The next bank battles

Jul 31, 2023

Presented by Structured Finance Association

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Washington regulators have set off a lobbying bonanza with a 1,000-page plan to hike big bank capital requirements. It’s just the beginning.

The Federal Reserve, the FDIC and the OCC have a series of rules they plan to roll out in the coming weeks and months as they try to shore up the banking system post-SVB. Here’s what we know based on the most recent intel from regulators.

Preparing for the worst

A big theme for this wave of regulation is that Washington has left the economy exposed to disastrous regional bank failures and needs to cast a wider net with tougher rules.

FDIC Chair Martin Gruenberg has been warning of this “underappreciated risk” for years. Lingering tremors from the failures of SVB, Signature Bank and First Republic have made it an urgent issue.

Case in point is a rule expected soon — possibly before Labor Day — that would force more large banks to hold long-term debt that can absorb losses when they collapse.

The requirement today applies to a handful of global systemically important banks. You may see regulators try to extend it to all banks with $100 billion or more in assets.

In the same vein, look for officials to try to strengthen requirements related to how large banks prepare “living wills.” The so-called resolution plans outline how they can be wound down when they fail.

Heading off a cash crunch

SVB went down in part because it failed to manage an exodus of depositors in the cash-strapped tech sector. Regulators are planning to respond by revamping two key liquidity rules this year.

One, the liquidity coverage ratio, acts as a kind of 30-day cash management safeguard, and was scaled back in the Trump era. The other, the net stable funding ratio, requires banks to consider the funding requirements of their operations over the course of a year.

Fed Vice Chair for Supervision Michael Barr has said regulators should consider applying tougher liquidity requirements to more firms.

Officials are also reevaluating the stability of bank deposits in general, in particular those that are uninsured.

“These recent experiences suggest that depositors’ relationship to their banks is changing and that runs are much faster and more significant,” Treasury assistant secretary Graham Steele said last week.

Klaros Group partner Jonah Crane, a former Treasury official, told MM he expects regulators to reconsider how they treat commercial deposits tied to private equity and venture capital firms.

“They’re going to have a look at all the banks that experienced deposit outflows and figure out which deposits left and which ones stayed,” he said.

Happy Monday — Sam’s back! Help us stay busy during August recess. Send tips: Zach Warmbrodt, Sam Sutton.

A message from Structured Finance Association:

Did you know? Your mortgage, credit card, or small-business or car loan probably has a lower interest rate because of securitization, the bundling of your loan with other loans for added safety by members of the Structured Finance Association. Learn more at www.structuredfinance.org.

Driving the Week

The Fed’s Senior Loan Officer Opinion Survey will tell us what’s happening with bank lending Monday at 2 p.m. … June’s Job Openings and Labor Turnover Survey is out Tuesday at 10 a.m. … The July jobs numbers will hit Friday at 8:30 a.m.

Driving the day

Bailed-out trucking giant collapses — The WSJ reports that Yellow, one of the biggest U.S. trucking businesses, shut down Sunday, imperiling nearly 30,000 jobs. It raises questions about the Trump administration’s decision to loan the company $700 million in 2020. Treasury holds about 30 percent of its shares.

Yellen warns of insurer pullback — Treasury Secretary Janet Yellen sees a “protection gap” for Americans seeking property insurance amid extreme weather, according to Bloomberg.

Yellen at a meeting with regulators on Friday zeroed in on insurers who are raising rates and withdrawing from regions where coverage is too high of a risk.

Yellen said the Financial Stability Oversight Council, which she leads, needs to look into the implications for the financial system.

“American households are already seeing the impacts even if their own homes have not been damaged,” Yellen said.

The WSJ reports that the insurance trend extends well beyond areas prone to hurricanes, floods and wildfires. Thirty-one states have seen double-digit rate increases since the start of last year, according to S&P Global Market Intelligence.

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Crypto

Everything’s coming up crypto again — Our Declan Harty has a look at the surprising shift in the crypto world’s fortunes. Prices are rising, a federal court has undercut the SEC and Congress is moving friendly legislation. Even Wall Street giants are jumping into the market.

“The frame of the conversation has shifted in a pretty profound way,” said Crypto Council for Innovation CEO Sheila Warren. “This industry is not going away.”

Or as crypto critic and former SEC official John Reed Stark frames it: “It’s the upside-down world of crypto. … None of this makes any sense.”

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Economy

Peak Prada? — The FT reports that luxury brands are bracing for the end of a post-pandemic boom as U.S. and Chinese consumers get pickier with their purchases.

The firms behind Louis Vuitton, Cartier and Prada are reporting slower U.S. sales growth.

“The global mood is not one of revenge buying like we saw in 2021 and 2022, so we’re talking more about normalization than anything else,” LVMH chief financial officer Jean-Jacques Guiony said.

Regulatory Corner

Washington doesn’t want banks to fear Fed assistance — Our Victoria Guida reports that regulators are urging lenders to make sure they can tap the Federal Reserve’s discount window as part of their contingency planning. They’re trying to reduce industry stigma around using the funding backstop.

The Fed, FDIC, OCC and NCUA encouraged banks to get familiar with the discount window in guidance on Friday.

As Victoria writes, there have been questions about whether usage of the discount window would have helped stave off SVB’s collapse. Firms have been reluctant to use it because they fear spooking investors.

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Markets

Visa vs. bodegas — Bloomberg reports that Visa is taking steps to rein in merchants that impose surcharges on credit card purchases. The payment network has lowered the maximum amount that retailers can charge and has started sending auditors to make sure stores are following its rules.

A message from Structured Finance Association:

When loans are bundled together – a process called securitization – the result is less risk and lower interest rates for American families and small businesses. Securitization provides $15.6 trillion in financing and last year funded over half of U.S. household debt. Members of the Structured Finance Association give individuals and businesses access to essential credit at a lower price through securitization. Learn more at www.structuredfinance.org.