The Federal Deposit Insurance Corporation (FDIC) estimates the cost to the Deposit Insurance Fund to cover the collapse of Silicon Valley Bank is $20 billion — including $18 billion to cover uninsured deposits, according to the chairman of the FDIC, Martin Gruenberg. And the failure of Signature Bank is likely to require about $2.5 billion, including $1.6 billion to cover its uninsured deposits.
“I would emphasize that these estimates are subject to significant uncertainty and are likely to change, depending on the ultimate value realized from each receivership,” Gruenberg, whose agency was appointed to manage both banks after their collapse, is expected to tell lawmakers Tuesday when he testifies before the Senate Banking Committee.
Gruenberg and top officials from the Federal Reserve and Treasury Department are set to testify before the committee about the failures of the two banks and will attempt to reassure lawmakers that the banking system remains sound, and mismanagement is to blame for the second greatest bank failure in U.S. history.
“SVB failed because the bank’s management did not effectively manage its interest rate and liquidity risk, and the bank then suffered a devastating and unexpected run by its uninsured depositors in a period of less than 24 hours,” Federal Reserve Vice Chair of Supervision Michael Barr will tell senators according to his prepared remarks about the bank, which collapsed on Mar. 10. He is also expected to say the bank waited too long to address its problems.
Barr is leading the Federal Reserve’s review of the two bank failures. That report will be released May 1. In his remarks, Barr notes that the Federal Reserve was fully responsible for the federal supervision and regulation of the bank, and the Fed’s review will examine both the growth and management of Silicon Valley Bank, as well as the Fed’s engagement with the bank and regulatory requirements that applied to the bank.
“SVB’s failure demands a thorough review of what happened, including the Federal Reserve’s oversight of the bank,” Barr will say. “I am committed to ensuring that the Federal Reserve fully accounts for any supervisory or regulatory failings, and that we fully address what went wrong.”
The sale of each of the FDIC managed bridge banks has been completed; a large portion of Signature Bank was sold to Flagstar Bank, and SVB has been sold to First Citizens Bank.
The FDIC has already started its own investigation into who should be held accountable in the wake of the failures. According to his prepared remarks, Gruenberg is expected to tell lawmakers that the FDIC will review the deposit insurance system, and will release its report at the same time as the Fed issues its report, on May 1.
As fears spread about the solvency of the banking system, the Treasury Department, Federal Reserve and FDIC announced on Mar. 12 that the FDIC would be able to guarantee all deposits at both Silicon Valley Bank and Signature Bank beyond its stated limit of $250,000.
The losses to the Deposit Insurance Fund will have to be recovered through special assessments on banks. The FDIC aims to issue more information on those assessments related to the failures of Signature Bank and Silicon Valley Bank, taking into account input from the public comment process in May.
Despite the recent failures, Gruenberg will also argue that the U.S. banking system remains sound.
A First Citizens Bank branch in Dunwoody, Georgia, on Thursday, March 23, 2023.
Elijah Nouvelage | Bloomberg | Getty Images
Regulators again assured the public that the banking system is safe, as fresh data showed customers recently pulled nearly $100 billion in deposits.
Treasury Secretary Janet Yellen, Federal Reserve Chairman Jerome Powell and more than a dozen other officials convened a special closed meeting of the Financial Stability Oversight Council on Friday.
A readout from the session indicated that a New York Fed staff member briefed the group on “market developments.”
“The Council discussed current conditions in the banking sector and noted that while some institutions have come under stress, the U.S. banking system remains sound and resilient,” the statement said. “The Council also discussed ongoing efforts at member agencies to monitor financial developments.”
There were no other details provided on the meeting.
The readout, released shortly after the market closed Friday, came around the same time as new Fed data showed that bank customers collectively pulled $98.4 billion from accounts for the week ended March 15.
Data show that the bulk of the money came from small banks. Large institutions saw deposits increase by $67 billion, while smaller banks saw outflows of $120 billion.
The withdrawals brought total deposits down to just over $17.5 trillion and represented about 0.6% of the total. Deposits have been on a steady decline over the past year or so, falling $582.4 billion since February 2022, according to the Fed data released Friday.
Money market mutual funds have seen assets rise over the past two weeks, up $203 billion to $3.27 trillion, according to Investment Company Institute data through March 22.
Earlier this week, Powell also sought to assure the public that the banking system is safe.
“You’ve seen that we have the tools to protect depositors when there’s a threat of serious harm to the economy or to the financial system, and we’re prepared to use those tools,” Powell said Wednesday during a news conference that followed the Fed’s decision to hike benchmark interest rates another quarter percentage point. “And I think depositors should assume that their deposits are safe.”
Powell noted that deposit flows “have stabilized over the past week” following what he called “powerful actions” from the Fed to backstop the system.
Banks have been flocking to emergency lending facilities set up after the failures of SVB and Signature. Data released Thursday showed that institutions took a daily average of $116.1 billion of loans from the central bank’s discount window, the highest since the financial crisis, and have taken out $53.7 billion from the Bank Term Funding Program.
U.S. stocks ended a volatile week higher on Friday, a week that saw the Federal Reserve raise rates another 25 basis points and risks in the U.S. and European banking sectors remain in key focus. The Dow Jones Industrial Average DJIA, +0.41%
rose about 132 points, or 0.4%, ending near 32,238, Friday, boosting its weekly gain to 1.2%, according to preliminary FactSet data. The S&P 500 index SPX, +0.56%
climbed 0.6% Friday and 1.4% for the week, while the Nasdaq Composite Index COMP, +0.31%
closed up 0.3% for a 1.7% weekly gain. Investors have been concerned about a potential credit crunch and its likely toll on the economy, after the failure earlier in March of Silicon Valley Bank and Signature Bank. Fed Chairman Jerome Powell on Wednesday said he expected credit conditions to tightening further, doing some of the central bank’s work for it, in terms of bringing down inflation. One worry is that high rates and tighter credit could lead to a wave of defaults. Goldman Sachs this week raised its default forecast for the U.S. high-yield, or junk-bond, market to 4% from 2.8% for 2023. The junk-bond market is considered an earlier harbinger of potential stress in credit markets since it finances companies already considered at an elevated risk of buckling. European banks also were in focus, including on Friday as shares of Deutsche Bank DB, -3.11%
came under pressure after costs of insuring it against a credit default jumped. Still, the S&P 500 and Nasdaq posted back-to-back weekly gains, according to Dow Jones Market Data. Before Friday, the Dow had two weekly declines in a row.
WASHINGTON — A bipartisan group of lawmakers overseeing the recent turmoil in the banking sector said Wednesday that they aim to increase Americans’ confidence in the banking industry after Silicon Valley Bank and Signature Bank collapsed over the last two weeks.
The two House and Senate committees that oversee banking have announced back-to-back hearings next week to examine regulatory lapses that missed signs the banks were in trouble. Federal Deposit Insurance Corp. Chairman Martin Gruenberg, Federal Reserve Vice Chair for Supervision Michael Barr and Treasury Undersecretary for Domestic Finance Nellie Liang are scheduled to testify at both hearings.
The high-profile hearings come as lawmakers try to understand what caused the two institutions to fold, and as many Democrats float legislation to bolster safeguards for the financial system. Regulators and lawmakers are also trying to contain further damage to the economy and reinforce confidence in the banking system.
“My hope is that this first hearing, we can actually get a lot of the information out and establish [the facts],” Rep. Patrick McHenry, a North Carolina Republican and chairman of House Financial Services Committee, said during a summit of the American Bankers Association. “I think this will bring a great deal of certainty and confidence to the market.”
Last week, the Fed appointed Barr to lead a review of the SVB failure. McHenry said he welcomed the probe and “the other views of financial regulators, as well.”
The Republican said Congress has a “very important role to play” in reviewing how the banks failed. But he stopped short of calling for legislation to prevent future collapses.
McHenry said he wanted to ensure the push for legislation matches “the realities of the situation.”
Sen. Tim Scott, a South Carolina Republican and ranking member of the Senate Banking Committee, also said writing new laws should take a back seat at the hearings to investigating what happened.
“Unfortunately, in Washington, that’s often what occurs, that those on the committee on the left will talk about Dodd-Frank and the reforms that were done in 2018,” he told the bankers’ group. He was referring to calls in Congress to unwind some of the provisions in the 2018 law that weakened regulatory powers in the landmark 2010 Dodd-Frank law.
“Nothing could be a clearer red herring than that,” he added.
Former SVB CEO Greg Becker lobbied lawmakers for certain exclusions from Dodd-Frank. But Scott said regulators already had the authority they needed to safeguard the banking system and failed to do so.
He also said bank executives had a responsibility to adjust their strategies as the Fed embarked on an aggressive interest rate hiking cycle to stem inflation.
McHenry also questioned the value of adding new regulatory authority or laws to govern the financial sector.
“It’s important to note that we can’t regulate competence,” McHenry said. “Management of institutions need to be competent, boards of directors need to be competent. We can’t legislate that either in the financial sector or among financial institutions management, nor with the regulators.”
Sen. Sherrod Brown, an Ohio Democrat and chairman of Senate Banking Committee, compared the SVB collapse to the devastating train crash in East Palestine, Ohio. He said the disaster in his state and the bank failures stemmed in part from companies pushing for fewer regulations and putting less effort into their own safeguards.
“They have one thing in common: corporate lobbyists pushed for weaker rules, less oversight,” he told the ABA in opening remarks. “Companies cut costs, failed to invest in safety – or perhaps in the case of SVB, were too incompetent to realize they too should care about safety.”
Brown, who said the congressional hearings can remain “mostly” bipartisan, warned banking lobbyists against using the crisis as a chance to lobby Congress for weaker oversight. He said “we continue to pay the price” when policymakers allow weaker regulations.
Rep. Maxine Waters, ranking member of the House Financial Services Committee, told the ABA that Congress will have to “take a deep dive” into what took place at Silicon Valley Bank. The California Democrat, who has called for legislation to strengthen congressional authority over clawbacks for bank executives, said she is taking a close look at the high rate of uninsured deposits at SVB.
“And of course, I’m looking to see whether or not all of the oversight agencies … really did miss the opportunity to see what was happening and to know what was going on with the balance sheet and to be able to correct things before they got to the point of collapse,” Waters said.
She added that the financial regulators’ quick decision to close SVB and secure customers’ deposits demonstrated the Biden administration’s competence.
“The way that the FDIC, the Treasury, president, they way that they handled this should be a message to everybody that your government is at work and can solve problems — serious problems — if they are working together,” she said.
Chair of the ECB Supervisory Board Andrea Enria and Chairperson of the European Banking Authority (EBA) Jose Manuel Campa in the European Parliament on March 21, 2023.
U.S. regulators made mistakes in failing to prevent the collapse of Silicon Valley Bank and other financial institutions, according to lawmakers in the European Union who believe this is also a moment for some self-assessment in Europe.
Silvergate Capital, a bank focused on cryptocurrency, was the first to fall, saying March 8 that it would be ceasing operations. Shortly after, Silicon Valley Bank failed after a run on deposits. Signature Bank, which focused on lending to real estate firms, then saw deposit outflows leading regulators to seize the bank to prevent contagion across the sector.
Since then, First Republic Bank has also received support from other banks amid fears of a wider shock to the financial system. And in Switzerland, a non-member of the European Union, authorities had to rescue Credit Suisse by asking UBS to step in with an acquisition.
Meanwhile, regulators and officials across the European Union have been nervous about potential contagion to their own banking sector. After all, it’s not been that long since European banks were in the depths of the global financial crisis.
“There is no direct read across of U.S. events to [the] euro area significant banks,” Andrea Enria, chair of the European Central Bank’s supervisory board, said Tuesday. Like him, an array of officials have made an effort to stress that the European banking system is in much better share compared to 2008.
The U.S. lacks some controls.
Paul Tang
Lawmaker in the European Parliament
This reinforces the view in the EU that the U.S. should learn from some of the regulatory works put in place in the euro area since the financial crisis.
“You need stronger regulation … in that sense the U.S. lacks some controls,” Paul Tang, a lawmaker and a member of the European Parliament’s economic committee, told CNBC.
When asked if U.S. regulators made some mistakes, thus failing to prevent the recent banking turmoil, he said: “I definitely think so, you need to have scrutiny. That was the message from 2008.”
In the heart of European policymaking, in Brussels, an official, who did not want to be named due to the politically sensitive nature of the topic, told CNBC that several meetings between EU officials in recent days “stressed the failures of regulation [in the U.S.] particularly when compared with the EU.”
One of the key differences is that the U.S. has a more relaxed set of capital rules for smaller banks.
“The main difference is the Basel III requirements,” Stéphanie Yon-Courtin, a member of the European Parliament told CNBC. “These banking rules,” she said, “apply to very few banks — this is where the problem lays.”
Basel III is a set of reforms that strengthens the supervision and risk management of banks and has been developed since 2008.
It applies to most European banks, but American lenders with a balance sheet below $250 billion do not have to follow them.
Despite some of the criticism toward American regulators, the EU recognizes this is not the time to be complacent. “We have to remain vigilant,” Yon-Courtin said. “We have to be careful and ensure these rules are still fit for purpose,” she added, pushing for a constant monitoring of the rulebook.
One of the main discussions in the EU in recent days has actually been the need to improve the European Banking Union — a set of laws introduced in 2014 to make European banks more robust.
The debate has been politically sensitive, but the reality that high interest rates are here to stay has made it even more important.
“We are well aware that the ongoing fast pace normalization of monetary policy conditions is increasing our banks’ exposure to interest rate risk,” Enria, the chair of the ECB’s supervisory board, said Tuesday.
U.S. Secretary of the Treasury testifies before the Senate Appropriations Subcommittee on Financial Services March 22, 2023 in Washington, DC.
Win Mcnamee | Getty Images
WASHINGTON — Federal bank regulators are not considering any plans to insure all U.S. bank deposits without congressional approval, Treasury Secretary Janet Yellen told members of a Senate Appropriations subcommittee on Wednesday.
Several banking groups and consumer advocates have called for some kind of a universal deposit guarantee after the government refunded most of the uninsured deposits at two banks that collapsed earlier this month, California-based Silicon Valley Bank and New York-based Signature Bank.
In response to a direct question about whether Treasury would circumvent Congress to insure all deposits, Yellen replied: “I have not considered or discussed anything having to do with blanket insurance or guarantees of all deposits.”
Yellen made the comment to senators during a hearing on Capitol Hill to consider the Treasury Department’s 2024 budget request.
Congress has broad authority over the FDIC insurance limit, currently set at $250,000 as part of the Dodd-Frank financial reforms. Congress can also temporarily suspend the limit, like it did in 2020 as part of the government’s response to Covid-19.
This time around, only a handful of Democrats have openly suggested Congress consider raising the limit across all deposits. An influential bloc of House Republicans, meanwhile, has already come out against any hike. This makes it difficult to envision how a bill to raise the limit would pass the GOP-controlled House.
In Washington, the emergency deposit guarantees made for SVB and Signature have set off a fierce debate over whether big banks that took excessive risks got a special bailout, while smaller banks are being forced to confront a rush of withdrawals — triggered by public fears about the big banks — without any special help.
“I’m very troubled,” said Maine Republican Sen. Susan Collins. “It seems to me, by guaranteeing all of the deposits [at SVB] that you’re creating a situation where they are immune from losses … in a way that puts the well managed community bank at a competitive disadvantage. So I guess my question to you is, how is this fair?”
Yellen said that at the time, regulators weren’t thinking about giving one bank an advantage over any other bank. At the time, they were thinking about “the implications for the broader banking system because of the contagion potential,” she said.
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That explanation has not been enough to satisfy small and mid-sized banks, however.
“If policymakers decide to provide unlimited deposit insurance to some institutions, they cannot leave others out—certainly not the community banks that have, as always, operated on a safe and sound basis,” Rebeca Rainey, CEO of the Independent Community Bankers of America, said in a recent statement.
While Yellen ruled out universal blanket deposit guarantees, she appeared to be open to other potential ways to help smaller banks offer additional insurance to large deposits.
One idea volunteered by Democratic West Virginia Sen. Joe Manchin was to create a system where depositors who needed to keep cash in excess of the $250,000 FDIC limit could pay slightly higher bank fees, akin to an insurance premium, in order to secure a higher level of FDIC insurance.
“Shouldn’t I be able to buy or pay a little higher bank fee, to get protection … with a cap maybe at $10 million?” Manchin said to Yellen near the end of her testimony. “We’ve been talking … some senators have been talking back and forth … and I don’t think we should [craft legislation] without you all involved, showing us how to structure that.”
“I think this is very worthwhile, for you and your colleagues to be discussing what’s appropriate here,” Yellen replied. “And we would be more than willing to work with you to think this through.”
She added: “For the moment, we’re trying to stabilize the situation using the tools at our disposal.”
These efforts are starting to bear fruit, Yellen told a bankers group Tuesday. She said that “aggregate deposit outflows from regional banks have stabilized.”
But while the trends are moving in the right direction, the amount of money banks borrowed in the week ending March 15 from the Fed’s discount window set a new record at $153 billion, according to the Fed’s weekly report, a sum that suggests the banking sector is not quite stable yet.
Clarification: This story has been updated to make clear that Yellen made her comment about “blanket insurance” while answering a senator’s question about whether Treasury would circumvent Congress in order to insure all deposits.
Forget about Treasury bills or certificates of deposit. Just look at the fat dividend yields now on offer among regional banks after the March meltdown triggered by the failure of Silicon Valley Bank, Signature Bank and Silvergate Capital. KeyCorp , an $11 billion market cap bank based in Cleveland, yielded 6.4% as of the Tuesday market close. Atlanta’s Truist Financial ($41 billion) now yields 6.2% while Minneapolis’s U.S. Bancorp ($53 billion) pays 5.1% on its common stock. The list goes on and on. Comerica of Dallas pays out the annual equivalent of 5.8%. Columbus, Ohio’s Huntington Bancshares wires to investors’ accounts or cuts checks equal to 5.5%. Cincinnati’s Fifth Third Bancorp pays 4.8%. Will the dividends be cut? Might some be omitted all together? After all, high dividend yields are often a sign of financial or business distress, or a red flag that the payments so many mom-and-pop investors depend on are unsustainable. That’s what happened during the Global Financial Crisis of 2008-2009, when bank after bank either passed the dividend or cut it to a token penny a share. It was just last week that embattled First Republic Bank, facing the withdrawal of a reported $70 billion in deposits , suspended its 27 cents quarterly dividend. Not this time But not this time. Wall Street just doesn’t think most payouts will be cut — so long as any recession this year stays on the mild side. Why’s the Street so sanguine? Because earlier banking crises were mostly caused by credit events. In 2008, Bear Stearns was lost in towers of mortgage-backed securities, while Lehman Brothers went belly up thanks to large positions in subprime mortgages. Years before, more than 1,000 savings and loans went bust in the S & L crisis , thanks to lax regulation, bad investments in commercial real estate and junk bonds, and a helping of fraud. In the 1980s, Continental Illinois National Bank and Trust loans to the oil patch went bad (creating the term “too big to fail”). So did Citigroup loans to Latin American sovereign governments. The challenge banks face today centers instead on the fastest rise in interest rates in two generations. Banks that hold Treasury bonds yielding 2% or mortgages at 4% suddenly find themselves in a higher-rate environment, and those bonds and mortgages held as capital have declined in price. “Unlike [2008-2009] or even 1990, those were credit debacles that crushed the banks, forced them to cut and eliminate dividends, pull back buybacks,” RBC Capital bank analyst Gerard Cassidy said on CNBC’s “Fast Money” on Monday. “This is an interest rate problem” and, in this environment, “banks know that if they maintain the dividends through the next cycle, which is maybe what we’re in right now, they will rerate coming out of the cycle. So dividend cuts I think [are] the last thing they need to do. Plus they’ve got strong capital levels today, unlike in 2007, plus they have plenty of liquidity, among the biggest banks.” As a reality check, CNBC ran a screen on the stocks in the Invesco KBW Bank ETF (KBWB), ranking them by the lowest dividend payout ratios , which measures dividends as a percentage of net income. We also looked at the yields themselves, plus the percentage of sell-side analysts rating the bank a buy and the potential upside if the stock hit the average analyst’s share price target. Looking outside that group of banks, New York Community Bancorp ‘s yield is more secure now after it bought most of the assets of Signature Bank earlier this week, according to Jenny Harrington, portfolio manager at Gilman Hill. Speaking on CNBC’s “Halftime Report” on Monday, Harrington argued that one bank’s loss is often another’s gain, saying that NYCB earnings will rise 20% as a result of the acquisition, and its book value expand by 15%. NYCB yielded 7.4% at Tuesday’s close. Little to no dividend growth The conventional wisdom today is that the pressure on bank profits makes the outlook for dividend growth in the sector more dicey, rather than jeopardizing the safety of current payouts. “Our dividend growth expectations have come down,” due to the fallout from Silicon Valley, Signature and First Republic, “as well as the economic impact of the Fed’s efforts to quell inflation via sharply higher rates over the past year,” Daniel Peris, head of the Strategic Value Dividend team at Federated Hermes, recently wrote. “Despite these lower dividend growth expectations, we believe these bank holdings still have attractive dividends,” Peris added. “Given a slowing economy we expect our banks to run their balance sheets more conservatively (and could be forced to via tougher regulation over the coming years); this would likely put a further damper on dividend growth.” A final straw in the wind: Wall Street has issued dozens of research reports since Silicon Valley Bank went under. Almost none of them so much as mention the word dividend. Take that as a sign most investors are confident the dividend checks will still roll.
It seemed like a good idea at the time: Red-state Democrats facing grim reelection prospects would join forces with Republicans to slash bank regulations — demonstrating a willingness to work with President Donald Trump while bucking many in their party.
That unlikely coalition voted in 2018 to roll back portions of a far-reaching 2010 law intended to prevent a future financial crisis. But those changes are now being blamed for contributing to the recent collapse of Silicon Valley Bank and Signature Bank that prompted a federal rescue and has stoked anxiety about a broader banking contagion.
The rollback was leveraged with a lobbying campaign that cost tens of millions of dollars, drew an army of hundreds of lobbyists and was seeded with ample campaign contributions.
The episode offers a fresh reminder of the power that bankers wield in Washington, where the industry spends prodigiously to fight regulation and often hires former Congress members and their staff to make the case that they are not a source of risk to the economy.
“We can draw a direct line between the deregulation of the Trump period, driven by the bank lobby, and the chaos of the last few weeks,” said Carter Dougherty, a spokesman for Americans for Financial Reform, a left-leaning financial watchdog.
“The bottom line is that these banks would have faced a tougher supervisory framework under the original … law, but Congress and the Trump regulators took an ax to it,” he said.
According to OpenSecrets, a nonpartisan group tracking money in politics, all seven registered lobbyists for Silicon Valley Bank in 2022 previously held government jobs overseeing financial institutions.
Tougher penalties?
President Joe Biden has asked Congress for the authority to impose tougher penalties on failed banks. The Justice Department and the Securities and Exchange Commission have started investigations. And congressional Democrats are calling for new restrictions on financial institutions.
But so far there is no indication that another bipartisan coalition will form in Congress to put tougher regulations back in place, underscoring the finance industry’s continued clout. Indeed, when the Federal Deposit Insurance Corporation last year moved to increase what banks pay to insure their customers against failures, lobbying groups blocked the measure, The Lever reported.
That influence was also on display when the banking lobby worked for two years to water down aspects of the 2010 Dodd-Frank law that had placed weighty regulations on banks designed to reduce consumer risk and force the institutions to adopt safer lending and investing practices.
Republicans had long looked to blunt the impact of Dodd-Frank. But rather than push for sweeping deregulation, Sen. Mike Crapo, an Idaho Republican who led the Senate banking committee, hoped a narrowed focus could draw enough support from moderate Democrats to clear the Senate’s 60-vote filibuster threshold.
Crapo broached the idea with Democratic Sens. Jon Tester of Montana, Joe Donnelly of Indiana and Heidi Heitkamp of North Dakota — all on the ballot in 2018 — as well as Mark Warner of Virginia. By the fall of that year, the bipartisan group met regularly, according to a copy of Tester’s office schedule posted to his Senate website.
A lobbying strategy also emerged, with companies and trade groups that specifically mention Crapo’s legislation spending more than $400 million in 2017 and 2018, according to an Associated Press analysis of the public lobbying disclosures.
“Crushed by unnecessary regulation”
The bill was sold to the public as a form of regulatory relief for overburdened community banks, which serviced farmers and smaller businesses. Community bankers from across the U.S. flew in to Washington to meet repeatedly with lawmakers, including Tester, who had 32 meetings with Montana bank officials. Local bank leaders pushed members of their congressional delegation when they returned home.
“Small banks and credit unions across the country have been crushed by unnecessary regulation for too long,” Crapo, the legislation’s main sponsor, said on Twitter.
But the measure also included provisions sought by midsize banks that drastically curtailed oversight once the Trump Fed finished writing new regulations necessitated by the bill’s passage.
Specifically, the legislation lifted the threshold for banks that faced a strict regimen of oversight, including mandatory financial stress testing. Under Dodd-Frank, banks had to be stress-tested if they held more than $50 billion in assets; the rollback raised that threshold to $250 billion — meaning only 12 banks would be stress-tested under the rule.
That component, which effectively carved large midsize banks out of more stringent regulation, has come under new scrutiny in light of the failure of Silicon Valley Bank and Signature Bank, whose executives lobbied on behalf of the 2018 rollback.
“The lobbyists were everywhere. You couldn’t throw an elbow without running into one,” Sen. Elizabeth Warren, a Massachusetts Democrat who vehemently opposed the bill, told reporters last week.
Campaign checks were written. Ads were cut. Mailers went out.
As a reward for their work, Heitkamp ($357,953), Tester ($302,770) and Donnelly ($265,349) became the top Senate recipients of money from the banking industry during the 2018 campaign season, according to OpenSecrets. Democratic Senate leader Chuck Schumer freed members to vote for the bill, a move intended to bolster the standing of vulnerable moderates, but the move bitterly divided the Democratic caucus, with Warren singling out the moderates as doing Wall Street’s bidding.
In the hours before the bill passed the Senate with 17 Democratic votes, Heitkamp took to the chamber floor to inveigh against the “diatribe,” “hyperbole” and “overstatement” from opponents of the bill.
Tester, meanwhile, huddled with executives from Bank of America, Citigroup, Discover and Wells Fargo, who were there on behalf of the American Bankers Association, according to his publicly available office schedule. The ABA, which helped lead the push, later paid $125,000 for an ad campaign thanking Tester for his role in the bill’s passage, records show.
Less than a month after the bill was passed out of the Senate, Tester met Greg Becker, the CEO for the now-collapsed Silicon Valley Bank, according to his schedule. Becker specifically lobbied Congress and the Federal Reserve to take a light regulatory approach with banks of his size. Lobbyists with the firm the Franklin Square Group, which had been retained by Silicon Valley Bank, donated $10,800 to Tester’s campaign, record show.
Heitkamp was the only member of the group invited to the bill signing ceremony, beaming alongside Trump. Later, Americans for Prosperity, the grassroots conservative group funded by the billionaire industrialist Koch brothers, ran an online ad commending Heitkamp for taking a stand against her party.
Virginia’s Mark Warner denied that the deregulation, which he supported, was responsible for the fall of SVB.
“I have not seen any evidence of that,” he told CBS News’ “Face the Nation” Monday. “If it ends up being partially the cause, I’m all for putting many protections in place to make sure that something like this doesn’t happen again. My belief is, today, the regulators, regardless of the size of the bank, should have spotted this.”
In an interview with the AP, Heitkamp pushed back against suggestions that the legislation was directly responsible for the collapse of Silicon Valley Bank. She acknowledged, however, that there was an open question about whether new rules put in place by the Fed after the measure was signed into law could have played a role.
“I’m willing to look at the argument that this had something to do with it,” Heitkamp said, adding: “I think you will find that (the Fed) was engaged in some level of some supervision. Why that didn’t work? That’s the question that needs to be resolved.”
In a statement issued last week, Tester did not directly address his role in the legislation, but he pledged to “take on anyone in Washington to ensure that the executives at these banks and regulators are held accountable.”
Cam Fine, who led the Independent Community Bankers of America trade group during the legislative push, said that overall, the bill was a good piece of legislation that offered much needed relief to struggling community banks.
But like any major piece of legislation that moves through Congress, final passage hinged on support from a broad coalition of interests — including those of Wall Street and midsize banks.
“Was it a perfect piece of legislation? No. But there’s an old saying in Washington: You can’t let the perfect be the enemy of the good,” said Fine.
Many of the moderate Democrats who supported the measure in hopes of bolstering their reelection chances did not fare as well.
Of the core group who wrote the bill, only Tester won reelection. Others from red states who supported it, including Claire McCaskill of Missouri and Bill Nelson of Florida, lost.
Tester will be on the ballot again in 2024. Last week he was in Silicon Valley for a fundraiser.
One of the event’s sponsors was a partner at a law firm for Silicon Valley Bank.
Treasury Secretary Janet Yellen will tell America’s top banking lobby Tuesday that the government has a playbook if other financial institutions, like Silicon Valley Bank, collapse and pose a risk to banking sector.
In a speech to the American Bankers Association, Yellen discusses the government’s emergency rescue of SVB and Signature Bank‘s depositors — and says similar action could be taken in the event of a bank run.
“The steps we took were not focused on aiding specific banks or classes of banks,” Yellen said. “Our intervention was necessary to protect the broader U.S. banking system. And similar actions could be warranted if smaller institutions suffer deposit runs that pose the risk of contagion.”
Her comments are likely to reassure depositors and Wall Street investors and come as the government and the nation’s top bankers rush to contain the worst banking crisis in 15 years.
The collapse of Silicon Valley Bank sent a shockwave across the global financial system earlier this month. And fears about the stability of midsize U.S. banks have shaken the banking sector.
General view of First Republic Bank in Century City on March 17, 2023 in Century City, California.
AaronP/Bauer-Griffin | GC Images | Getty Images
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UBS’ planned takeover of Credit Suisse calmed the market slightly. Broader market conditions, however, still look unstable.
U.S. markets staged a relief rally as all major indexes made minor gains Monday. Asia-Pacific markets rose on Tuesday too. South Korea’s Kospi added 0.42% as the country’s producer price index for February increased 4.8% year on year, a slight decline from the previous month.
Japan’s Prime Minister Fumio Kishida is on his way to Ukraine for a surprise visit to Ukraine’s President Volodymyr Zelenskyy, Japan’s Ministry of Foreign Affairs confirmed. Kishida’s unexpected trip overlaps with Chinese leader Xi Jinping’s official state visit to Ukraine’s nemesis, Russia and its leader Vladimir Putin.
The “Minsky moment,” named after the economist Hyman Minsky, is a sudden collapse of the market after a long period of aggressive speculation brought on by easy money. Markets might face a Minsky moment soon, warned Marko Kolanovic, JPMorgan Chase’s chief market strategist and co-head of global research.
Markets haven’t collapsed. Some bank stocks are in the doldrums, yes, but the SPDR S&P Regional Banking ETF, a fund of regional bank stocks, rose 1.11% on Monday. Major indexes were up yesterday too. The Dow Jones Industrial Average gained 1.2%, the S&P 500 added 0.89% and the Nasdaq Composite increased 0.39%.
But there are signs market instability is increasing. The banking crisis is causing regional banks — which account for around a third of all lending in the United States — to reduce their loans, said Eric Diton, president and managing director of The Wealth Alliance. In other words, the availability of money in the economy is slowing even without the Federal Reserve increasing interest rates.
Speaking of interest rates, analysts seem to think there’s no good path forward for the Fed. An interest rate hike “would be a mistake,” MKM Partners Chief Economist Michael Darda told CNBC. On the other hand, a pause would cause “panicked reactions by equity and bond investors,” according to Nationwide’s Mark Hackett. This suggests markets are already so jittery that whatever the Fed does — even if it’s nothing — it might cause instability to spread.
With that in mind, investors might want to heed Kolanovic’s warning that a Minsky moment could be on the horizon.
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The Signature bank logo is seen in this photo illustration in Warsaw, Poland on 13 March, 2023.
Jaap Arriens | Nurphoto | Getty Images
WASHINGTON — The top Republicans on committees that oversee the U.S. financial system sent letters Monday to Federal Reserve Chair Jay Powell and FDIC Chair Martin Gruenberg formally requesting documents and personnel records related to the oversight of two banks that failed over the last 11 days.
The lawmakers wanted “full information about what appears to be glaring bank mismanagement, fundamental lack of prudence in bank risk and balance sheet management, and regulators’ lack of basic supervision and enforcement of safety and soundness rules, regulations, and principles,” wrote House Financial Services Committee Chairman Patrick McHenry, N.C., and Senate Banking Committee ranking member Sen. Tim Scott, S.C.
A spokesperson for the Federal Reserve told CNBC on Monday it received its letter and planned to respond. A spokesperson for the FDIC declined to comment, citing agency policy regarding congressional correspondence.
The letters come as Congress seeks to learn more about how the second largest bank collapse in U.S. history unfolded earlier this month, when Silicon Valley Bank went in just a matter of days from fully operational to government owned on March 10. New York-based Signature Bank failed two days later before U.S. bank regulators put in a backstop to cover uninsured deposits and other safeguards for the broader system.
The Scott and McHenry letter also requested a timeline of regulators’ decision-making in the hours and days following the initial closure of SVB and Signature.
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Specifically, GOP lawmakers are questioning the Treasury Department’s designation that the collapse of SVB and Signature — and the potential losses of hundreds of billions of uninsured deposits — posed a systemic risk to the banking sector.
That designation gave it authority to unwind both institutions in a way that it said “fully protects all depositors,” by tapping the FDIC’s deposit insurance fund to cover uninsured deposits.
The Fed also created a Bank Term Funding Program aimed at safeguarding institutions affected by the market instability of the bank failures.
In the days following the collapse, reports have emerged indicating that Silicon Valley Bank ignored repeated warnings from regulators that the bank would be at risk of collapse in the event that interest rates rose quickly.
Both Republicans and Democrats in Congress have raised questions about whether regulators ignored signs of trouble at the banks or failed to take appropriate action in response to weaknesses that they did see.
But while Democrats have been quick to call for a return to more stringent regulations and capital requirements for mid-sized banks, Republicans have so far indicated they would oppose additional regulations.
Read more of CNBC’s coverage of the bank crisis
Rather than suggest the Fed and FDIC did not regulate the banks tightly enough, Republicans instead suggested that culpability may lie with individual regulators, not the overall regulatory landscape.
The letters sent Monday also advised both the Fed and the FDIC to preserve all records of their oversight of the two failed banks, a request that telegraphs the intent to open a congressional investigation.
With Republicans in the majority in the House, McHenry has broad discretion as to how he will direct the committee he chairs to proceed in any investigation.
On the Senate side, however, the Senate Banking Committee is chaired by Ohio Democratic Sen. Sherrod Brown, with Scott as the No. 2.
Last week, Brown sent a letter of his own to Gruenberg, Treasury Secretary Janet Yellen, and Michael Barr, the vice chair for supervision at the Federal Reserve board. In it, Brown suggested that responsibility for the bank failures lay in part with top executives at the failed banks.
Brown also asked the regulators to “identify and close regulatory gaps, shortfalls, or failures by state or federal regulators that contributed to the banks’ failures.” He did not ask for the names of individual Fed or FDIC officials involved in supervising the banks.
A version of this story first appeared in CNN Business’ Before the Bell newsletter. Not a subscriber? You can sign up right here. You can listen to an audio version of the newsletter by clicking the same link.
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It’s difficult to overstate the influence that Silicon Valley Bank had over the startup world and the ripple effect its collapse this month had on the global tech sector and banking system.
While SVB was largely known as a regional bank to those outside of the tight-knit venture capital sphere, within certain circles it had become an integral part of the community – a bank that managed the idiosyncrasies of the tech world and helped pave the way for the Silicon Valley-based boom that has consumed much of the economy over the past three decades.
SVB’s collapse was the largest bank failure since the 2008 financial crisis: It was the 16th largest bank in the country, holding about $342 billion in client funds and $74 billion in loans.
At the time of its collapse, about half of all US venture-backed technology and life science firms were banking with SVB. In total, it was the bank for about 2,500 venture firms including Andreessen Horowitz, Sequoia Capital, Bain Capital and Insight Partners.
But the influence of SVB went beyond lending and banking – former CEO Gregory Becker sat on the boards of numerous tech advocacy groups in the Bay Area. He chaired the TechNet trade association and the Silicon Valley Leadership Group, was a director of the Federal Reserve Bank of San Francisco and served on the United States Department of Commerce’s Digital Economy Board of Advisors.
There’s no doubt that the failure of Silicon Valley Bank left a large void in tech. The question is how that gap will be filled.
To find out, Before the Bell spoke with Ahmad Thomas, president and CEO of the Silicon Valley Leadership Group. The influential advocacy group is working to convene its hundreds of member companies – including Amazon, Bank of America, BlackRock, Google, Microsoft and Meta – to discuss what happens next.
This interview has been edited for length and clarity.
Before the Bell: What’s the feeling on the ground with tech and VC leadership in Silicon Valley?
Ahmad Thomas: Silicon Valley Bank has been a key part of our fabric here for four decades. SVB was truly a pillar of the community and the innovation economy. The absence of SVB – that void – and coalescing leaders to fill that void is where my energy is focused and that is not a small task.
I would say there was a fairly high level of unease a few days ago, and I believe the swift steps taken by leaders in Washington have helped quell a fair amount of that unease, but looking at Credit Suisse and First Republic just over the last couple of days, clearly we are in a situation that is going to continue to develop in the weeks and months ahead.
So how do you fill it?
We’re working to be a voice around stability, particularly about the fundamentals of the innovation economy. We can acknowledge the void given the absence of Silicon Valley Bank, but I do think we need voices out there to be very clear in highlighting that the fundamentals and the innovation infrastructure remains robust here in Silicon Valley.
This is a moment where I think people need to take a step back, let cooler heads prevail, and understand that there are opportunities both from an investment standpoint, a community engagement standpoint and corporate citizenship standpoint for new leaders in Silicon Valley to step up.
Are you working to advocate for more permanent regulation in DC?
It’s far too early for that. But if there are opportunities to enhance access to capital to entrepreneurs to founders of color or in marginalized communities and if there are opportunities to try and drive innovation and economic growth, we will always be at the table for those conversations.
Do you have any ideas about how long this crisis will continue for? What’s your outlook?
The problem is twofold: A crisis of confidence and the set of economic conditions on the ground. The economic conditions remain volatile for a variety of reasons: The softening economy, inflationary pressures and the interest rate environment. But I think right now we need to focus on stabilizing confidence in the investor community, in our business executive community and in the broader set of stakeholders around the strength of the innovation economy. That is something we need to shore up near term.
From CNN’s Mark Thompson
Switzerland’s biggest bank, UBS, has agreed to buy its ailing rival Credit Suisse (CS) in an emergency rescue deal aimed at stemming financial market panic unleashed by the failure of two American banks earlier this month.
“UBS today announced the takeover of Credit Suisse,” the Swiss National Bank said in a statement. It said the rescue would “secure financial stability and protect the Swiss economy.”
UBS is paying 3 billion Swiss francs ($3.25 billion) for Credit Suisse, about 60% less than the bank was worth when markets closed on Friday. Credit Suisse shareholders will be largely wiped out, receiving the equivalent of just 0.76 Swiss francs in UBS shares for stock that was worth 1.86 Swiss francs on Friday.
Extraordinarily, the deal will not need the approval of shareholders after the Swiss government agreed to change the law to remove any uncertainty about the deal.
Credit Suisse had been losing the trust of investors and customers for years. In 2022, it recorded its worst loss since the global financial crisis. But confidence collapsed last week after it acknowledged “material weakness” in its bookkeeping and as the demise of Silicon Valley Bank and Signature Bank spread fear about weaker institutions at a time when soaring interest rates have undermined the value of some financial assets.
A week after Signature Bank failed, the Federal Deposit Insurance Corporation said it has sold most of its deposits to Flagstar Bank, a subsidiary of New York Community Bank.
On Monday, Signature Bank’s 40 branches will begin operating as Flagstar Bank. Signature customers won’t need to make any changes to do their banking Monday.
New York Community Bank bought substantially all of Signature’s deposits and a total of $38.4 billion worth of the company’s assets. That includes $12.9 billion of Signature’s loans, which New York Community Bank purchased at a steep discount -— it paid just $2.7 billion for them. New York Community Bank also paid the FDIC stock that could be worth up to $300 million.
At the end of last year, Signature had more than $110 billion worth of assets, including $88.6 billion of deposits, showing how the run against the bank two weeks ago led to a massive decline in deposits.
Not included in the transaction is about $60 billion in other assets, which will remain in the FDIC’s receivership. It also doesn’t include $4 billion in deposits from Signature’s digital bank business.
A week after Signature Bank failed, the Federal Deposit Insurance Corporation said it has sold most of its deposits to Flagstar Bank, a subsidiary of New York Community Bank.
On Monday, Signature Bank’s 40 branches will begin operating as Flagstar Bank. Signature customers won’t need to make any changes to do their banking Monday.
New York Community Bank bought substantially all of Signature’s deposits and a total of $38.4 billion worth of the company’s assets. That includes $12.9 billion of Signature’s loans, which New York Community Bank purchased at a steep discount -— it paid just $2.7 billion for them. New York Community Bank also paid the FDIC stock that could be worth up to $300 million.
At the end of last year, Signature had more than $110 billion worth of assets, including $88.6 billion of deposits, showing how the run against the bank two weeks ago led to a massive decline in deposits.
Not included in the transaction is about $60 billion in other assets, which will remain in the FDIC’s receivership. It also doesn’t include $4 billion in deposits from Signature’s digital bank business.
As the banking crisis spreads, banks have grown increasingly wary of taking on risk. That’s likely why New York Community Bank was unwilling to take on all Signature’s assets.
“We are unsurprised the FDIC retained loans as we would expect banks to be cautious on quickly buying loans without liability and loss protections,” said Jaret Seiberg, analyst at TD Cowan. “More broadly, we see it as positive for consumer confidence for the branches to be opening Monday as NYCB branches.”
The FDIC said Sunday it expects to sell off those assets over time, and the total cost to the government will ultimately be about $2.5 billion.
A subsidiary of New York Community Bancorp has entered into an agreement with U.S. regulators to purchase deposits and loans from New York-based Signature Bank, which was closed earlier this month.
The Federal Deposit Insurance Corporation said the deal would see Flagstar Bank, the subsidiary, assume substantially all deposits and certain loan portfolios, and all 40 of Signature Bank’s former branches. The FDIC said roughly $60 billion of the bank’s loans and $4 billion of its deposits will remain in receivership.
A customer walks towards an automated teller machine (ATM) inside a Credit Suisse Group AG bank branch in Geneva, Switzerland, on Thursday, Sept. 1, 2022.
Jose Cendon | Bloomberg | Getty Images
Swiss banking giant UBS on Sunday offered to buy its embattled rival Credit Suisse for up to $1 billion, according to the Financial Times, citing four people with direct knowledge of the situation.
The deal, which the FT said could be signed as early as Sunday evening, values Credit Suisse at around $7 billion less than its market value at Friday’s close.
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The FT said UBS had offered a price of 0.25 Swiss francs ($0.27) a share to be paid in UBS stock. Credit Suisse shares ended Friday at 1.86 Swiss francs. The fast-moving nature of the negotiations means the terms of any end deal could be different from those reported.
It had already been battling a string of losses and scandals, and last week sentiment was rocked again with the collapse of Silicon Valley Bank and the shuttering of Signature Bank in the U.S., sending shares sliding.
Credit Suisse’s scale and potential impact on the global economy is much greater than the U.S. banks. The Swiss bank’s balance sheet is around twice the size of Lehman Brothers when it collapsed, at around 530 billion Swiss francs as of end-2022. It is also far more globally inter-connected, with multiple international subsidiaries — making an orderly management of Credit Suisse’s situation even more important.
Credit Suisse lost around 38% of its deposits in the fourth quarter of 2022, and revealed in its delayed annual report early last week that outflows have still yet to reverse. It reported a full-year net loss of 7.3 billion Swiss francs for 2022 and expects a further “substantial” loss in 2023.
Red pedestrian crossing signs outside a Credit Suisse Group AG bank branch in Basel, Switzerland, on Tuesday, Oct. 25, 2022.
Stefan Wermuth | Bloomberg | Getty Images
Talks over rescuing Credit Suisse rolled into Sunday as UBS sought $6 billion from the Swiss government to cover costs if it were to buy its struggling rival, a person with knowledge of the talks said.
Authorities are scrambling to resolve a crisis of confidence in the 167-year-old Credit Suisse, the mostly globally significant bank caught in the turmoil spurred by the collapse of U.S. lenders Silicon Valley Bank and Signature Bank over the past week.
The guarantees UBS is seeking would cover the cost of winding down parts of Credit Suisse and potential litigation charges, two people told Reuters.
Credit Suisse, UBS and the Swiss government declined to comment.
The frenzied weekend negotiations follow a brutal week for banking stocks and efforts in Europe and the U.S. to shore up the sector. U.S. President Joe Biden’s administration moved to backstop consumer deposits while the Swiss central bank lent billions to Credit Suisse to stabilise its shaky balance sheet.
UBS was under pressure from the Swiss authorities to take over its local rival to get the crisis under control, two people with knowledge of the matter said. The plan could see Credit Suisse’s Swiss business spun off.
Switzerland is preparing to use emergency measures to fast-track the deal, the Financial Times reported, citing two people familiar with the situation.
U.S. authorities are involved, working with their Swiss counterparts to help broker a deal, Bloomberg News reported, also citing those familiar with the matter.
Berkshire Hathaway‘s Warren Buffett has held discussions with senior Biden administration officials about the banking crisis, a source told Reuters.
The White House and U.S. Treasury declined to comment.
British finance minister Jeremy Hunt and Bank of England Governor Andrew Bailey are also in regular contact this weekend over the fate of Credit Suisse, a source familiar with the matter said. Spokespeople for the British Treasury and the Bank of England’s Prudential Regulation Authority, which oversees lenders, declined to comment.
Credit Suisse shares lost a quarter of their value in the last week. The bank was forced to tap $54 billion in central bank funding as it tries to recover from a string of scandals that have undermined the confidence of investors and clients.
It ranks among the world’s largest wealth managers and is considered one of 30 global systemically important banks – the failure of any would ripple throughout the entire financial system.
There were multiple reports of interest for Credit Suisse from other rivals. Bloomberg reported that Deutsche Bank was considering buying some of its assets, while U.S. financial giant BlackRock denied a report that it was participating in a rival bid for the bank.
The failure of California-based Silicon Valley Bank brought into focus how a relentless campaign of interest rate hikes by the U.S. Federal Reserve and other central banks – including the European Central Bank on Thursday – was pressuring the banking sector.
SVB and Signature’s collapses are largest bank failures in U.S. history behind the demise of Washington Mutual during the global financial crisis in 2008.
First Citizens BancShares is evaluating an offer for SVB and at least one other suitor is seriously considering an offer, Bloomberg News reported on Saturday.
Banking stocks globally have been battered since SVB collapsed, with the S&P Banks index falling 22%, its largest two-week loss since the pandemic shook markets in March 2020.
Big U.S. banks threw a $30 billion lifeline to smaller lender First Republic. U.S. banks have sought a record $153 billion in emergency liquidity from the Federal Reserve in recent days.
The Mid-Size Bank Coalition of America asked regulators to extend federal insurance to all deposits for the next two years, Bloomberg News reported on Saturday, citing a letter from the coalition.
In Washington, focus has turned to greater oversight to ensure that banks and their executives are held accountable.
Biden called on Congress to give regulators greater power over the sector, including imposing higher fines, clawing back funds and barring officials from failed banks.
The swift and dramatic events may mean big banks get bigger, smaller banks may strain to keep up and more regional lenders may shut.
“People are actually moving their money around, all these banks are going to look fundamentally different in three months, six months,” said Keith Noreika, vice president of Patomak Global Partners and a Republican former U.S. comptroller of the currency.
WASHINGTON — Treasury Secretary Janet Yellen sought to reassure markets and lawmakers on Thursday that the federal government is committed to protecting U.S. bank deposits following the failure of Silicon Valley Bank and Signature Bank over the weekend.
“Our banking system remains sound and Americans can feel confident that their deposits will be there when they need them,” Yellen said in testimony before the Senate Finance Committee.
Under questioning, however, Yellen admitted that not all depositors will be protected over the FDIC insurance limits of $250,000 per account as they did for customers of the two failed banks.
A Silicon Valley Bank office is seen in Tempe, Arizona, on March 14, 2023.
Rebecca Noble | AFP | Getty Images
Yellen has been at the center of emergency federal efforts this past week to recover deposits for account holders at two failed banks, the California-based SVB and the crypto-heavy Signature Bank, based in New York.
A majority of SVB’s customers were small tech companies, venture capital firms and entrepreneurs who used the bank for day-to-day cash management to run their businesses. Those customers had $175 billion on deposit with tens of millions in individual accounts. That left SVB with one of the highest shares of uninsured deposits in the country when it collapsed, with 94% of its deposits landing above the FDIC’s $250,000 insurance limit, according to S&P Global Market Intelligence data from 2022.
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U.S. bank regulators announced a plan Sunday to fully insure all deposits at the two failed banks, including those above the $250,000 limit covered by traditional FDIC insurance. The additional protection will be paid for out of a special fund made up of fees levied on all FDIC-insured institutions.
In addition, the Federal Reserve loosened its borrowing guidelines for banks seeking short-term funding through its so-called discount window. It also set up a separate unlimited facility to offer one-year loans under looser terms than usual to shore up troubled banks facing a surge in cash withdrawals. Both programs are being paid for through industry fees, not by taxpayers, the Biden administration has emphasized.
“This will help financial institutions meet the needs of all of their depositors,” Yellen said. “This week’s actions demonstrate our resolute commitment to ensure that depositors’ savings remain safe.”
Democrats and Republicans in Congress have largely supported the emergency actions taken in the past week. But with markets recovering somewhat, lawmakers Thursday questioned Yellen about whether backstops for big banks will become a new norm, and what that could mean for community lenders.
“I’m concerned about the precedent of guaranteeing all deposits and the market expectation moving forward,” Sen. Mike Crapo, R-Idaho, the committee’s ranking member, said in his opening remarks.
People line up outside of a Silicon Valley Bank office on March 13, 2023 in Santa Clara, California.
Justin Sullivan | Getty Images
Republican Sen. James Lankford of Oklahoma pressed Yellen about how widely the uninsured deposit backstops will apply across the banking industry.
“Will the deposits in every community bank in Oklahoma, regardless of their size, be fully insured now?” asked Lankford. “Will they get the same treatment that SVB just got, or Signature Bank just got?”
Yellen acknowledged they would not.
Uninsured deposits, she said, would only be covered in the event that a “failure to protect uninsured depositors would create systemic risk and significant economic and financial consequences.”
Lankford said the impact of this standard would be that small banks would be less appealing to depositors with more than $250,000, the current FDIC insurance threshold.
U.S. Treasury Secretary Janet Yellen takes questions on the Biden administration’s plans following the collapse of three U.S. lenders including Silicon Valley Bank and Signature Bank, as she testifies before a Senate Finance Committee hearing on U.S. President Joe Biden’s proposed budget request for fiscal year 2024, on Capitol Hill in Washington, March 16, 2023.
Mary F. Calvert | Reuters
“I’m concerned you’re … encouraging anyone who has a large deposit at a community bank to say, ‘We’re not going to make you whole, but if you go to one of our preferred banks, we will make you whole.’”
“That’s certainly not something that we’re encouraging,” Yellen replied.
Members of Congress are currently weighing a number of legislative proposals intended to prevent the next Silicon Valley Bank-type failure.
One of these is an increase in the $250,000 FDIC insurance limit, which several senior Democratic lawmakers have called for in the wake of SVB’s collapse.
Following the 2008 financial crisis, Congress raised the FDIC limit from $100,000 to $250,000, and approved a plan under which big banks contribute more to the insurance fund than smaller lenders.
According to the FT, the Swiss National Bank and Finma, its regulator, are behind the negotiations, which are aimed at boosting confidence in the Swiss banking sector. The bank’s U.S.-listed shares were around 7% higher in after-hours trading early Saturday.
Credit Suisse is undergoing a massive strategic overhaul aimed at restoring stability and profitability after a litany of losses and scandals, but markets and stakeholders still appear unconvinced.
Shares fell again on Friday to register their worst weekly decline since the onset of the coronavirus pandemic, failing to hold on to Thursday’s gains which followed an announcement that Credit Suisse would access a loan of up to 50 billion Swiss francs ($54 billion) from the central bank.
Possible UBS sale
There has long been chatter that parts — or all — of Credit Suisse could be acquired by domestic rival UBS, which boasts a market cap of around $60 billion to its struggling compatriot’s $7 billion.
Beat Wittmann, chairman and partner at Swiss advisory firm Porta Advisors, said he expects a merger to be announced before market open Monday.
“If negotiations this weekend won’t be successful then expect that CS will be under non stop fire from a falling equity price, soaring credit default swaps prices, bank counterparties cutting lines, client assets’ outflows and international regulators in New York, London and Frankfurt,” he warned.
“Key elements of a straightforward corporate financial transaction have to be to unwind and/or sell crucial parts of the investment bank and secure continuation of the Swiss bank’s business,” Wittmann added.
JPMorgan’s Kian Abouhossein described a takeover “as the more likely scenario, especially by UBS.”
In a note Thursday, he said a sale to UBS would likely lead to: The IPO or spinoff of Credit Suisse’s Swiss bank to avoid “too much concentration risk and market share control in the Swiss domestic market”; the closure of its investment bank; and retention of its wealth management and asset management divisions.
Both banks are reportedly opposed to the idea of a forced tie-up.
BlackRock, meanwhile, denied an FT report Saturday that it is preparing a takeover bid for Credit Suisse. “BlackRock is not participating in any plans to acquire all or any part of Credit Suisse, and has no interest in doing so,” a company spokesperson told CNBC Saturday morning.
Vincent Kaufmann, CEO of Ethos, a foundation that represents shareholders holding more than 3% of Credit Suisse stock, told CNBC that its preference was “still to have a spin-off and independent listing of the Swiss division of CS.”
“A merger would pose a very high systemic risk for Switzerland and also create a dangerous Monopoly for the Swiss citizens,” he added.
Bank of America strategists noted on Thursday, meanwhile, that Swiss authorities may prefer consolidation between Credit Suisse’s flagship domestic bank and a smaller regional partner, since any combination with UBS could create “too large a bank for the country.”
‘Orderly resolution’ needed
The pressure is on for the bank to reach an “orderly” solution to the crisis, be that a sale to UBS or another option.
Barry Norris, CEO of Argonaut Capital, which has a short position in Credit Suisse, stressed the importance of a smooth outcome.
“I think in Europe, the battleground is Credit Suisse, but if Credit Suisse has to unwind its balance sheet in a disorderly way, those problems are going to spread to other financial institutions in Europe and also beyond the banking sector, particularly I think into commercial property and private equity, which also look to me to be vulnerable to what’s going on in financial markets at the moment,” Norris told “Squawk Box Europe” Friday.
The importance of an “orderly resolution” was echoed by Andrew Kenningham, chief European economist at Capital Economics.
“As a Global Systemically Important Bank (or GSIB) it will have a resolution plan but these plans (or ‘living wills’) have not been put to the test since they were introduced during the Global Financial Crisis,” Kenningham said. “Experience suggests that a quick resolution can be achieved without triggering too much contagion provided that the authorities act decisively and senior debtors are protected.”
He added that while regulators are aware of this, as evidenced by the SNB and Swiss regulator FINMA stepping in on Wednesday, the risk of a “botched resolution” will worry markets until a long-term solution to the bank’s problems becomes clear.
Despite a possible UBS acquisition, Norris still expects Credit Suisse‘s stock to become worthless.
“Our view has been that the end game has always been UBS stepping in and rescuing Credit Suisse with the encouragement of the Swiss government/National Bank,” Norris told CNBC Pro Saturday.
“If this happens we would expect [Credit Suisse] equity holders to get zero, deposit holders guaranteed and probably but not certain that bond holders will be made whole.”
European banking shares have suffered steep declines throughout the latest Credit Suisse saga, highlighting market concerns about the contagion effect given the sheer scale of the 167-year-old institution.
The sector was rocked at the beginning of the week by the collapse of Silicon Valley Bank, the largest banking failure since Lehman Brothers, along with the shuttering of New York-based Signature Bank.
Yet in terms of scale and potential impact on the global economy, these companies pale in comparison to Credit Suisse, whose balance sheet is around twice the size of Lehman Brothers when it collapsed, at around 530 billion Swiss francs as of end-2022. It is also far more globally inter-connected, with multiple international subsidiaries.
For Wittmann, the demise of Credit Suisse has been “entirely self-inflicted by years of mismanagement and an epic destruction of corporate and shareholder value.”
“Broader lessons learnt will have to include minimization of investment banking, higher capital requirements, securing alignment of interest re compensation and importantly that the structurally under-resourced Swiss regulator FINMA would be brought up to fulfill its task,” he said.
Central banks to provide liquidity
The biggest question economists and traders are wrestling with is whether Credit Suisse’s situation poses a systemic risk to the global banking system.
Oxford Economics said in a note Friday that it was not incorporating a financial crisis into its baseline scenario, since that would require systemic problematic credit or liquidity issues. At the moment, the forecaster sees the problems at Credit Suisse and SVB as “a collection of different idiosyncratic issues.”
“The only generalised problem that we can infer at this stage is that banks – who have all been required to hold large amounts of sovereign debt against their flighty deposits – may be sitting on unrealised losses on those high-quality bonds as yields have risen,” said Lead Economist Adam Slater.
“We know that for most banks, including Credit Suisse, that exposure to higher yields has largely been hedged. Therefore, it is difficult to see a systemic problem unless driven by some other factor of which we are not yet aware.”
Despite this, Slater noted that “fear itself” can trigger depositor flights, which is why it will be crucial for central banks to provide liquidity.
The U.S. Federal Reserve moved quickly to establish a new facility and protect depositors in the wake of the SVB collapse, while the Swiss National Bank has signaled that it will continue to support Credit Suisse, with proactive engagement also coming from the European Central Bank and the Bank of England.
“So, the most likely scenario is that central banks remain vigilant and provide liquidity to help the banking sector through this episode. That would mean a gradual easing of tensions as in the LDI pension episode in the U.K. late last year,” Slater suggested.
Kenningham, however, argued that while Credit Suisse was widely seen as the weak link among Europe’s big banks, it is not the only one to struggle with weak profitability in recent years.
“Moreover, this is the third ‘one-off’ problem in a few months, following the UK’s gilt market crisis in September and the US regional bank failures last week, so it would be foolish to assume there will be no other problems coming down the road,” he concluded.
— CNBC’s Katrina Bishop, Leonie Kidd and Darla Mercado contributed to this report.
BlackRock headquarters in New York, US, on Friday, Jan. 13, 2023. via Getty Images
Michael Nagle | Bloomberg | Getty Images
BlackRock has denied a report that it is preparing a takeover bid for embattled Swiss lender Credit Suisse.
“BlackRock is not participating in any plans to acquire all or any part of Credit Suisse, and has no interest in doing so,” a company spokesperson told CNBC Saturday morning.
It comes after the Financial Times reported that the U.S. asset manager was working on a bid to acquire the bank, citing people familiar with the situation.
UBS has also been suggested as a potential buyer, with the FT reporting Friday that it is in talks to take over all or part of Credit Suisse. UBS hasn’t commented on the report.
Credit Suisse’s future looks to be hanging in the balance after a multibillion-dollar lifeline offered by the Swiss central bank last week failed to calm investors.
Credit Suisse’s shares registered their worst weekly decline since the onset of the coronavirus pandemic last week, and are down almost 35% over the month to date.
The failure of Silicon Valley Bank — the largest U.S. banking failure since Lehman Brothers — and the shuttering of New York-based Signature Bank compounded nervousness around the global banking sector.
