A year ago, the government and America’s biggest banks joined forces in a rare moment of optimism.
They were forced into action after Silicon Valley Bank collapsed on March 10, 2023, quickly followed by two other lenders, First Republic and Signature Bank. Faced with the threat of a burgeoning crisis that could threaten the banking industry — the worst since 2008 — rivals and regulators have raised a massive bailout fund. Eventually all three troubled banks were declared insolvent by the government and sold off.
The biggest banks emerged from the period even bigger, having taken accounts from their smaller rivals. But they have also become more confident in challenging regulators about what went wrong and what they need to do to prevent future crises. Indeed, many bankers and their lobbyists are now quick to describe the period as a peripheral banking crisis, a term that tends to understate how troubled the industry was at the time.
One reason for the heightened tensions is that government officials are proposing rule changes that lenders argue would squeeze their businesses and would have done little to stem the collapse of Silicon Valley Bank. Regulators say last year’s crisis proves that changes are needed. They point to the growing risks in the commercial and residential real estate markets and the growing number of so-called problem banks, or those rated low for financial, operational or managerial weaknesses.
Here’s the state of the game, one year after the crisis:
What happened last spring?
In just a few days last March, Silicon Valley Bank went from being a darling of the banking world. The lender, which catered to venture capital clients and startups, had loaded up on supposedly safe investments such as Treasuries and mortgages that had turned sour in an era of higher interest rates.
This in itself may not have spelled disaster. But when nervous depositors — many of whom had accounts larger than the $250,000 limit for state insurance — began pulling their money out of the bank, executives failed to assuage their concerns, leading to a bank run.
Soon after, two other lenders — First Republic, which like Silicon Valley Bank, had many clients in the startup industry, and cryptocurrency-focused Signature Bank — also closed, dropped by their own banks. Together, these three banks were larger than the 25 that failed during the 2008 financial crisis.
What happened to the failed banks?
Under standard procedure, government officials auctioned off failed banks, with losses covered by a fund into which all banks paid. Silicon Valley Bank was purchased by First Citizens Bank. Many of Signature’s assets went to New York Community Bank (which has had its own problems lately), and First Republic was absorbed by JPMorgan Chase, the largest bank in the country.
No depositors lost money, even those with accounts that would not normally qualify for federal insurance.
What are regulators doing about it?
Many banking supervisors blame the industry itself at least in part for pushing for weaker rules in the years leading up to 2023. The Federal Reserve has also taken responsibility for its own lax oversight. Regulators say they are paying more attention to mid-sized banks, recognizing that problems can quickly spread among banks with different geographic footprints and customer bases at a time when depositors can drain their accounts with the click of a button on a website or an application.
Regulators are planning a variety of measures to rein in banks. One part of this is an international agreement called “Basel III” that will require big banks to hold more capital to offset risks arising from loans and other liabilities. Last week, after pressure from the banking industry, Fed Chairman Jerome H. Powell indicated that regulators could limit or rework that initiative.
In the United States, regulators draw up so-called liquidity rules that focus on banks’ ability to quickly raise cash in a crisis. Some of these rules, which have not yet been formally proposed but are expected to be implemented in the coming months, could address banks’ ratio of insured to uninsured depositors, a major issue in last year’s crisis.
Why are the big banks fighting so hard?
Suffice it to say that the biggest banks have indicated that they believe Basel III and other proposed regulations are punishing them. They filed comment letters with regulators arguing that they helped stabilize the system last year and that the cost of the proposed rules may eventually hinder their lending or drive that business to less-regulated non-bank lenders.
Perhaps the most visible US banking leader, JPMorgan’s Jamie Dimon, told clients at 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, Mr. Dimon said: “If interest rates go up and there’s a big recession, you’re going to have exactly the same problem with a different set of banks.”
He added: “I don’t think it will be systemic, except when there is a run on the bank that people fear. People are panicking. We’ve seen it happen. We haven’t solved this problem.”
What is the most immediate risk to banks?
Two words: real estate.
Many banks have set aside billions of dollars to cover expected losses on loans to owners of commercial office buildings. The value of these buildings has plummeted since the pandemic as more people work remotely. Such problems have weighed heavily on New York Community Bank, which last week accepted a billion-dollar bailout from former Treasury Secretary Steven Mnuchin, among others, to stay afloat.
