The Latest on the Liquidity Crisis

It’s about two weeks since the collapse of Silicon Valley Bank threatened a potential financial crisis, and one day since Federal Reserve policymakers went ahead with a quarter-point increase in interest rates—staying on an inflation-fighting path. Where we do we stand?

In a press conference following the rate announcement, Fed Chair Jerome Powell said there was evidence that the rapid movement of deposits that prompted the current liquidity crisis had stabilized. And while stocks, including certain bank stocks, fell following Wednesday’s rate announcement, there was yet another reversal as markets opened today.

As to the next interest rate move, some observers said credit tightening in response to the crisis could counter inflationary pressures to the extent that another rate increase is not needed. Others think the next move will be a rate cut.

Regulatory-related fallout was also a theme yesterday as, per The New York Times, both Powell and Treasury Secretary Janet Yellen “suggested changes to federal regulation and oversight might be needed to prevent future runs on American banks.”

This was just the latest in a growing crisis that had included several significant developments in recent days.

Time To Lift the Deposit Insurance Limit?

The conversation about deposit insurance expansion is growing larger and louder as regulators, legislators, and markets process the shock of Silicon Valley Bank’s failure. Hoping to tamp down bank runs, regulators have lifted the $250,000 per deposit cap for customers of the failed SVB and Signature Bank of New York—guaranteeing all deposits regardless of size.

Now there are calls for more protection—from temporarily applying the program for SVB and Signature industrywide, to permanently raising the insurance cap into the millions of dollars per account. But there is disagreement in Congress and, apparently, among regulators. Questions abound: Who would pay for raising the FDIC cap, and how? And what about the moral hazard of a system where deposits are risk free for banks and customers?

The New York Times takes a look here.  

Big Banks ‘Recirculate’ New Deposits in Rescue 

Eleven banks provided $30 billion in funding to First Republic Bank last week to shore up the regional institution as the industry’s bank run crisis unfolded. A person familiar with the talks that led to the deal told Yahoo! Finance, “A whole bunch of deposits flowed into the big banks over the last five days. This is basically recirculating the capital.”

The source also said the rescue funds “will be treated the exact same way anyone’s non-insured deposit would be treated,” and that the participating banks were acting to boost “the banking industry, which lifts all boats.” There was news this week that JPMorgan Chase CEO Jamie Dimon, who brought the idea to the 11 banks, is seeking to provide another round of funding for First Republic. Meanwhile, Time and others are reporting that another infusion could involve government backing.  

The Community Bank Impact

Bloomberg reports that many community banks have also experienced gains in deposits as customers diversify their accounts in the liquidity crisis. Community bankers also told Bloomberg that, so far, they are not tightening their lending standards.

The former CEO of the Independent Community Bankers Association, Cam Fine, told The Hill that he has heard from several community banks that it’s been “business as usual.” Fine said about 10% of deposits at community banks are above the $250,000 deposit insurance cap.

Survey Shows Possible Extent of Deposit Diversification

Amid all these deposit flows, a Gartner survey found that 28% of chief financial officers planned to diversify their companies’ deposits in the wake of the Silicon Valley Bank and Signature Bank of New York failures. CFO Dive, reporting on the survey, said “at least one person discussed plans to stay up past midnight to move their firm’s money out of a regional bank, figuring the bank’s website would not be overwhelmed in the middle of the night.”

Amid the flurry, Gartner’s chief of research in the finance practice, Alexander Bant, is urging businesses to think through any deposit moves before acting. CFO Dive said Bant advises against “shifting deposits too quickly away from banks that are not at risk of failure and harming their relationship rates and terms.”  

Beware Cyber Exploits Capitalizing on Crises

Since the Silicon Valley Bank collapse, cybersecurity firm Artic Wolf has noticed several new domains related to SVB. What does it mean? The domains will likely be “a hub for phishing attacks” targeting people with concerns or business regarding SVB, a Cybersecurity Dive piece says. In any crisis, the article notes, individuals and organizations are especially vulnerable to news-driven social engineering attacks. One reason, Cynet CEO Eyal Gruner told Cybersecurity Dive, is because people are “more apt to open random emails that may help them.”

The Age of the ‘Bail-In’?

The $17 billion in losses sustained by certain Credit Suisse bondholders in the bank’s government-sponsored takeover signal that we, to at least a certain extent, have entered the age of the bank “bail-in.” The investors were holders of additional tier 1 (AT1) bank debt, which is “designed to convert into equity when a lender runs into trouble,” notes The Guardian.

The contingent convertible bonds at issue, commonly known as “CoCos,” pay a premium but are not guaranteed—and are one way that regulatory reforms, including Dodd-Frank in the U.S., sought to shift the burden of bank bailouts from taxpayers to bank creditors. The Guardian notes that with the bail-in precedent set in this rescue of a global systemically important bank, investors may demand higher premiums to hold CoCos, driving interest payments for banks higher.

Read more about bail-ins in this Investopedia piece.