FT: Bair on Protecting Smaller Banks from Investor Nerves

Today, the Financial Times published Sheila Bair’s Opinion piece “Congress must act to protect smaller banks from investor nerves. Measures to shield operational business accounts, introduced during Covid, should be triggered urgently.”

While she does not believe that universal coverage for all accounts is the answer, she does advocate for using the Transaction Account Guarantee (or TAG programme). “To promote banking competition and mitigate concentrations of power, we need to help them protect their core business accounts. Congress needs to reinstate TAG.”

We look forward to any comments you might have.

To view the full article:
https://www.ft.com/content/caae5e89-4f6f-4ec8-94c7-0c15ed4592fa

Sheila Bair is a former chair of the US Federal Deposit Insurance Corporation and a senior fellow and Advisory Board member at the Center for Financial Stability.

CFS Monetary Measures for March 2023

Today we release CFS monetary and financial measures for March 2023. CFS Divisia M4, which is the broadest and most important measure of money, fell by 2.4% in March 2023 on a year-over-year basis, following a decrease of 1.3% in February.

For Monetary and Financial Data Release Report:
https://centerforfinancialstability.org/amfm/Divisia_Mar23.pdf

For more information about the CFS Divisia indices and the data in Excel:
https://centerforfinancialstability.org/amfm_data.php

Bloomberg terminal users can access our monetary and financial statistics by any of the four options:

1) ALLX DIVM
2) ECST T DIVMM4IY
3) ECST –> ‘Monetary Sector’ –> ‘Money Supply’ –> Change Source in top right to ‘Center for Financial Stability’
4) ECST S US MONEY SUPPLY –> From source list on left, select ‘Center for Financial Stability’

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info@the-cfs.org

CFS Monetary Measures for February 2023

Today we release CFS monetary and financial measures for February 2023. CFS Divisia M4, which is the broadest and most important measure of money, fell by 1.3% in February 2023 on a year-over-year basis, following a decrease of 0.8% in January.

For Monetary and Financial Data Release Report:
https://centerforfinancialstability.org/amfm/Divisia_Feb23.pdf

For more information about the CFS Divisia indices and the data in Excel:
https://centerforfinancialstability.org/amfm_data.php

Bloomberg terminal users can access our monetary and financial statistics by any of the four options:

1) ALLX DIVM
2) ECST T DIVMM4IY
3) ECST –> ‘Monetary Sector’ –> ‘Money Supply’ –> Change Source in top right to ‘Center for Financial Stability’
4) ECST S US MONEY SUPPLY –> From source list on left, select ‘Center for Financial Stability’

US regulators are setting a dangerous precedent on Silicon Valley Bank

Former FDIC Chair and CFS senior fellow Sheila Bair penned “US regulators are setting a dangerous precedent on Silicon Valley Bank” in the Financial Times (FT).  The piece covers:

– Systemic risk determination,
– Use of FDIC insurance,
– Fed policy.

To view the piece:
https://www.ft.com/content/b860ebb6-f202-4ec6-a80c-8b1527c949f4

U.S. Government Announces Uninsured SVB/Signature Depositors to Be Made Whole

In a joint statement, the U.S. Treasury, the FDIC and the Federal Reserve Board announced that all depositors, both insured and uninsured, of Silicon Valley Bank and Signature Bank, would be made whole for their deposits. Each bank had been closed this past Friday, SVB by the FDIC and Signature Bank by the New York State banking authorities.

The regulators described the protection of the depositors as not requiring funding from taxpayers as the funding would come from a special assessment on banks that will be paid into the Deposit Insurance Fund.

The regulators had previously said that shareholders and other unsecured creditors of the bank would not be protected (and thus could be wiped out) and that management of the two banks had been removed.

President Joseph R. Biden issued a statement to assure depositors and call on Congress and the banking regulators to “strengthen the rules for banks to make it less likely that this kind of bank failure will happen again.” Numerous other statements have been issued (see primary sources below).

LOFCHIE COMMENTARY

First, the statement that none of the bailout will be borne by taxpayers is somewhat misleading. The bailout is not being financed by other banks buying a business that had positive going forward value. Rather, it is being financed by government-imposed regulatory fees that must be passed through and eaten by shareholders or paid by customers in higher fees or lower interest rates on deposits.  

Second, the statement raises many questions. Are all bank deposits from now on implicitly insured? Where will the no-bailout line be drawn in the future? What is the justification? That is not to say that the bailout was not reasonable under the circumstances. Had there not been one, we almost certainly would have seen additional runs on other banks and financial institutions. Depositors were very much poised to move their money from small banks to larger ones. But it will be interesting to see whether depositors begin assessing bank risk more closely going forward, just as institutional investors began to assess broker-dealer risk more carefully after 2008.

Third, the best explanation of the 2008 financial crisis was a 1986 book by Hyman Minsky called “Stabilizing an Unstable Economy.” (See The Future of Financial Regulation.) Minsky argued that periods of financial calm create a lack of focus on real risks, which in turn leads to speculation and thus to instability. The book came briefly into vogue during the 2008 financial crisis, in a period referred to as the “Minsky Moment.” 

One could reasonably argue that that the last few years have seen rampant speculation, but by the regulators, not market participants. Rather than focus on the ordinary risks inherent to our economy – money supply, inflation, price volatility – the financial regulators have become distracted by speculative risks that are of high political import, such as climate change, an issue as to which they have neither sufficient knowledge nor actionable data, nor any meaningful ability to influence events. 

The FSOC’s 2022 Annual Report (see related coverage) makes 16 references to inflation (many of them about global inflation and very little about the impact of inflation and the attempts to control it on bank risk). By contrast, there are 112 references to climate (not historically regarded as a threat to financial stability). The FSOC 2021 Annual Report managed 41 references to inflation versus 86 references to climate, a lack of attention to actual risk in 2021 that only became more pronounced in 2022. (It also is notable that SVB was particularly focused on ESG lending, not limited to climate.)  So while the regulators may have been right that climate risk is a material risk to the financial system, they were likely wrong about the reasons. The risk was that climate change distracted the financial regulators from the relative boring work of financial regulation.  

Financial regulators need to devote their attention to the ordinary and mundane matters of financial risk. Attending to mundane matters does not mean adopting a slew of new and burdensome regulations, imposing new weights on the markets to compensate for past regulatory distractions.  When the next FSOC Annual Report is published, there should be more references to ordinary risks such as inflation, interest rates, maturity mismatches and failures to diversify risk, than there are to references to climate.  

Primary Sources

  1. White House: Remarks by President Biden on Maintaining a Resilient Banking System and Protecting our Historic Economic Recovery
  2. Joint Statement by the Department of the Treasury, Federal Reserve, and FDIC
  3. House Financial Services Committee Press Release: McHenry Statement on Regulator Actions Regarding Silicon Valley Bank
  4. Senate Banking, Housing and Urban Affairs Committee Press Release: Scott Statement on Government Response to Failures of Silicon Valley Bank and Signature Bank
  5. NYS Department of Financial Services: Superintendent Adrienne A. Harris Announces New York Department of Financial Services Takes Possession of Signature Bank
  6. FRB Press Release: Federal Reserve Board announces it will make available additional funding to eligible depository institutions to help assure banks have the ability to meet the needs of all their depositors
  7. Press Release: Joint Statement by Treasury, Federal Reserve, and FDIC
  8. SEC Statement: Chair Gary Gensler on Current Market Events
  9. FDIC Establishes Signature Bridge Bank, N.A., as Successor to Signature Bank, New York, NY
  10. FDIC Acts to Protect All Depositors of the former Silicon Valley Bank, Santa Clara, California
  11. FDIC Creates a Deposit Insurance National Bank of Santa Clara to Protect Insured Depositors of Silicon Valley Bank, Santa Clara, California
  12. Financial Stability Oversight Council Meeting on March 12, 2023
  13. House Financial Services Committee: Ranking Member Waters’ Statement Following the Closure of Silicon Valley Bank

CFS Monetary Measures for January 2023

Today we release CFS monetary and financial measures for January 2023. CFS Divisia M4, which is the broadest and most important measure of money, fell by 0.8% in January 2023 on a year-over-year basis, following a decrease of 0.7% in December.

For Monetary and Financial Data Release Report:
https://centerforfinancialstability.org/amfm/Divisia_Jan23.pdf

For more information about the CFS Divisia indices and the data in Excel:
https://centerforfinancialstability.org/amfm_data.php

Bloomberg terminal users can access our monetary and financial statistics by any of the four options:

1) ALLX DIVM
2) ECST T DIVMM4IY
3) ECST –> ‘Monetary Sector’ –> ‘Money Supply’ –> Change Source in top right to ‘Center for Financial Stability’
4) ECST S US MONEY SUPPLY –> From source list on left, select ‘Center for Financial Stability’

Falling Money and the Fed

CFS Divisia M4 (DM4) declined by the 14th largest amount on record since 1968.

The implication is that inflation and growth are slowing more dramatically than many believe.

Over years and cycles, our data and analytics offer paths for investors to profit and officials to conduct policy in a way to limit inflation and promote growth in a less volatile financial environment.

A message on markets, analytics and policy implications will follow next week.

View “Falling Money and the Fed” at
https://centerforfinancialstability.org/research/Falling_Money_013123.pdf

CFS Monetary Measures for December 2022

Today we release CFS monetary and financial measures for December 2022. CFS Divisia M4, which is the broadest and most important measure of money, fell by 0.9% in December 2022 on a year-over-year basis versus an increase of 0.3% in November.

For Monetary and Financial Data Release Report:
https://centerforfinancialstability.org/amfm/Divisia_Dec22.pdf

For more information about the CFS Divisia indices and the data in Excel:
https://centerforfinancialstability.org/amfm_data.php

Bloomberg terminal users can access our monetary and financial statistics by any of the four options:

1) ALLX DIVM
2) ECST T DIVMM4IY
3) ECST –> ‘Monetary Sector’ –> ‘Money Supply’ –> Change Source in top right to ‘Center for Financial Stability’
4) ECST S US MONEY SUPPLY –> From source list on left, select ‘Center for Financial Stability’

OFR Annual Report Warns of Elevated Risk to Financial Stability

In its 2022 Annual Report to Congressthe Office of Financial Research (“OFR”) warned that threats to U.S. financial stability are elevated compared to previous years because of rising inflation, tight credit conditions and geopolitical uncertainty.

OFR found that U.S. economic growth slowed due to elevated interest rates, a significant increase in commodity prices and lingering supply chain issues from the COVID-19 pandemic. OFR reported that non-financial corporate credit risk is rising, but household credit risk remains low. OFR said that financial stability risk is elevated across the financial system, including (i) macroeconomic risk, (ii) credit risk, (iii) liquidity and funding risk and (iv) contagion risk. OFR also that said (i) high volatility in the digital asset market, (ii) increased frequency and complexity of cybersecurity attacks, and (iii) financial losses due to climate-related financial risk contributed to the increased risk to financial stability.

Additionally, OFR highlighted the launch of two pilot programs:

  • the Non-centrally Cleared Bilateral Repo Pilot Project, which OFR said will give regulators more insight into the non-centrally cleared bilateral repo market. OFR is currently considering a rule to establish an ongoing data collection program as to bilateral repo (see previous coverage); and
  • the Climate Data and Analytics Hub pilot, which provides regulators with reliable climate data and tools to properly assess climate risks to financial stability.

LOFCHIE COMMENTARY

In the report, OFR tells us, “[a]s a frontier risk, climate-related financial risk—though difficult to model and forecast within the financial system—presents an increasing threat to financial stability. Being able to assess it accurately is vital to mitigating its effects.” Put differently, OFR acknowledges that it cannot measure the risk that climate change poses to financial stability, and it cannot demonstrate that climate change is a financial stability risk, or how risky it is, but OFR pledges to find something there. This makes no sense whatsoever. If the U.S. government is able to demonstrate the risks that arise from climate change in a convincing manner, businesses will adjust to these risks. For now, OFR does not have the data.

Further, much of what OFR paints as “climate change risk” is really very ordinary “weather risk,” such as building houses in areas likely to be flooded, or areas at risk of wildfires. (See footnote 167 of the OFR report and the papers cited therein.) These risks do not arise because the temperature rose a degree; they arise because people are building where perhaps they should not, which undoubtedly creates financial risk. But it is not climate change risk; it’s weather risk. If the OFR would approach the issue of weather more temperately, it would be more likely to produce work of value.

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CFS Monetary Measures for November 2022

Today we release CFS monetary and financial measures for November 2022. CFS Divisia M4, which is the broadest and most important measure of money, grew by 0.2% in November 2022 on a year-over-year basis, maintaining the same growth rate as in October.

For Monetary and Financial Data Release Report:
https://centerforfinancialstability.org/amfm/Divisia_Nov22.pdf

For more information about the CFS Divisia indices and the data in Excel:
https://centerforfinancialstability.org/amfm_data.php

Bloomberg terminal users can access our monetary and financial statistics by any of the four options:

1) ALLX DIVM
2) ECST T DIVMM4IY
3) ECST –> ‘Monetary Sector’ –> ‘Money Supply’ –> Change Source in top right to ‘Center for Financial Stability’
4) ECST S US MONEY SUPPLY –> From source list on left, select ‘Center for Financial Stability’