SVB, Signature Bank Depositors to Get All Their Money as Fed Moves to Stem Crisis Regulators take control of a second bank and race to roll out emergency measures
The measures, which include guaranteeing all deposits of SVB, were designed to shore up wavering confidence in the banking system. They were jointly announced Sunday night by the Treasury Department, the Federal Reserve and the Federal Deposit Insurance Corp.
Regulators announced they had taken control of Signature Bank, one of the main banks for cryptocurrency companies, on Sunday. The New York bank’s depositors will be made whole, officials said.
A senior Treasury official said the steps didn’t constitute a bailout because stock and bondholders in SVB and Signature wouldn’t be protected.
The Fed and Treasury separately said they would use emergency-lending authorities to make more funds available to meet demands for bank withdrawals, an additional effort to prevent runs on other banks.
“This should be enough to stop the depositor panic,” said William Dudley, who served as president of the New York Fed from 2009 to 2018. “What it tells you is that risks to the financial system are not just tied to the big money-center banks.”
Officials took the extraordinary step of designating SVB and Signature Bank as a systemic risk to the financial system, which gives regulators flexibility to guarantee uninsured deposits. (…)
Federal regulators said any losses to the government’s fund would be recovered in a special assessment on banks and that the U.S. taxpayers wouldn’t bear any losses. (…)
First Republic caters to wealthy clients with big balances in excess of the FDIC insurance cap. Investors worried that the bank could be vulnerable to a run like the one that claimed Silicon Valley Bank. First Republic’s shares had fallen about 30% since Wednesday. (…)
Regulators struggled to find a buyer on Sunday and pivoted to backstopping the deposits, according to a senior Treasury official, as they sought to announce a resolution to depositors by Monday morning. (…)
Officials on Sunday signaled they would likely weigh tougher capital requirements and liquidity rules, reversing at least some of the steps taken during the Trump administration to ease restrictions on smaller banks.
“We learned today that a $200 billion bank was too big to fail—or at least too big to be allowed to fail with losses borne by large depositors, as the bank resolution system assumes,” said Daniel Tarullo, a former Fed governor who was the central bank’s point person on regulation following the financial crisis. “While I understand the government’s concern about economic fallout, today’s actions strike me as having major implications for financial regulation.” (…)
The WSJ Editorial Board:
(…) The FDIC may have resorted to its “systemic risk exception” for SVB and Signature, but this is a stretch considering their size. The joint statement by regulators said it received the required two-thirds vote of both the FDIC and Fed boards, and we’d like to see the creative legal work by the Office of Legal Counsel at the Justice Department.
The Fed is acting as it should as a provider of liquidity to all comers. But it’s going further and offering one-year loans to banks against collateral of Treasurys and other fixed-income assets. The Fed will value these assets at par, which means banks don’t have to sell their assets at a loss. The Fed is essentially guaranteeing bank assets that are taking losses because banks took duration risk that Fed policies encouraged. This too is a bailout. (…)
SVB was the 16th largest bank in the U.S. but still not a large bank with $209B in assets. We all know that SVB’s problems were self inflicted by poor, reckless, stupid management.
Banks are supposed to match the duration of their liabilities (deposits) with that of their assets (securities). SVB was long on assets against demand deposits. And unhedged. When it had to sell its Treasuries to meet sudden withdrawals, it sold them at a loss since interest rates have risen. These losses ($1.8B) erased its equity base … yaddi, yaddi ,yadda.
So why were SVB and Signature Bank designated as a systemic risk to the financial system?
Because, technically, this gives regulators flexibility to guarantee uninsured deposits. Why? Where was the systemic risk? Even Larry Summers said Friday: “I don’t think this is likely to be a broadly systemic problem.”
From my lens, the systemic risk was in the unregulated, free-wheeling crypto world:
(…) With a circulation of around $40 billion, Circle’s token is second only to Tether’s USDT. (…)
Trading activity on a large decentralized exchange called Curve showed similar signs that traders were adjusting out of their positions in Circle’s stablecoin. Acheson said Curve’s 3pool protocol, which allows users to swap between Circle’s token, Tether and another stablecoin called DAI is now “severely out of balance” as users try to exit their USDC positions. In theory, the supply of the three stablecoins should be held roughly in line. But data on Curve Finance shows just about 6.4% of the pool was Tether, while USDC and DAI both have more than 40% of the supply.
“Unforseen SVB collapse and potential exposure of USDC to SVB created panic around it, so people started fleeing to USDT,” Michael Egorov, founder of Curve Finance, said in an email. He explained the activity in the DAI token by noting that traders treat it as almost a proxy for USDC. “DAI is not a safe haven in this regard because a lot of it is collateralized by USDC directly,” he said. (…)
The crypto sector had already been rattled by the Silvergate meltdown earlier in the week. The California-based bank had been one of a handful of US-based lenders providing financial services to crypto firms, including FTX. The shrinking pool of crypto-friendly banks may make trading in and out of cryptocurrencies from US dollars increasingly difficult for crypto exchanges and market makers. (…)
As time goes by and the overly easy monetary tide is receding, we keep learning how the crypto world is managed by people who don’t seem to understand risk and don’t really know what they are doing.
Who in his right mind would even think of leaving $3.3B in a small, regional and concentrated bank like SVB?
Circle not having access to this $3.3B would have created a run on USDC and a major domino effect throughout the crypto world as seven of the 10 largest so-called liquidity pools running on the Ethereum blockchain use USDC for transactions, eventually reaching traditional banking one way or the other.
So-called stablecoins serve as the money-market funds of the crypto world, seen as safe havens for traders and investors. Like money-market funds, stablecoins are not supposed to “break the buck”.
Back to SVB: why was it not stress-tested? Adam Tooze:
Because in 2018 the regulations were changed and SVB was leading the charge pushing for the onerous regulations to be lifted.
Josh Marshall @joshtpm
The bank executive lobbying in this instance, is the same Greg Becker who “sold $3.6 million of company stock under a trading plan less than two weeks before the firm disclosed extensive losses that led to its failure. The sale of 12,451 shares on Feb. 27 was the first time in more than a year that Becker had sold shares in parent company SVB Financial Group, according to regulatory filings. He filed the plan that allowed him to sell the shares on Jan. 26.” As reported by Business Standard. (…)
The same Becker who last week “was on stage at a Morgan Stanley conference answering questions about the startup scene, market valuations, M&A, IPOs, remote work, crypto, ChatGPT—everything except how the bank was doing. Becker was even asked about how he relaxed!” (The Information)
Now we know: he had a plan…
BTW: Monday last week, SVB made the Forbes list of America’s Best Banks for the fifth consecutive year.
Back to business as usual?
Investors slash Fed rate rise bets on fallout from Silicon Valley Bank collapse Goldman Sachs predicts central bank will pause its tightening later this month due to banking system stress
- Goldman: “In light of the stress in the banking system, we no longer expect the FOMC to deliver a rate hike at its next meeting on March 22 (vs. our previous expectation of a 25bp hike). We have left unchanged our expectation that the FOMC will deliver 25bp hikes in May, June, and July and now expect a 5.25-5.5% terminal rate, though we see considerable uncertainty about the path.”
- JP Morgan: “If they indeed have used the right tool to address financial contagion risks (time will tell), then they can also use the right tool to continue to address inflation risks—higher interest rates. So, we continue to look for a 25bp hike at next week’s meeting.”
- John Authers: “Here is a league table of the biggest two-day declines in two-year yields going back to 1987. This latest ranks sixth, behind a succession of the most infamous crisis points in recent financial history: the Black Monday crash of 1987, its successor the “mini-crash” of 1989, the 9/11 terrorist attacks in 2001, the bankruptcy of Lehman and the Congressional vote against the so-called TARP bailout plan in September 2008. It even ranks ahead of the implosion that followed Société Generale’s fire sale of assets in January 2008 after the Jerome Kerviel rogue trading incident.
- For policy makers, “if you are vacillating between 25 and 50, you’d be more inclined to go 25 at this point because of the added concern” over the failure of Silicon Valley Bank, said Eric Rosengren, who served as president of the Boston Fed from 2007 to 2021.
- If the CPI doesn’t notably slow down in February, “it will have been very hard to have opened the door to 50 and not walk through that door,” said Jason Furman, a Harvard economist who served as a top adviser to former President Barack Obama.
Meanwhile
U.S. Economy Shows Surprising Resilience With 311,000 Jobs Added The job gains aligned with other evidence of resilient economic growth in the face of high inflation and rising interest rates. The jobless rate rose to 3.6%, while wage growth cooled.
(…) More Americans ages 25 to 54 jumped into the labor force—giving companies more workers to choose from and taking some pressure off wage growth, which was little changed in February from January. (…)
Large parts of the labor market—including restaurants, hospitals and nursing homes—are driving the growth. Those service providers were hit hardest by social-distancing measures at the onset of the pandemic. Now, nearly three years later, they are hiring at a rapid clip as they find it easier to recruit and fill openings, helping fuel an extended stretch of outsize hiring gains. (…)
Employers that hired aggressively earlier in the pandemic in industries—such as transportation and warehousing, finance and the tech-heavy information sector—cut employees last month. Workers’ average weekly hours have been trending downward for about two years and ticked down in February, a sign of some cooling in the labor market. (…)
Average hourly earnings for private-sector workers rose 4.6% over the 12 months through February, below a recent peak last March of 5.9%. (…)
There was much more important and significant stuff in this NFP report:
- The labour force grew 419k in February, +1.72M (+1.0%) in the last 3 months while new jobs totalled 1.05M. YoY, the labor force is up +1.5% in February and is now 0.9% above its pre-pandemic level, and only about 1% below its pre-pandemic trendline. We could be there in May or June!!
- If so, the labor supply would have grown by 3.5M workers in 6 months since December against labor demand of 2.02M per the rather strong last 6 months.
- The last 3 months each saw more people entering the labor force than jobs created (first time since May-July 2019). The cumulative surplus is 670k or 223k per month.
- This in spite of favorable weather conditions, and on the eve of a looming large decline in demand for construction workers as mild weather likely helped reduce the current building backlog.
- The diffusion index, which tallies the difference between the number of industries that are adding workers and those that are cutting, fell to 56% in February, the lowest since February 2019 (ex-covid).
- Looking at labor income, the January numbers seemed to break a trend but February re-established the downward path of the last 15 months.
- Not only is employment growth slowing, total average weekly hours are back to pre-pandemic levels, even in service-producing sectors.
- Average hourly earnings increased by 0.24% MoM in February, +4.6% YoY, while the 3-month annualized rate fell 0.8pp to +3.6%.
- But wages for production and non-supervisory workers (80% of the total) increased 0.46% mom, or 5.3% from a year ago.
This ING chart also augurs badly for the labor market, particularly since banks are likely to tighten standards even more:
Source: Macrobond, ING
Canada: The labour market remains vigorous in February
The details of the February report were also robust, with 31K full‑time jobs created and the private sector adding 39K employees to its workforce. Moreover, at the regional level, the only employment declines were in Quebec and Nova Scotia, two provinces that had posted outsized gains in the previous month.
These employment gains must be placed in the current Canadian demographic context. In February, the country’s population grew by 60K, matching January’s gain. As a result, the ranks of the labour force swelled by 42K in the month, with that gain evenly split between employment and unemployment. This development prevented the unemployment rate from falling in the month despite the job creation.
Hourly earnings also surprised to the upside in February, but we do not believe that there is reason to be overly alarmed as signs of moderation persist. While the unemployment rate is comparable to last summer, the labour market is not as red-hot as it was then. In fact, consumers have historically been clairvoyant to sense reversals in the labour market, and the latest Conference Board survey shows that optimism is waning. The employment outlook indicator returned to its 2019 level after hitting all-time highs in 2021.
Other indicators also point to a slowdown ahead. Sluggish business formation, as well as declines in corporate profits and business investment in Q3 and Q4 all point to a soft patch in the labor market through 2023. Thus, it remains important to let the ultra-tight monetary policy work its way in the economy before concluding that the central bank has not done enough, especially as Canada could import further tightening of financial conditions from the United States.
Here’s the U.S. chart of the same data:
Falling Survey-Response Rates Undermine Economic Data The declines skew government measures of inflation and the job market.
(…) This is a problem for two reasons. First, surveying only works if the people it samples are representative of the overall population. When response rates drop, the people who don’t answer might have something in common, biasing the results. (…)
Second, even absent systemic bias, falling response rates mean the data isn’t capturing the true state of the economy.
In a December presentation, an official with the Labor Department’s Bureau of Labor Statistics showed that response rates across 16 major government surveys, including nine of households and seven of businesses, had declined, especially for households.
“If you go from 80% to 79% it’s not the end of the world,” Douglas Williams, a senior research survey methodologist for the BLS, said in the presentation, referring to response rates. “What’s problematic is when this happens every year for a ten-year period—that accumulates to a very substantial amount.”
(…) a decade ago the report’s headline estimate of job creation in the prior month was based on about 80% of establishments in the survey responding. That figure slowly declined to the mid-70s before the pandemic. Then the pandemic hit and the response rate spiraled down even more, into the low 60s in some months.
(…) “the kind of follow-up that BLS used to do to sustain participation is much harder when people are working from home,” making it harder to contact the individuals at a business who must fill out the surveys. (…)
In the years before the pandemic, the jobs report was typically revised up or down by about 40,000 jobs between the first and third report. But in 2020 the average size of revisions jumped to nearly 140,000, before falling to about 90,000 in 2021 and 60,000 in 2022—still about 50% more than before the pandemic. (…)
The consumer-price index report on inflation depends in part on surveys where response rates are also plunging. The response rate for an interview survey on consumer expenditures, which establishes the representative basket from which subsequent price changes are calculated, has fallen from 70% to 38%. Response to the inflation report’s housing survey has dropped from 72% to 58%.
For the BLS’s monthly report on job openings and labor turnover, which reports on vacancies, quitting and hiring, the response rate has dropped from 69% a decade ago to 31% late last year, according to data compiled by Mr. Slok. Some economists have noted the BLS measure has diverged from private measures in recent months. The BLS measure shows robust openings, while private measures—such as one calculated by the job-posting website Indeed.com—have declined. (…)
Data dependent, huh?