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Debate on banking sector regulations one year after the collapse of the SVB

by SuperiorInvest

A year ago, the government and America's largest banks joined forces in a rare moment of civility.

They were forced to act after the collapse of Silicon Valley Bank on March 10, 2023, quickly followed by two other lenders, Signature Bank and First Republic. Faced with a crisis that could threaten the banking industry – the worst since 2008 – rivals and regulators created a huge bailout fund. The three troubled banks were declared insolvent by the government and sold.

The largest banks emerged from the period even larger, after acquiring accounts from their smaller rivals. But they have also become more confident in challenging regulators about what went wrong and what to do to prevent future crises. In fact, many bankers and their lobbyists are now quick to describe the period as a regional banking crisis, a term that tends to understate how worried the industry was at the time.

One reason for the heightened tensions is that government officials have proposed rule changes that lenders say will hurt their businesses and would not have done much to stop the collapse of Silicon Valley Bank. Regulators say last year's crisis shows changes are needed. They point to growing risks in the commercial and residential real estate markets and the growing number of so-called problem banks, or those with poor ratings due to financial, operational or management weaknesses.

This is the situation, one year after the crisis:

In just a few days last March, Silicon Valley Bank went from the darling of the banking world to collapse. The lender, which served venture capital and startup clients, had accumulated safe investments that had lost value when the Federal Reserve raised interest rates.

That in itself may not have spelled doom. But when nervous depositors (many of whom had accounts above the $250,000 limit for government insurance) began withdrawing their money from the bank, executives failed to allay their concerns, sparking a bank run.

Soon after, two other lenders (cryptocurrency-focused Signature Bank and First Republic, which like Silicon Valley Bank, had many clients in the startup industry) were also taken over by regulators, brought down by their own runs. banking. Together, those three banks were larger than the 25 that failed during the 2008 financial crisis.

Under standard procedure, government officials auctioned off the failed banks, and losses were covered by a fund to which all banks contributed. Silicon Valley Bank was purchased by First Citizens Bank. Many of Signature's assets went to New York Community Bank (which has suffered its own problems lately), and First Republic was absorbed by JPMorgan Chase, the country's largest bank.

No depositors lost money, not even those with accounts that normally would not have qualified for federal insurance.

Many banking supervisors blame, at least in part, the industry itself for lobbying for weaker rules in the years leading up to 2023. The Federal Reserve has also taken responsibility for its own slow oversight of Silicon Valley Bank. Regulators say they are paying more supervisory attention to midsize banks, recognizing that problems can spread quickly among banks with diverse geographic footprints and customer bases in an era when depositors can empty their accounts with the click of a button. a button on a website or application.

Regulators plan a variety of measures to clamp down on banks.

Last year they unveiled the U.S. version of an international agreement called “Basel III” that will require big banks to hold more capital to offset the risks posed by loans and other obligations. Last week, Federal Reserve Chairman Jerome H. Powell signaled that regulators could rework that initiative.

In the United States, regulators are also crafting so-called liquidity rules that focus on banks' ability to quickly shore up cash in a crisis. Some of those rules, which have not yet been formally proposed but could come to light in the coming months, could take into account banks' uninsured depositors, a major issue in last year's crisis.

Suffice it to say that the largest banks have signaled that they feel the Basel III rules, in particular, are punishing them. They have sent comment letters to regulators arguing that they helped stabilize the system last year and that the costs of the proposed rules may ultimately hinder their lending or drive that business to less regulated nonbank lenders.

Perhaps the most visible American banking leader, JPMorgan's Jamie Dimon, told clients in a private conference two weeks ago that the collapse of Silicon Valley Bank could be repeated with another lender. According to a recording heard by The New York Times, Dimon said: “If rates go up and there's a major recession, you're going to have exactly the same problem with a different set of banks.”

And he added: “I don't think it will be systemic except when there is a bank run and people get scared. People panic. We have seen that happen. “We haven’t solved that problem.”

Two words: real estate.

Many banks have been setting aside billions of dollars to cover anticipated losses on loans to owners of commercial office buildings. The value of those buildings has plummeted since the pandemic as more people work remotely. These problems have weighed most heavily on New York Community Bank, which last week accepted a $1 billion bailout package from former Treasury Secretary Steven Mnuchin, among others, to stay afloat.

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