The ‘mini-bank crisis’ keeps getting bigger

From: POLITICO's Morning Money - Friday May 05,2023 12:02 pm

May 05, 2023

By Sam Sutton, Victoria Guida and Declan Harty

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LOS ANGELES — Yes, regional bank stocks are swooning. But don’t expect bank regulators to act unless they start to see deposits start to crumble.

The FDIC’s sale of failed First Republic Bank to JPMorgan Chase earlier this week — which JPMorgan CEO Jamie Dimon said would hopefully draw the “mini-bank crisis” of the last two months to a close — failed to stop the bleeding at institutions like PacWest Bancorp and Western Alliance.

As share prices at the regional lenders tumbled, a U.S. official told Victoria that the market gyrations aren’t cause for the government to step in with more sweeping action, with deposit flows still relatively stable.

That’s not going to be enough for financiers and lawmakers alarmed by the parade of scary news coming from the financial sector.

“The fact that First Republic did not end the problem is a huge fact that everyone needs to take on board. The cascade continues, unfortunately,” Rep. Ro Khanna (D-Calif.), told Sam on Thursday, adding that “Congress must act” to give the FDIC more tools to backstop uninsured deposits.

Fully insuring deposits — a herculean task with Congress deadlocked over the debt ceiling — might be enough to calm markets. But deposit outflows weren’t a problem at PacWest or Western Alliance. A majority of the funds held in accounts are insured and both reported their deposit and withdrawal activity were stable even after the First Republic sale.

So, with regional bank shares getting clobbered by short sellers and skittish investors, banks are asking Washington for help fighting back.

The shorts: Financial institutions are pressuring SEC Chair Gary Gensler and other policymakers to crack down — and potentially issue a temporary ban — on short-selling strategies that profit when bank stocks slide. Bill Isaac, who led the FDIC under President Ronald Reagan, told Sam that “it's time for the SEC to jump in” and suspend the practice as bank executives clamor for relief.

Consumer Bankers Association President and CEO Lindsey Johnson urged policymakers to “take a serious look at the role short sellers are playing in the market and their impact on Americans’ confidence in our financial system.”

It’s on the Biden administration’s radar: White House Press Secretary Karine Jean-Pierre said the administration was closely monitoring short selling pressures “on healthy banks.” Gensler, meanwhile, repeated his warning that the agency would investigate and prosecute “any form of misconduct” amid volatility and uncertainty.

But as for a ban? A senior agency official told Sam that isn’t in the cards.

Here’s why: In 2008, as markets plunged, then-SEC Chair Chris Cox called time-out on short selling on nearly 1,000 financial stocks in a bid to restore faith in public markets. It was a decision he came to regret within months.

The New York Fed later found that the ban did little to stem flailing financial stocks in the market. Another study discovered that most of the stocks included in the ban suffered “a severe degradation” in market quality, price impact and volatility.

Isaac Boltansky, director of policy research at BTIG, said there’s little chance the SEC decides to jump on the “grenade” of a short-selling ban. But he also warns that “unlikely options become likely options, if the pain expands.”

Any move to pull the pin will unleash war with the private funds industry, however. “It would be regulatory malpractice to repeat these past mistakes,” Managed Funds Association President and CEO Bryan Corbett told Declan in a statement.

IT’S FRIDAY — Tune in to Twitter Spaces at 11 a.m. this morning to hear Sam, Eleanor Mueller and everyone’s favorite MM alum Ben White chat about the jobs report and Milken. We’ll be back to our regularly scheduled broadcasts from New York and Washington next week. Send tips, gossip and suggestions to Sam at ssutton@politico.com and Zach at zwarmbrodt@politico.com.

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Driving The Day

The jobs report is out at 8:30 a.m. … St. Louis Fed President Bullard speaks at 1 p.m. …

DeSantis’s Wall Street swoon — From Sam and Ben: “Florida Gov. Ron DeSantis had been seen as the top pick to lock down the support of financial titans who have already pumped millions into his state campaigns. But as he stumbles through gaffes over everything from his personal demeanor and stance on Ukraine to his snacking habits, Wall Street donors are keeping the door open to his competitors, according to more than a dozen bankers, attorneys and political consultants interviewed for this story.

‘People will change horses,’ said Dave Carney, a veteran Republican strategist for both former Bush presidents. ‘You may get really excited about somebody and then all of a sudden realize, 'Eh, not really my cup of tea.’”

Jobs incoming — Bloomberg’s Augusta Saraiva: “Economists expect the Labor Department’s monthly jobs report to show Friday that employers scaled back hiring and the unemployment rate ticked up slightly from historically-low levels last month.”

First Look: New York AG moves to regulate crypto — New York Attorney General Tish James is proposing state-level legislation that would bar crypto executives from engaging in common ownership of token issuers, marketplaces, brokerages and investment advisory businesses, her office told MM. It would also force exchanges to publish regular public audits and force trading platforms to reimburse customers who’ve been victimized by fraud.

“Rampant fraud and dysfunction have become hallmarks of cryptocurrency and it is time to bring law and order to the multi-billion dollar industry,” James said in a statement. “All investments are regulated to account for every penny of investors’ money — cryptocurrency should be no exception.”

More on the banking turmoil — The NYT’s Rob Copeland, Joe Rennison and Matthew Goldstein: “Unlike the banks that failed after depositors rushed to pull their money out, the lenders now under pressure have reported relatively stable deposit bases and don’t sit on mountains of soured loans.

“‘How do we get out of this?’ said Christopher McGratty, head of U.S. bank research at Keefe, Bruyette & Woods. ‘I think we’re still searching for that answer.’”

Regulatory Corner

Kibosh — The WSJ’s Vipal Monga and Adriano Marchese: “Toronto-Dominion Bank and First Horizon have called off their $13.4 billion merger. TD ran into hurdles getting regulators to sign off on the deal … [and] said it couldn’t be sure when or if it would get the necessary approvals.”

— One way out of the banking turmoil? Regulators should “allow as many shotgun marriages as possible,” Steven Kelly, senior research associate at the Program on Financial Stability at Yale University, told MM. “If you can put an unstable regional bank inside of a stable large bank, that is the best possible solution to prevent a continued erosion of franchise value.”

— Center for Responsible Lending President Mike Calhoun applauded the OCC and Federal Reserve for showing “they would not rubber stamp this merger bid without considering the public interest.”

Perfect timing — Reuters’s Chris Prentice and Trevor Hunnicutt: “U.S. federal and state officials are assessing the possibility of ‘market manipulation’ behind big moves in banking share prices in recent days.”

Assessment time — Bloomberg’s Katanga Johnson: “The US is poised to exempt smaller lenders from kicking in extra money to replenish the government’s bedrock deposit insurance fund, and instead saddle the biggest banks with much of the bill.”

Manger’s interesting next chapter — Miami Herald’s Ben Wieder: “As the chief of staff at the U.S. Small Business Administration, William Manger oversaw the agency’s implementation of the $800 billion Paycheck Protection Program … After his exit from the agency in January 2021, Manger went on to do work for a company identified by congressional investigators as one of the worst offenders, the technology company called Womply.”

In Congress

Hearings — From Sam: “The House Financial Services Committee is planning to hold two follow-up hearings on the failures of Silicon Valley Bank and Signature Bank later this month as shockwaves continue to ripple through the financial sector.”

Scott open to executive pay clawbacks — Eleanor reports that the South Carolina Republican, and possible 2024 presidential candidate, said “we can and should discuss” prying bonuses from executives if excessive risk-taking leads to losses.

Jobs Report

Shelby Adams is now special assistant in the office of legislative and intergovernmental affairs at the Department of Commerce. She most recently was a social justice fellow at the Memorial Foundation. — Daniel Lippman

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