Tag: Banking

Congress cools on post-SVB banking overhaul

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It’s a void that’s left lawmakers all over the place, with at least one key leader — House Financial Services Chair Patrick McHenry — signaling that he’s wary about making changes to the cap.
“We’ve gone from the overreaction to a period of time where we’re thinking it through,” Sen. Thom Tillis (R-N.C.) said in an interview.
The fading urgency around expanding government deposit insurance — one of the first potential policy prescriptions that emerged from the failures of Silicon Valley Bank and Signature Bank — is evidence that Congress may let the latest episode of banking turmoil pass without revamping rules for the industry.
“There’s not been consensus,” Senate Banking Chair Sherrod Brown said in an interview.
Lawmakers turned to the issue immediately after SVB’s collapse, which was precipitated by a $42 billion run by depositors. SVB, which catered to tech startups and investors, at the end of last year reported that 88 percent of its deposits were uninsured, with Signature Bank — which failed shortly afterward — reporting that 90 percent of its deposits were above the limit.
The Treasury Department and financial regulators responded to the meltdown by backstopping all depositors at SVB and Signature. With fears of a broader bank run looming, a coalition of mid-size lenders urged the government to temporarily guarantee deposits at all banks — a step that administration and agency officials declined to take. The turmoil appeared to encourage some depositors to move their money from regional lenders to the largest banks.
Members of Congress on both sides of the aisle have since floated competing ideas about temporary and permanent expansions of deposit insurance. The limit hasn’t been raised since the 2008 financial crisis, which also triggered a sweeping overhaul of bank regulations.
Deposit insurance policy “is not one that has simply divided Republicans versus Democrats,” Sen. Elizabeth Warren (D-Mass.) said in an interview.

Warren has floated a potential expansion of coverage, in particular for payroll accounts, but is against an unlimited backstop. Rep. Ro Khanna (D-Calif.) said he’s working with Republicans on a bill that would temporarily insure all deposits used for payroll, regardless of size.
Warren argues Congress should step in now that bank customers may expect the government to guarantee their uninsured deposits in future bank failures.
“Every depositor now anticipates that they will also be covered even for deposits greater than $250,000,” she said. “That means we need to confront that directly in Congress and authorize the FDIC both to increase the insured level and to make sure those who are taking advantage of it pay for that insurance.”
Republicans appear to be split on the issue.
Rep. Blaine Luetkemeyer (R-Mo.) was one of the first lawmakers to call for a temporary universal guarantee to fend off runs — an idea that the House Freedom Caucus has since come out against. Luetkemeyer said in an interview that he is mulling a bill that would give the FDIC “up to 60 days to be able to guarantee deposits all the way across the board.”
Other Republicans, like Reps. Ann Wagner of Missouri and Warren Davidson of Ohio, have suggested instead finding ways to incorporate more private-sector options into the banking safety net, including through tax credits.
But McHenry, whose committee would be responsible for crafting an expansion of deposit insurance on the House side, has shown no indication that he’s embracing it and downplayed the prospects for post-SVB legislation.
In a late March appearance at an American Bankers Association conference, McHenry said lawmakers needed to better understand the trade-offs involved when it comes to moral hazard and bank consolidation before acting.
Another key Republican, FDIC Vice Chair Travis Hill, warned earlier this month that raising the cap could lead to more regulations on lenders.
“People should think about how these things actually work in the real world as they think about potential reforms,” he said.
Now, conservatives and progressive advocates are arguing that policymakers are best off steering clear of the issue. A separate, bipartisan push to restrict bank executive compensation and increase penalties for failures — a policy sought by President Joe Biden — is also on the table.
“Lawmakers should focus their attention elsewhere,” said Alex Thornton, senior director of financial regulation at the Center for American Progress. “It’s a complicated discussion, and it’s not a discussion policymakers should be focusing on right now, because it’s not going to address the root problem.”
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#Congress #cools #postSVB #banking #overhaul
( With inputs from : www.politico.com )

April 26, 2023
Yellen to meet with global regulators on banking turmoil

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The banking turmoil is just one of several big priorities that Treasury outlined in Secretary Janet Yellen’s agenda for the IMF-World Bank spring meetings, which begin Monday. | Andrew Harnik/AP Photo
Treasury Secretary Janet Yellen plans to tell financial regulators gathered in Washington this week that the U.S. banking system is on solid ground despite a string of failures that rattled global markets, a department official said Monday.
The banking turmoil is just one of several big priorities that Treasury outlined in Yellen’s agenda for the IMF-World Bank spring meetings, which begin Monday.
Yellen will hold a press conference at 11:30 a.m., Tuesday, amid meetings with world leaders related to bolstering the global economy, revamping the World Bank and similar institutions, pushing for World Bank nominee Ajay Banga, rallying allies on Russia sanctions and tackling the indebtedness of developing countries.
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( With inputs from : www.politico.com )

April 10, 2023
Swiss prosecutors open probe into UBS takeover of Credit Suisse

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Swiss prosecutors have opened an investigation into possible illegal activity in connection with government support for UBS’s rushed takeover of Credit Suisse.
The two banks agreed to merge in March as part of an emergency deal targeted at avoiding a national financial crisis that could have had a knock-on effect globally.
“The Federal Prosecutor’s office wants to proactively fulfill its mission and responsibility to contribute to a clean Swiss financial center and has set up monitoring in order to take immediate action in any situation that falls within its field of activity,” the authority said in a statement.
Last month, Zurich-based UBS was forced by Swiss authorities to take over its longtime domestic rival Credit Suisse in a deal that creates a new bank.
The prosecutor’s statement said that the intention of the probe was to “analyze and identify any criminal offenses” associated with the deal, adding that various bodies had been contacted to provide clarifications and information.
The deal has been unpopular locally and on Sunday, Swiss daily Tages-Anzeiger reported that the new entity could slash jobs by up to 30 percent.
“If we had done nothing, [Credit Suisse] shares would have been worthless on Monday and the shareholders would have gone home empty-handed,” Swiss Finance Minister Karin Keller-Sutter said last weekend in justifying the deal.

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( With inputs from : www.politico.eu )

April 1, 2023
Hill frustrations simmer over banking chief

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“Throughout the course of that weekend I was inundated with phone calls telling me legitimate bidders were being waved off,” Sen. Bill Hagerty (R-Tenn.) told Gruenberg. “If ideology had anything to do with this, this committee is going to be deeply concerned about that.”
For many Republicans, the conflict goes far beyond how Gruenberg and his agency dealt with the California lender. It touches on the role of the federal government itself in steering the economy, with President Joe Biden’s regulators increasingly coming under fire for trying to usurp what GOP lawmakers view as the job of the private market. They also used the opportunity to hit the Biden administration for its crackdown on corporate consolidation across industries.
“When you hear rumors that this process was delayed because the White House doesn’t like mergers in any shape, form, or fashion, it makes you wonder what actually is going on,” said Sen. Tim Scott, the top Republican on the Banking Committee. Scott said a sale would have prevented the government from having to back uninsured depositors, a move that regulators said was necessary because of the threat of runs on other banks.
The FDIC’s moves could reverberate for years to come and have already ignited a heated debate in Congress about whether to expand the public safety net of deposit insurance — a cost that would likely be borne by consumers because banks would pass it along. A key to answering that question will be determining whether Gruenberg’s agency properly considered all options.
Policymakers have pointed to extenuating circumstances that made it difficult to sell the bank quickly, in particular the fact that SVB, a darling of the tech startup industry, unraveled so rapidly.
“This was a very rushed process,” Gruenberg said at the hearing. Also, banks had little time that weekend to get comfortable with SVB’s books, particularly when its borrowers and depositors were so closely intertwined, an FDIC official said.
A Biden administration official also defended Gruenberg against speculation that he wasn’t open to a purchase by a megabank, saying the FDIC chief has made clear that “he didn’t have some kind of bigness criteria.”
As for the administration itself, “our focus in the short term has been on stabilizing the system,” said the official, who was granted anonymity so he could speak more freely,

The epic collapse of SVB has thrust the spotlight on the normally low-profile Gruenberg, bringing to the forefront the battle-scarred perspective of the FDIC chief. He had a front-row seat to the agency’s efforts in the wake of the 2008 financial crisis when more than 500 banks failed, an experience that in 2019 led him to give a speech that in part reads like a preview of what would eventually go wrong with SVB.
This is, depending on how it’s counted, Gruenberg’s fourth stint atop the FDIC, having been confirmed to the job under President Barack Obama and serving twice as its acting head. His current term was secured by unconventional means: sticking around at the agency after his board term had expired and after his successor, Jelena McWilliams, had already been named by President Donald Trump.
Gruenberg became a persistent thorn in McWilliams’ side, regularly dissenting against her moves to ease regulations on banks. She ultimately resigned early from her four-year term after Gruenberg and his fellow Democratic board members voted to take public feedback on potential changes to the agency’s bank merger approval process without her say-so.
It was a striking move by the soft-spoken chief bank insurer, who is consistently described by friends and acquaintances as “cautious” above all else.
In a town where people usually jump around to a lot of different jobs, Gruenberg has spent the last three and a half decades at two places: the Senate Banking Committee, where he played a role in drafting legislation like the Sarbanes-Oxley Act of 2002 that governs corporate financial recordkeeping; and the FDIC, where he has served on the board since 2005 — its longest-serving director in history.
“You can tell he’s done this before and frankly been in more chaotic situations than this,” said an official involved in the talks on SVB who was granted anonymity to discuss closed-door conversations. “You never felt like he was in any way flustered or the moment was too big, and he always held his ground in discussions with the Fed, Treasury and the White House.”
Yet Gruenberg’s cautious nature also has played into the criticism, both within the government and in the banking industry, that the FDIC did not have enough urgency in seeking a buyer for SVB.
Rep. Andy Barr (R-Ky.) said he wants to investigate whether decisions made by the deposit insurance agency after SVB was taken over by regulators “thwarted a private sector solution.”
“We could have had a much less costly, non-bailout solution potentially, had they not botched and mismanaged the resolution of the institution,” Barr told POLITICO.
House Financial Services Chair Patrick McHenry said on Tuesday at an event hosted by news outlet Punchbowl that he wanted to make sure the agency hadn’t avoided selling SVB to particular firms.
Gruenberg noted in his testimony that legal requirements for the FDIC to minimize losses to the deposit insurance fund made it so the agency could not accept the one full, valid bid it received that weekend.
Because the percentage of insured deposits was so low at the bank, the FDIC’s exposure was minimal, and the bid “was more expensive than a liquidation of the institution would’ve been,” he said.
Ultimately the FDIC, along with the Federal Reserve and Treasury Secretary Janet Yellen, unanimously voted to invoke an exception allowing the agency to bypass the “least cost” requirements on the justification that failing to back uninsured depositors would’ve caused financial turmoil. They feared that broader panic would spur runs on other healthier institutions.
The Fed and Treasury were resolved earlier in the weekend to move forward with that decision, but for the FDIC, the decision was down to the wire, as Gruenberg worked through the implications with his fellow board members — both Republicans and Democrats.
“His role in part was forcing the group of principals to make sure they showed their work internally to their respective boards” on whether that exception was warranted, the official involved with the talks said.
Once that exception was invoked, the FDIC hired an investment bank and marketed the failed firm more extensively, ultimately receiving 27 bids from 18 bidders, according to Gruenberg’s testimony. Last Sunday, the FDIC announced SVB’s loans and deposits had been sold to another regional lender, First Citizens.
Senate Banking Chair Sherrod Brown (D-Ohio) defended the moves by the regulators that initial weekend, arguing that the primary failures were what led to the failure in the first place.
“Monday morning quarterbacking aimed only at the actions of regulators this month is as convenient as it is misplaced — coming from those who have never met a Wall Street wish list they didn’t want to grant,” he said.
But the scrutiny is far from over.
Sheila Bair, a George W. Bush appointee who led the FDIC during the 2008 crisis and worked collaboratively with Gruenberg for years, has criticized the move to back uninsured depositors.
“Is that system really so fragile that it can’t absorb some small haircut on these banks’ uninsured deposits?” she wrote in the Financial Times. “If it is as safe and resilient as we’ve been constantly assured by the government, then the regulators’ move sets dangerous expectations for future bailouts.”
Eleanor Mueller contributed to this report.
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( With inputs from : www.politico.com )

March 29, 2023
Delhi HC grants six weeks to RBI to respond to PIL on Uniform Banking Code

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New Delhi: The Delhi High Court on Monday granted six weeks’ time to Reserve Bank of India (RBI) for filing response in a plea seeking directions to implement Uniform Banking Code.
Filed as a Public Interest Litigation (PIL) by Advocate and BJP leader Ashwini Kumar Upadhyay, the plea brings up the need for a Uniform Banking Code for foreign exchange transfers to regulate benami transactions and the creation of black money.
A division bench of Chief Justice Satish Chandra Sharma and Justice Subramonium Prasad granted time to RBI for filing a response.
In the previous hearing, the bench had given notice to RBI and directed that the entire set of documents be given to its standing counsel while taking into account the significance of the matter.
Additional Solicitor General Chetan Sharma appearing for Centre submitted that the plea raised a serious issue which required detailed examination.
The plea stated that the “immigration rules for Visa are same whether a foreigner comes in Business Class or Economy Class, uses Air India or British Airways and comes from USA or Uganda. Likewise, deposit details in Indian banks, including foreign bank branches for Foreign Exchange Transaction must be in the same format whether it is export payment in a current account or salary, in a savings account or donation, in a charity’s current account or service charges payable in YouTuber’s accounts.”
“Foreign Inward Remittance Certificate (FIRC) must be issued and all international and Indian banks must send the link through SMS to get FIRC automatically in case the foreign exchange is being deposited in the account as converted INR (Indian rupee),” it stated.
“Moreover, only a person or company should be permitted to send Indian rupees from one bank account to another bank account inside the territory of India through RTGS, NEFT and IMPS and international banks should not be allowed to use these domestic banking transactions tools,” the plea further said.

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( With inputs from www.siasat.com )

March 21, 2023
Opinion | FDR Would Hate the Fix to Today’s Banking Crisis

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Second, he knew what it took to deal with a banking crisis, and, specifically, how to restore public confidence in the banking system. At the worst moment of the Great Depression, he faced a much more daunting challenge than the problems of the present — and he succeeded in turning things around almost immediately. In contrast, policymakers and regulators today dither, hoping that empty words and weak measures can restore confidence. The FDR mirror is very revealing of the inadequacies of the current policy response.
Many people are surprised when I tell them that FDR explicitly opposed federal deposit insurance during the 1932 presidential campaign. In the heart of the banking upheaval, with many bank failures producing depositor losses in 1931-1932, his 1932 letter to the New York Sun stated that federal deposit insurance “would lead to laxity in bank management and carelessness on the part of both banker and depositor. I believe that it would be an impossible drain on the Federal Treasury.”
FDR here makes an important, and empirically correct, point: Good bank risk management depends on depositors’ discipline, which depends on their having skin in the game.
Later, Roosevelt reluctantly agreed to create FDIC insurance, at the insistence of Rep. Henry Steagall, as part of a larger political deal, but he kept the agency’s coverage limited to small deposit balances. Furthermore, he had closed all banks in March 1933, and they were permitted to reopen and have access to insurance coverage only after they had undergone a thorough examination to establish that they were in sound financial condition.
FDR did not handle the banking panic by throwing deposit insurance at the problem, or by waiting for more banks to be shut down by worried depositors. He first put an end to runs by closing banks and established a credible process for them to reopen upon demonstrating their strength. Because regulators’ examinations were demonstrably credible to independent observers, and often accompanied by increased capital, confidence in the system was restored and many banks were able to reopen quickly. Runs did not return — not because of the small coverage of the new deposit insurance system, but because FDR had actually addressed the problem of bank weakness that was driving the runs.
What would a similarly effective policy response for the current crisis look like? The problem today is much less severe, making the solution easier.
There are only about 200 U.S. banks that are clearly vulnerable because of securities losses similar to those of Silicon Valley Bank. Regulators should have met with those banks individually last weekend, required them either to immediately come up with credible recapitalization commitments, or put them into conservatorship (beginning Monday morning). In conservatorship, they would have had limits placed on their activities until it was determined whether they could offer adequate recapitalization, or, if not, be placed in receivership. In the meantime, they could have been allowed to pay out all insured deposits, but only to pay out a fraction of uninsured deposits (based on the potential losses of uninsured depositors at each bank). This would have put pressure on those banks to resolve the problem quickly, and would have limited the illiquidity problem to a portion of the uninsured deposits at a small number of banks.
If that had been done, industry and academic experts would have been able to immediately reassure relatively uninformed depositors that the government policy response had been effective and that there was no cause for further alarm. I believe some uninsured depositors would still have wanted to move their funds, as a long-term precaution, but the short-term urgency of these disruptions would have been substantially reduced.

Instead, the Biden administration has done nothing about the 200 vulnerable banks, thereby encouraging continuing panic. The two measures they did undertake last Sunday have clearly failed to calm the market. First, the bailout of uninsured depositors at Signature and SVB has no clear implication for the risk of loss to uninsured depositors at other banks, especially given how much criticism those bailouts have received for being politically motivated and unfair. No uninsured depositor worried about their own potential losses will think that their money is necessarily safe now.
The second policy announcement was also ineffectual. The Federal Reserve created a new special lending facility for banks, allowing them to borrow for up to one year against qualifying Treasury and Agency securities. Banks can borrow an amount equal to the face value of those securities, which exceeds their market value. This implies a partially noncollateralized loan (the opposite of the typical “haircut” applied to collateral in central bank lending).
These loans provide no reason for worried uninsured depositors to rest easy. The decline in the value of securities at vulnerable banks is not temporary but is fundamentally the result of the Fed’s interest rate hikes, which are not only going to persist but will be increased going forward. Securities used as collateral are not going to increase in value as the result of the Fed stepping in here. Second, the loan is only for a year, so after the end of that year, a bank that is insolvent today because its securities have fallen in value will still be insolvent. For these reasons, the Fed lending program will not cause uninsured depositors at an insolvent or deeply weakened bank to decide not to withdraw their funds immediately, if they were already predisposed to do so.
It is time to take FDR’s example to heart, address the banking problem immediately and directly, and give U.S. depositors a real reason to believe that “there is nothing to fear but fear itself.”
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( With inputs from : www.politico.com )

March 18, 2023
China makes surprise rate cut to boost liquidity in banking system

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Hong Kong: China’s central bank has made a surprise cut to the amount of money that banks must keep in reserve, in an effort to keep money flowing through the financial system and prop up the economy, media reports said.
The People’s Bank of China (PBOC) said it would cut the reserve requirement ratio (RRR) for almost all banks by 0.25 percentage points, effective March 27, CNN reported.
“(We must) make a good combination of macro policies, better serve the real economy, and maintain reasonable and sufficient liquidity in the banking system,” the PBOC said in a statement.
The late Friday move came as a surprise and follows a week of turmoil in global financial markets triggered by the failure of some regional US banks.
As recently as Wednesday, analysts from Goldman Sachs said they were expecting the PBOC to keep interest rates and the RRR “unchanged” through the first half of 2023, CNN reported.
The central bank had already injected hundreds of billions of yuan into the banking system since January, mainly through a medium-term lending facility, the analysts said.
The rapid collapse of the two US banks and troubles at Credit Suisse have stoked fears about the health of the global banking sector.
Regulators on both sides of the Atlantic have taken emergency measures since Sunday to provide liquidity support to troubled lenders and shore up the confidence in the banking system. On Thursday, a group of America’s largest banks stepped in to rescue First Republic Bank with a $30 billion lifeline, CNN reported.

Earlier this month, Yi Gang, Governor of the PBOC, hinted at a news conference that monetary policy this year will be largely stable.
“The current level of real interest rates is relatively appropriate,” he said.
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( With inputs from www.siasat.com )

March 17, 2023
Yellen seeks to calm lawmakers amid banking turmoil

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The Biden administration’s Sunday rescue plan for the Northern California bank’s customers, along with those of Signature — a New York institution that was shuttered that day — were essential for stemming a possible contagion that put “community banks across the country at great risk of runs,” Yellen said.
In her prepared testimony, the former Federal Reserve chair assured lawmakers that the banking system remains sound and that “Americans can feel confident that their deposits will be there when they need them.”
Still, lawmakers from both parties sounded alarms over the many failures that contributed to Silicon Valley Bank’s downfall.
“Nerves are certainly frayed at this moment,” Committee Chair Ron Wyden (D-Ore.) said at the start of the hearing.

Treasury Secretary Janet Yellen shakes hands with Senate Finance Committee Chair Ron Wyden (D-Ore.) after a hearing on President Biden’s fiscal year 2024 budget request on Capitol Hill March 16, 2023.
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Francis Chung/POLITICO
Markets have been jittery over the last week amid fears the crisis could spread beyond regional banks. Investors dumped shares of institutions that may be facing a financial crunch with rising interest rates. Moody’s earlier this week downgraded its outlook for the entire U.S. banking industry, citing a “rapid and substantial decline in bank depositor and investor confidence.”
The bank run that sparked Silicon Valley Bank’s collapse on Friday left thousands of depositors — an overwhelming majority of whom weren’t covered by the FDIC’s deposit insurance limit of $250,000 — panicked that they wouldn’t be able to access their funds when banks opened on Monday morning.
Republicans who have scrambled to chart a united response to the Biden administration’s handling of the crisis criticized regulators for failing to intervene.
Sen. Tim Scott, a South Carolina Republican and possible 2024 presidential candidate, said a “lax regulatory environment” and deficient bank examiners allowed the failures of the SVB’s management team to slip through the cracks. Others, like Sen. Chuck Grassley (R-Iowa), said the implosion was a byproduct of a Biden-era economy that’s been stymied by soaring inflation and rising interest rates.

Yellen bristled at questions from Sens. James Lankford (R-Okla.) and Marsha Blackburn (R-Tenn.) about the potential long-term consequences of the rescue plan. The plan backstopped the banks’ uninsured depositors and made cash loans from the Fed available to lenders in exchange for safe collateral — an action that in theory would allow banks to handle deposit withdrawals of any amount for up to a year.
While Democrats are also urging federal agencies to examine regulatory shortfalls, many have also seized on the crisis as an opportunity to toughen standards around capital requirements and oversight.
“We certainly need to analyze carefully what happened to trigger these bank failures and reexamine our rules and supervision and make sure they’re appropriate for the risks banks face,” Yellen said.
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( With inputs from : www.politico.com )

March 16, 2023
The crypto ‘contagion’ that helped bring down SVB

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As U.S. banking regulators begin their post-mortem of Silicon Valley Bank, some pundits are pointing the finger at crypto markets, whose own collapse over the past year left the tech-focused lender hopelessly exposed.
The conventional wisdom about crypto is that it’s “self-referential” — a separate universe to conventional finance — and that its inherent volatility can be contained. The emerging “contagion” theory is that there are enough linkages for extreme turmoil to spill over, much as a virus can sometimes jump from one species to another.
That’s what happened here, according to Barney Frank, the former U.S. congressman who wrote sweeping new banking rules after the banking crisis in 2008, and joined the crypto-friendly Signature Bank as a board member in 2015.
“I think, if it hadn’t been for FTX and the extreme nervousness about crypto, that this wouldn’t have happened,” Frank told POLITICO this week. “That wasn’t something that could have been anticipated by regulators.”
FTX, the crypto exchange that collapsed in November amid allegations of massive fraud, capped a year of turmoil in crypto markets, as investors began withdrawing funds from riskier ventures in response to rising interest rates, which in turn exposed the shaky foundations underpinning the industry. The ensuing “crypto winter” saw the value of the industry plummet by two-thirds, from a peak of $3 trillion in 2021.
Policymakers sought to reassure the public that volatility in the crypto market, blighted by scams and charlatans who sought to profit from investors’ fear of missing out, would naturally be contained. With the collapse of SVB, that claim is facing its biggest test yet.
Patient zero
Under the contagion theory, “patient zero” could be traced back to the implosion of TerraUSD, an “algorithmic stablecoin” that relied on financial engineering to keep its value on par with the U.S. dollar. That promise fell short in May last year following a mass sell-off, creating panic among investors who had used the virtual asset as a safe haven to park cash between taking punts on the crypto market. The origin of the crash is still subject to debate but rising interest rates are often cited as one of the main culprits.
TerraUSD’s demise was catastrophic for a major crypto hedge fund called Three Arrows Capital, dubbed 3AC. The money managers had invested $200 million into Luna, a crypto token whose value was used to prop up TerraUSD, which had become the third largest stablecoin on the market. A British Virgin Islands court ordered 3AC to liquidate its assets at the end of June.

The fund’s end created even more problems for the industry. Major crypto lending businesses, such as BlockFi, Celsius Network and Voyager, had lent hundreds of millions of dollars to 3AC to finance its market bets and were now facing massive losses.
Customers who had deposited their digital assets with the industry lender were suddenly locked out of their accounts, prompting FTX — then the third largest crypto exchange — to step in and bail out BlockFi and Voyager. Meanwhile, central banks continued to raise rates.
The contagion seemed under control for a few months until revelations emerged in November that FTX had been using client cash to finance risky bets elsewhere. The exchange folded soon after, as its customers rushed to get their money out of the platform. BlockFi and Voyager, meanwhile, were left stranded.
Outbreak widens
This is the point where the outbreak of risk in the crypto industry might have jumped species into the banking sector.
Silvergate Bank and Signature Bank, two smaller banks that also failed last week, had extensive business with crypto exchanges, including FTX. Silvergate tried to downplay its exposure to FTX but ended up reporting a $1 billion loss over the last three months of 2022 after investors withdrew more than $8 billion in deposits. Signature also did its best to distance itself from FTX, which made up some 0.1 percent of its deposits.
FTX, the crypto exchange that collapsed in November amid allegations of massive fraud, capped a year of turmoil in crypto markets | Leon Neal/Getty Images
SVB had no direct link to FTX, but was not immune to the broader contagion. Its depositors, including tech startups, crypto firms and VCs, started burning their cash reserves to run their businesses after venture capital funding dried up.
“SVB and Silvergate had the same balance sheet structure and risks — massive duration mismatch, lots of uninsured runnable deposits backed by securities not marked to market, and inadequate regulatory capital because unrealized fair value losses excluded,” former Natwest banker and industry expert Frances Coppola told POLITICO.
Eventually, the deposit drain forced SVB to liquidate underwater assets to accommodate its clients, while trying to handle losses on bond portfolios and an outsized bet on interest rates. As word got out, the withdrawals turned into a bank run as frictionless and hype-driven as a crypto bubble.
Zachary Warmbrodt and Izabella Kaminska contributed reporting from Washington and London, respectively.
This article has been updated to correct the value of the crypto industry.

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( With inputs from : www.politico.eu )

March 14, 2023
How Biden saved Silicon Valley startups: Inside the 72 hours that transformed U.S. banking

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The result, announced just minutes before financial markets in Asia reopened, was sweeping: The federal government would provide SVB’s depositors with access to all their funds, effectively averting painful financial uncertainty — and the threat of heavy losses — for thousands of venture-backed startups. Signature Bank, which had followed SVB into insolvency, would receive the same guarantee.
Even more critically, the Federal Reserve would provide a massive lifeline to the nation’s banks: It would singlehandedly give all other similar lenders access to funds designed to keep them afloat and quell the panic brewing across the country.
The swift and forceful action to rescue depositors at the two failed midsize lenders rewrote crucial banking guardrails in ways that could reverberate for years. It put the Biden administration’s stamp — for good or ill — on the sector’s future financial stability, while sending a message about the government’s willingness to rescue private businesses in new ways. It also was done without passing a single new act of Congress or holding hearings among elected officials in recent days.
And it almost didn’t happen.
President Joe Biden began the weekend highly skeptical of anything that could be labeled a taxpayer-funded bailout, according to four people close to the situation, who were not authorized to speak for attribution.
That would be a serious political risk for the president given that many of SVB’s customers were start-up entrepreneurs and investors with so much money deposited in the bank that they far exceeded the federal government’s $250,000 insurance limit. Signature catered in part to once-high-flying crypto investors.
Biden, who as vice president had watched then-President Barack Obama get hammered over his role in bailing out giant banks during the financial crisis, had little desire for a repeat — especially since he had long embraced a “bottom-up, middle out” economic philosophy focused on average working families, the people close to the situation said.
Yet as officials worked through the weekend — mostly in open-ended virtual meetings tying several agencies together — to determine the blast radius of SVB’s failure, they concluded that failing to protect the bank’s depositors could leave small businesses across the country unable to access money needed to pay workers and keep their operations going.

“There’s not a way to help the people he wants without also helping the uninsured depositors who made a bad choice by putting too much money into a single bank,” said one adviser to the White House. “I have no doubt in my mind that he feels ambivalent about it. But he’s not willing to take a risk with this economy.”
Though there was little concern that the failures of SVB and Signature threatened to destabilize the entire banking sector, officials mapping the network of companies tied to those institutions worried that refusing to step in could disrupt large swaths of the economy.
Panicked depositors would likely pull their money en masse from other regional banks, creating a cascading crisis on top of the alarm already spreading throughout Silicon Valley.
Biden aides and Democratic lawmakers had also grown concerned about the viability of certain payroll-processing companies tied to SVB, two people familiar with the discussions said. If they were unable to function, the number of workers at risk of not receiving their paychecks would increase exponentially. The situation risked spiraling quickly from there, denting consumer confidence in the economy’s stability.
“There’s just a lot of sensitivity, and he doesn’t want to disrupt an economy that he thinks is doing really well for workers,” the adviser said. “The direction was: Stabilize everything.”
Biden eventually came around to the view that an emergency rescue was the only viable option after multiple briefings Friday through Sunday from chief of staff Jeff Zients and new National Economic Council Director Lael Brainard, who just joined the White House after serving as vice chair of the Fed and chair of the central bank’s Financial Stability Committee. He also spoke with California Gov. Gavin Newsom on Saturday about SVB’s failure and its impact on the state.
Biden received a final briefing from Treasury Secretary Janet Yellen along with Zients and Brainard on Sunday afternoon shortly before the announcement.
Throughout the weekend, Biden’s inner circle emphasized the potential impact on workers’ paychecks, which they believed would resonate both with the president and the public, said one of the people familiar with the deliberations. And they urged Biden to speak to the public before U.S. markets opened to ward off runs on other regional banks.
Biden agreed, but not before stressing that his speech needed to play up his concern for small businesses and make it clear Americans should maintain trust in the banking system.
At 1 p.m. Friday, Yellen convened a team to come up with a battle plan: Fed Chair Jerome Powell, FDIC Chair Martin Gruenberg, Acting Comptroller of the Currency Michael Hsu, and San Francisco Fed President Mary Daly, whose regional branch oversaw the bank.
Their teams eventually settled on three potential options, according to a person familiar with the talks: looking for a buyer, backstopping uninsured depositors, and launching a new emergency lending program at the Fed. By Saturday, they’d agreed to pull the trigger and work on all three.
But it was not easy getting to the finish line, especially when it came to the FDIC and protecting all depositors at the two failed banks.
The FDIC’s decision was particularly fraught and down to the final hours, two people said. Agency officials worried that the proposal could create thorny issues for the agency, which is statutorily bound to protect the deposit insurance fund — a longstanding pot of money financed by bank fees.
It also raised questions about whether the FDIC might be expected to make all depositors whole anytime a bank fails, something it is not designed to do, making the decision especially painful for Gruenberg and his fellow board members.
Though the Fed and the FDIC were each designed to stop financial panics, the moves by both agencies also risked ratifying the notion that the government would always be there to dull the consequences of the collapse of a larger bank. It was the “moral hazard” question that dogged rescue efforts in 2008 and 2009.
But the administration needed a straightforward solution, and also faced increasing pressure from Capitol Hill, where California lawmakers inundated by worried constituents pushed officials to take whatever steps were necessary to maximize SVB’s chances of being bought by another bank.
Members of the California delegation spent the weekend scrambling for any information that might shed light on whether SVB’s extensive customer network of high-tech startups and powerful venture capitalists would be able to access their funds come Monday. A briefing with FDIC officials on Friday offered little substance — according to a lawmaker who attended — as the agency was still gathering information about the bank’s uninsured deposits.
As information trickled out on Sunday about a possible plan to backstop depositors, FDIC and Treasury officials wouldn’t even confirm or deny a widely reported auction process for SVB’s assets, Rep. Anna Eshoo, a California Democrat whose district includes a large section of Silicon Valley, said in an interview.
While lawmakers remained largely in the dark until shortly before the announcement, officials from the Fed, FDIC, White House and Treasury spent all weekend in rolling virtual meetings that continued through Friday and Saturday nights into Sunday.
The administration had yet to finalize its plan by the time Yellen went on “Face the Nation” Sunday morning, forcing her to remain noncommittal about a path forward. Yellen merely said the government would not be bailing out a bank’s investors.
Yet over the next several hours, officials raced to nail down the final details of their approach. Emails and drafts were exchanged among the top players right up until they pushed the button on the announcement and held press briefings. One person familiar with the meetings described them as short of frantic but “very driven and determined.”
At 6:15 p.m. ET on Sunday, the Fed, Treasury and the FDIC jointly announced that the government would immediately provide access to all depositor funds held at the two failed banks, using the government’s power to immediately designate the institutions as systemically significant.
The action did forestall a market meltdown. Stocks ended Monday only slightly lower. But it did not keep investors from hammering other regional banks. Shares in First Republic, which saw lines of panicked depositors over the weekend, plunged 62 percent despite the government actions, suggesting investors still have doubts about the banking system, especially the tiers just below the most heavily regulated giant banks.
Bob Kocher, a partner at venture capital firm Venrock and former Obama-era White House official, said some panicked companies are going as far as transferring all their money into board members’ individual bank accounts while they set up their own new accounts with major financial institutions.
“There’s no way now as a board member you can sign off on putting all your money into a regional bank,” he said, adding that he expects to see significant outflows at similarly sized institutions like First Republic Bank and PacWest Bancorp. “Everybody’s racing to put their money into JPMorgan and Goldman Sachs.”
Beyond making payroll, Kocher said, SVB’s failure raised questions about how companies would pay for basic services like cloud storage and website maintenance, as well a constellation of smaller suppliers, if their deposits got tied up in a troubled bank.
“I think it’s going to take at least a month or two for things to calm down and settle out,” he said.
There’s similar trepidation among Biden officials, who spent Monday holding their breath, closely monitoring banks’ falling stock prices for signs of broader contagion.
In the meantime, aides have tried to head off blowback from the party’s progressive wing, emphasizing that taxpayer money won’t directly go toward propping up SVB’s depositors — and that the toll on workers could have been far worse had they simply let the bank fail.
Biden stressed that point on Monday in remarks aimed at calming the markets, expressing confidence that “the banking system is safe” while also repeatedly emphasizing that taxpayers wouldn’t be on the hook for any losses.
Rep. Maxine Waters (D-Calif.), the top Democrat on the House Financial Services Committee, was similarly resolute. “The government is not bailing out anything,” she said in an interview. “If the banks have made mistakes, if the investments have been bad, if they weren’t watching the balance sheet, they’re going to be held accountable.”
Jonathan Lemire, Sam Sutton and Eleanor Mueller contributed to this report.
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( With inputs from : www.politico.com )

March 14, 2023