Here come the hearings

From: POLITICO's Morning Money - Monday Mar 27,2023 12:01 pm

Mar 27, 2023

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Two weeks after the collapse of Silicon Valley Bank and Signature Bank sent the financial sector into a tailspin, Washington lawmakers will finally get a forum to publicly grill top regulators on what went wrong and what needs to be done to prevent more fubar.

Federal Reserve Vice Chair for Supervision Michael Barr, FDIC Chair Martin Gruenberg and Treasury Under Secretary for Domestic Finance Nellie Liang will testify at a pair of hearings — Senate Banking on Tuesday and House Financial Services on Wednesday — on the Biden administration’s response to market-rattling bank runs that have shaken the public’s faith in regional banks.

That response remains a concern. Banks are leaning on the Fed’s newly christened emergency borrowing program to address their funding needs. Late Sunday, the FDIC announced that First Citizens Bank of North Carolina had agreed to assume SVB’s loans and deposits — capping a sales process that had frustrated some lawmakers.

More than a week after receiving $30 billion in deposits from major banks, the eventual fate of the San Francisco-based lender First Republic remains uncertain. And clouds are still hovering over major European institutions after Swiss regulators engineered UBS’s takeover of Credit Suisse.

With that as a backdrop, congressional leaders have spent the last two weeks trying to stake out positions on a sprawling policy battle over the future of banking regulation. While that fight may not yield legislation in a divided Congress, the hearings will offer the sharpest indication where lawmakers stand on key issues like deposit insurance, bank supervision and capital requirements.

Here’s what we’ll be watching for during the hearings this week:

— Deposit Insurance: Senate Banking Chair Sherrod Brown (D-Ohio) said last week that changes to deposit insurance, including raising the $250,000 cap to help businesses address issues like payroll in the event of a bank failure, could get bipartisan support. Any sweeping alterations to the FDIC would be politically fraught — as Zach covered last week — but it will be important to keep an eye on which lawmakers identify tweaks to deposit insurance as potential long-term policy solution.

— Bank Supervision: House Financial Services Chair Patrick McHenry (R-N.C.) – along with top deputies like Reps. French Hill (R-Ark.), Andy Barr (R-Ky.) and Bill Huizenga (R-Mich.) — fired off letters last week demanding more information from regulators about the events leading up to SVB and Signature’s collapse. Senate Republicans, led by Tim Scott of South Carolina, are pressuring both the Fed and San Francisco Fed over its supervision of SVB, which was exhibiting warning signs “in the months and years leading up to its closure.”

Certain Democrats, including Sen. Elizabeth Warren (D-Mass.), have also knocked banking regulators for failing to do more to prevent SVB’s implosion. While those critiques often come with calls for tighter regulation, moderate Democrats may probe the panel on potential supervisory failures as well.

— Capital requirements and tailoring: Speaking of Warren, even though the odds are nil for repealing a 2018 law that rolled back parts of Dodd-Frank, Barr’s vocal opposition to that measure should offer progressive lawmakers an opportunity to hit their talking points on how it eventually contributed to SVB’s downfall. We’re expecting him to face questions on both his “holistic” review of capital requirements and the 2018 changes.

IT’S MONDAY — And I’m back at work after a week in France. If you get a chance to visit the World War I museum in Meaux, take it. Send tips, suggestions and gossip to Sam at ssutton@politico.com and Zach at zwarmbrodt@politico.com.

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Driving the Week

MONDAY … Fed Gov. Philip Jefferson will give a speech on monetary policy at Washington and Lee University at 5 p.m. … TUESDAY … McHenry will speak at a Punchbowl News event at 9 a.m. … Senate Banking will hold its Silicon Valley Bank hearing at 10 a.m. … The House Small Business Committee has a hearing on the CFPB’s data collection rules at 10 a.m. … Treasury Secretary Janet Yellen will speak at an anti-corruption panel at 10:30 a.m. … The House Appropriations Committee holds a hearing on the Commodity Futures Trading Commission’s fiscal 2024 budget at 1 p.m. … WEDNESDAY … House Financial Services will hold its Silicon Valley Bank hearing at 10 a.m. … Congressional Budget Office Director Phillip Swagel will speak at a National Association for Business Economics at noon … SEC Chair Gary Gensler will testify before the House Appropriations Committee at 2:30 p.m. … THURSDAY … Revised GDP data will be released at 8:30 a.m. … The American Bar Association kicks off its two-day economic justice summit … Boston Fed President Susan Collins speaks at 12:45 p.m. … FRIDAY … The Commerce Department will release February PCE data at 8:30 a.m. … New York Fed President John Williams speaks at 3:05 p.m. … Fed Gov. Governor Lisa Cook will deliver remarks at the Midwest Economics Association’s annual meeting in Cleveland at 5:45 p.m. … Fed Gov. Christopher Waller will give a speech on the Phillips Curve in San Francisco at 10 p.m.

Risks ahead — Our Bartosz Brzezinski: “The outlook for the global economy is likely to remain weak in the medium term amid heightened risks to financial stability, according to International Monetary Fund Managing Director Kristalina Georgieva.”

— BofA Global Research’s survey of fund managers found that the perceived likelihood of a recession in the next 12 months jumped to 42 percent in March — nearly doubling the 24 percent notched in February.

— WSJ’s Jason Douglas reports: “Though economists broadly believe that a full-blown financial crisis isn’t likely, they also see heightened risks to global growth from a shaken banking sector and the specter of tightening credit.”

— Minneapolis Fed President Neel Kashkari on CBS’s “Face the Nation”: "What's unclear for us is how much of these banking stresses are leading to a widespread credit crunch. And then that credit crunch, you're right, just as you said, would then slow down the economy. This is something we are monitoring very, very closely.”

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Crypto

ANOTHER CRYPTO RECKONING — Our Declan Harty: “Crypto businesses have warned for months that the Biden administration is quietly moving to push them out of the U.S. Now, with the collapse of three crypto-friendly banks, they say the evidence is piling up … The clash marks the latest front in what is already an all-out battle between the once high-flying industry and officials in Washington that could shape the future of crypto in the U.S. European lawmakers are trying to court crypto companies, sparking concern among Republicans that the U.S. may see its reputation as a home for financial innovation diminished.”

— Speaking of which, the Fed on Friday released the 86-page order that denied crypto bank Custodia’s bid to become a member bank. The central bank said that Custodia “could in fact pose significant risk to its community” and that it’s unclear if the Wyoming-based special purpose depository institution “would be able to comply with any applicable consumer protection requirements given the inherent features of its intended business model.”

— In a statement, Custodia spokesperson Nathan Miller said the order was a product of “numerous procedural abnormalities, factual inaccuracies that the Fed refused to correct, and general bias against digital assets.” He added that “perhaps more attention to areas of real risk would have prevented the bank closures that Custodia was created to avoid.”

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In the markets

MORE SVB — From Zach, Victoria Guida and Brendan Bordelon: “This entire saga has also increased the risk of a recession, as financial stress has the ability to lead to a sharp, quick drop in economic activity, particularly as the Fed’s fight against surging prices might not yet be over.”

— Bloomberg’s Brett Miller: “US stock futures crept higher while a gauge of dollar strength fell fractionally amid cautious trading early Monday amid growing concern over the risk of recession.”

— The FT’s Brooke Masters, Harriet Clarfelt and Kate Duguid report that more than $273 billion “has flooded into money market funds so far in March” as bank customers pull their deposits.

RETURN TO THE OFFICE — WSJ’s Gwynn Guilford: “Working remotely is becoming increasingly rare a few years after the pandemic caused millions of Americans to decamp from worksites to their basements and bedrooms.”

Regulatory Corner

STANDARDIZED — From Victoria: “The 12 regional branches of the Federal Reserve have agreed to adopt a common policy on handling requests for information, as the quasi-public institutions come under increased pressure to be more forthcoming.”

SURPRISE FSOC MEETING — From Victoria: “Treasury Secretary Janet Yellen convened the government’s top financial regulators on Friday for an unscheduled meeting as turmoil in markets dented global bank stocks, hitting Germany’s largest bank particularly hard.”

Fly Around

Israeli Prime Minister Benjamin Netanyahu on Sunday sacked Defense Minister Yoav Gallant, triggering mass protests, a day after Gallant broke ranks with the government and urged a halt to a highly contested plan to overhaul the judicial system. — Reuters’s Ari Rabinovitch

Marine Le Pen’s far-right party is the biggest beneficiary of French discontent over President Emmanuel Macron’s decision to push through an increase in the retirement age. — Bloomberg’s James Regan

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