The era of bailout politics and bank crises is back as policymakers and investors navigate the fallout from the government’s intervention in SVB and Signature Bank
It’s the 15-year anniversary of the government intervention to facilitate JP Morgan Chase’s purchase of Bear Stearns. To commemorate the occasion, the banking system and Washington, D.C. decided to have another banking crisis.
To paraphrase an Oscar-winning movie, the capital was everything everywhere all at once this past week. The collapse of two banks – Silicon Valley Bank and Signature Bank – and the government response was a crisis within a crisis within a crisis. Interest rates, bailouts, bank regulations, the tech sector, venture capital, crypto, social media, woke capitalism, and even the debt ceiling were all intertwined.
Can policymakers unravel the recent events into a coherent set of policies moving forward or will it remain a jumbled mess until the next crisis? There are four things investors should watch moving forward.‘Bailout’ Is Still A Four-Letter Word
To bailout, or not to bailout, that was once the question. Today, it’s “what is a bailout?”
In 2008, bailouts helped investors and owners of systemically important large banks. As Treasury Secretary Janet Yellen said last weekend, “We’re not going to do that again.” President Joe Biden made pains to say what the government was doing was not a bailout.
Over a decade ago, being associated with bank bailouts was the worst thing for a politician’s electoral future. The bailouts spawned the Occupy Wall Street movement on the left and the Tea Party on the right. The populist elements in the country have only grown since then.
Several of the leading politicians and regulators today have battle scars from the Great Financial Crisis and the development of the Dodd-Frank Act to prevent the largest banks from getting any more power or size. None of them wants to be near the term bailout or be seen growing the largest banks. However the banking unit of SVB VB gets resolved or sold off, regulators don’t want the big banks involved.
Of course, what’s considered a “bailout” is in the eye of the beholder. It’s an argument over semantics. Regardless, some Republicans hope to harness anti-bailout populism in the aftermath of the non-bailout bailout.Regulators Traded Relief Today For Tough Decisions Tomorrow
With a big bank buyout off the table, prudential regulators went back in the closet for their bazooka to stave off broader financial contagion.
The decision was reportedly unanimous this weekend among Yellen and the FDIC and Fed boards to determine there was a “systemic risk” to the financial system to protect the uninsured deposits of SVB and Signature Bank.
The Fed also created the Bank Term Funding Program to provide new liquidity to banks with market-rate collateral. Officially, this gave banks unlimited funds to meet depositor withdrawals. Unofficially, this removes duration risks on bank holdings in the hopes of stopping more bank runs.
The BTFP lasts for a year. In the interim, the Fed needs to find an off-ramp to build back trust in non-mega banks. That comes, in part, from developing new regulations.
The key person here is Fed Vice Chair for Supervision Michael Barr. He is leading a review of the supervision and regulation of SVB. Barr today has a broader agenda besides just getting to the bottom of what happened with SVB.
