Rep. Patrick McHenry, R-N.C., told top officials at the Federal Reserve, Treasury and FDIC at the beginning the hearing.
The committee’s ranking member, Rep. Maxine Waters, D-Calif., questioned whether the repeated warnings regulators delivered to SVB about its balance sheet and long-term interest risks were sufficient.
“The light touch cautions from the Fed to SVB management are clearly not what Congress intended for bank supervision,” said Waters.
Rep. Juan Vargas, D-Calif., put it more bluntly. “It seems like [SVB] blew you guys off, and you didn’t do anything.”
Federal Reserve Vice Chair Michael Barr did not disagree with this assessment. “I expect that we’re going to find that we need to have more of an emphasis on supervisors using the tools they have more promptly, and putting in mitigations in place more promptly when they see problems at banks that they’re supervising,” he said.
McHenry slammed the panel for a lack of transparency over that fateful weekend when the three regulators hastily arranged backup financing to ensure depositors at the two banks wouldn’t lose any money in their collapse.
There are no notes publicly available from regulators’ emergency meetings the weekend the banks collapsed, McHenry said. “That lack of transparency has a negative effect on the public view of the safety of the financial arena,” he added.
The question of what records would be given to Congress came up repeatedly in the contentious hearing.
Rep. Brad Sherman, D-Calif., requested a broad survey of banks that are undercapitalized the same way SVB was.
“Are there any banks out there, and roughly how many, that have capital of under 5% if you subtract from their stated capital their unhedged, unrealized losses on long-term debt?” Sherman asked the regulators.
“Let us get back to you on that,” said Martin Gruenberg, chairman of the Federal Deposit Insurance Corp. “We’ll get the numbers and share them with you very quickly.”
Republican Rep. Bill Huizenga of Michigan, demanded raw, confidential supervisory information about the banks, available to regulators ahead of the collapses.
Gruenberg did not agree explicitly to provide confidential information, instead suggesting the committee would need to issue a subpoena for this information. “I think you have the authority to compel that information,” he said, “and [the FDIC] will be responsive to you.”
Members of the Republican majority House challenged many of the decisions made by regulators in the hours and days after SVB collapsed and Signature Bank followed 48 hours later. Chief among these was what regulators did, or didn’t do, in the three days from the time they each learned of SVB’s looming collapse, on Thursday to Sunday, when they decided that the failures of SVB and Signature Bank posed a systemic risk to the financial system.
“Despite U.S. regulators having clear knowledge of insufficient risk management, it seems the examiners and your supervisors were asleep at the wheel while signs that Silicon Valley Bank was heading towards a collapse were staring them right in the face for many, many months,” Rep. Ann Wagner, R-Mo., said to Barr.
On Tuesday, bank stocks turned negative following a similar hearing before the Senate Banking Committee. Investors may have been spooked by the three top regulators each saying they favored more stringent rules for banks with more than $100 billion in assets.
Nellie Liang, undersecretary for domestic finance at the Treasury Department, testified alongside Gruenberg and Barr before the House committee after appearing Tuesday before the Senate Banking Committee.
Sens. Elizabeth Warren, D-Mass., and Catherine Cortez Masto, D-Nev., both members of Senate Banking, introduced bipartisan legislation on Wednesday that would require federal regulators to claw back all or part of compensation earned by bank executives in the five-year period preceding a banking failure.
“Americans are sick and tired of fat cat bankers paying themselves handsomely while risking other people’s hard-earned money,” Warren said in a statement. “It’s time for Congress to step up and strengthen the law so bank executives bear the cost of failure, not line their pockets and walk away scot-free.”
Sens. Josh Hawley, R-Mo., and Mike Braun, R-Ind., also sponsored the bill.
Commercial leases often require tenants to deliver letters of credit instead of cash security deposits. This practice reflects the belief that an L/C gives the owner better security than a cash deposit if the tenant goes bankrupt. Until very recently, many of those L/Cs came from Signature Bank or—especially for start-up or high-tech companies—Silicon Valley Bank.
When those banks failed, the L/Cs they had issued temporarily became worthless, because they are not backed by deposit insurance and simply represent contractual obligations of the issuer. The federal government solved that problem quickly. The FDIC declared that the “bridge banks”—the temporary banks that took over for the failed banks—would honor all contracts of the failed banks. That would include any outstanding L/Cs. Thus, any owner that had accepted a Signature Bank L/C became the holder of a Signature Bridge Bank L/C instead. The FDIC’s announcement also stated that “all obligations of the bridge are backed by the FDIC and the Deposit Insurance Fund.”
An owner might still worry that the L/C isn’t quite as reliable or as comforting as it was supposed to be. In that case, the owner will need to ask itself whether it can require the tenant to replace that L/C with a potentially “better” one. That will depend on the terms of the lease.
Some leases contain elaborate provisions that would probably entitle the owner to require the tenant to replace any L/C that was issued by a bank that failed, whether or not the successor bank or the FDIC stepped up to the L/C obligation. In those cases, the owner might simply demand that the tenant perform its obligations under the lease and deliver a new L/C. In a more typical case, however, the tenant probably has no obligation to do anything about the L/C. A tenant that cares about its relationship with the owner might very well arrange a replacement of the L/C anyway, if asked to do so.
Also, any Signature Bank or Silicon Valley Bank L/C will eventually expire and probably not be renewed, typically within a year. At that point, nearly every lease will require the tenant to deliver a replacement L/C. Of course, the owner will not want to wait around.
If the owner can require the tenant to replace a Signature Bank or Silicon Valley Bank L/C, or if the tenant wants to cooperate if asked to make such a replacement, what happens next and how long will it take? In most cases, it’s not all that difficult for a tenant to accommodate the owner’s request and deliver a new L/C from a bank that hasn’t failed.
Most L/Cs are issued by whatever bank provides the tenant’s revolving credit line (“revolver”). The existence of a revolver means the tenant’s bank has decided it is willing, for example, to lend the tenant up to $10,000,000 at any one time. If the bank issues an L/C with a face amount of $1,000,000, this implies the bank might need to advance $1,000,000 at any moment, if the L/C were drawn upon. The bank would treat any such advance, if made, as one made under the revolver. As long as the L/C is outstanding, therefore, the bank will limit other borrowings under the revolver to $9,000,000, to assure that the total loan balance can never exceed $10,000,000.
If the tenant maintains several revolvers with various banks, the tenant can often obtain a replacement L/C rather quickly from another bank, assuming its revolver with that other bank has a low enough outstanding loan balance to accommodate issuance of an L/C. If the tenant had only one revolver, i.e., with only Signature Bank or Silicon Valley Bank, then the tenant won’t be able to have a revolving lender issue a replacement L/C unless and until the tenant has set up a new revolver. That can take a while, especially in an environment of tightening credit standards and lower asset valuations.
In the meantime, the tenant might temporarily resort to a less sophisticated strategy to obtain a replacement L/C: the tenant can deposit cash with a new L/C issuer bank and then that new bank would issue an L/C backed by the cash deposit. Of course, that’s not an optimal use of cash or one that every tenant can set up instantly.
Smaller companies that don’t maintain any revolver in the first place often need to back their L/Cs with cash collateral from day one. If one of those companies deposited cash with Silicon Valley Bank or Signature Bank, that deposit should be treated the same as any other deposit. If it’s covered by deposit insurance, which all deposits of the two failed banks now seem to be, the tenant should be able to get control of the cash rather quickly. The tenant can then use the cash as collateral to have another institution issue an L/C. That’s quicker than setting up a new revolver, but it’s still not instant.
If the tenant delivers a new L/C in place of the L/C from a failed bank, the tenant will typically ask the property owner to release the first L/C. This would also need to happen at the same time as the tenant moves cash between banks.
Any owner holding an L/C from Silicon Valley Bank or Signature Bank should make sure they know exactly where that L/C is stored. If no one can find it—which happens with some frequency—that can create a whole new set of problems. And today’s focus on L/Cs also reminds every property owner that they should carefully track all L/Cs – not just their location but also their amount, expiry date, and issuer.
