Englund

About 55% of Americans own stocks, and equities now make up the largest share of household net worth, surpassing real estate. Importantly, while the middle class still relies on the value of their homes as the basis of their nest eggs, the wealthiest Americans’ portfolios are heavily dominated by stocks and stakes in private businesses. There was a time when economists treated a stock-market crash as a healthy, cleansing event for the broader economy. But these days, many on Wall Street and in Washington increasingly wonder if another bear market might pose too great a risk to economic security. Bloomberg Intelligence’s Eric Balchunas says the government may be increasingly unwilling to tolerate a prolonged bear market.  “K-shaped economy.” Fed has maintained a longstanding focus on protecting the banking system. This is what motivated the central bank to step in after the collapse of Silicon Valley Bank in March 2023. Joseph Adinolfi MarketWatch 11 July 2026 https://www.marketwatc...

Without a clear distinction between temporary liquidity support and protection for insolvent institutions, the Fed’s independence turns into cover for ad hoc bailouts, and monetary policy becomes hostage to weak institutions and authorities’ reluctance to admit supervisory failure. With each successive crisis over the past decade and a half, from the 2007-08 financial crisis to the 2020 COVID-19 shock and the 2023 regional-bank turmoil, the Fed has steadily expanded the scope and scale of its interventions.  What began as emergency liquidity support has now become a recurring feature of financial-market management. The turmoil of 2023  extended support to roughly $9 trillion in uninsured deposits, vastly expanding the safety net. The benchmark for central-bank restraint was set by Walter Bagehot more than a century ago: https://en.wikipedia.org/wiki/Walter_Bagehot lend early and freely, but only to solvent institutions, against good collateral and at a penalty rate.   Und...

The Trump administration argues that the Genius Act would take our country to a modern future. But what they seem to forget is that America had a similar banking system more than 150 years ago, and it unleashed chaos and financial ruin.  Lawmakers should think twice before passing this piece of legislation. This proposal bears an uncanny resemblance to the way America’s monetary system functioned from the mid-1830s until the Civil War, a period known as the Free Banking Era. In the age of social media, rumors about bank insolvencies can spread in minutes — as they did in 2023, when Silicon Valley Bank collapsed. Wall Street Braces for the Next Silicon Valley Bank That’s why the government stepped in and bailed out Silicon Valley’s customers, including those whose balances exceeded the normal $250,000 limit on insured deposits.  The government knew that losing those deposits might have provoked a contagious loss of confidence and a run on other banks, destabilizing the entire b...

  U.S. banks are no longer living in the shadow of the 2023 crisis sparked by the collapse of regional lenders Silicon Valley Bank, Signature Bank, and later First Republic.  But recent reports offer a glimpse of what could haunt them next: a long, slow grind. In particular, continued slow loan growth is becoming a drag on regional banks,  which have less exposure to the booming Wall Street trading and investment-banking business that is benefiting some of the very biggest megabanks. Wall Street Journal 31 January 2025 https://www.wsj.com/finance/banking/wall-street-is-booming-but-banks-are-in-a-lending-rut-2b4f4a64 Tillbaka till Rolfs länktips 31 januari 2025 https://englundmacro.blogspot.com/2025/01/rolfs-lanktips-31-januari-2025.html

US remained vulnerable to the same combination of problems that caused major recent crises,  including the 1980s savings and loan collapse,  https://englundmacro.blogspot.com/2021/10/before-1986-act-s-were-primary-source.html https://englundmacro.blogspot.com/2021/04/financial-crises-get-triggered-about.html S&L Savings and Loans Banking Crisis Rolf Englund the 2008 financial crisis  https://englundmacro.blogspot.com/2024/09/us-counts-its-bank-bailout-billions.html and the 2023 regional bank runs.  FDIC Says It Should Have Done More to Supervise First Republic Bank https://englundmacro.blogspot.com/2024/09/worst-performance-for-stocks-since-2023.html The Silicon Valley Bank Rescue Changed Capitalism https://englundmacro.blogspot.com/2023/03/the-silicon-valley-bank-rescue-changed.html In each case, deregulation and looser supervision enabled the rapid growth of new products and nonbank financial companies that later proved to be riskier than anticipated. Financial...

The 16th anniversary of the collapse of Lehman Brothers has been marked by regulators signaling that the era of toughening up capital rules is over. Last week, the Federal Reserve’s top rulemaker, Michael Barr, watered down the US’s proposed version of the global Basel 3 standards, slashing demands for extra capital at the biggest banks by half.  His climbdown followed a bruising backlash from industry and Congress over the past year. There were lots of problems with the Fed’s initial proposal, but Barr’s humbling was unusually harsh. And it may not be over yet. Big banks are likely to push for further changes and have threatened lawsuits if the end result is still tougher than they want. Most of the heavy lifting of shoring up bank balance sheets was done – and most of the extra capital requirements imposed – in the years immediately after the 2008 crisis. There is no magic number for how much capital banks should have and there will always be voices that demand more. Unfortunatel...

  For those on Wall Street clinging to the bull case on the economy, life is getting harder. Bond investors — historically dubbed the smart money, rightly or wrongly, for their propensity to foresee a shift in the economic direction — priced in faster interest-rate cuts. Bloomberg 6 September 2024 https://www.bloomberg.com/news/articles/2024-09-06/wall-street-traders-suddenly-converge-on-economic-hazards-ahead Silicon Valley Bank  https://englundmacro.blogspot.com/2023/03/silicon-valley-bank-is-just-tip-of.html First Republic Joins List of Biggest-Ever Bank Failures Collapse is second-largest, behind Washington Mutual Washington Mutual  When the subprime bubble burst, the bank’s fortunes quickly turned.    It still stands as the largest bank failure in U.S. history. https://englundmacro.blogspot.com/2023/05/jpmorgan-to-take-over-first-republic.html

  Regional and mid-cap banks, like Silicon Valley Bank before them, are all part of a shifting and, in some cases, worrying global trend.  Interest-rate shocks, regulatory burdens and a yawning tech gap are disrupting lenders that have served as a bedrock for regional economies for centuries, threatening to cut off consumers and businesses from their traditional funding routes. In the US, where thousands of smaller banks seek to compete with trillion-dollar behemoths such as JPMorgan Chase, the decline of in-person banking and regulatory changes have eroded once-entrenched business models A risk assessment published by the European Banking Authority in June found that “several banks, mainly smaller in size, have CRE exposures that reach multiple times their equity, which makes them increasingly vulnerable to downturns in CRE markets.”  The authority defines smaller banks as those whose total assets are in the “double-digit euro-billion area,”  Bloomberg 4 September 2...

  Banks are sitting on around $517 billion in unrealized losses on their balance sheets, according to data from the Federal Deposit Insurance Corp.  The bank regulator said in May the amount has been “unusually high” for nearly 2½ years. Most of that is because banks bought government bonds such as Treasurys and mortgage-backed securities when interest rates were low and banks were flush with customers’ deposits during the pandemic.  When the Federal Reserve started to raise rates in 2022, the carrying value of these bonds declined. (Bonds sell at a discount when rates go up to offer investors higher yields.)  Wall Street Journal 10 July 2024 https://www.wsj.com/finance/banking/bank-earnings-season-charts-4fa221cc ‘Silicon Valley Bank is just the tip of the iceberg’   https://englundmacro.blogspot.com/2023/03/silicon-valley-bank-is-just-tip-of.html Hans Wallenstam uppmanar Riksbanken att fortsätta att sänka räntan https://englundmacro.blogspot.com/2024/07/hans-w...

Regional banks around the U.S. hoping to insulate themselves from a replay of the turmoil that followed Silicon Valley Bank’s failure last year.  Wall Street smells a payday. Ohio-based Huntington Bancshares recently entered into an arrangement to sell investors some of the risk that its borrowers won’t repay their loans. That helps the bank meet new proposed standards meant to make lenders look healthy to regulators.  The deal is known on Wall Street as a synthetic risk transfer Wall Street Journal 19 June 2024 https://www.wsj.com/finance/banking/regional-banks-want-to-slim-down-hedge-funds-smell-a-bargain-f4e1d0fe One big reason the global financial system nearly collapsed in 2008 was banks relying on insurance-like instruments.  They’re at it again. https://englundmacro.blogspot.com/2024/03/one-big-reason-global-financial-system.html

Most of the country, investors, politicians, and the general public assume that the fabled bond vigilantes us old folks talk about are really and truly dead, if they think about it at all.  When the people find out that they are indeed not dead, it will be the most startling resurrection in 2,000 years. “It truly was an unfettered laissez faire economic world back then. Booms and busts in the economy and the markets tended to be violent because there was not much in the way of government interference. Human nature being what it is, the booms were associated with all kinds of excesses just as they are in modern times. However, these excesses tended to get completely washed out in the downturns. Debtors went bust, banks failed, and balance sheets were cleansed. “Things changed dramatically after the 1930s’ Great Depression when the government decided that it could not let such a severe contraction happen again. John here again. It’s important not to sugarcoat the past as somehow idea...

Sheila Bair (Chair) Joyce Chang, Charles Goodhart, Lawrence Goodman, Barbara G. Novick, and Richard L. Sandor October 16, 2023 https://www.centerforfinancialstability.org/research/CFSMonPaper101623.pdf

A year ago, as regional lenders found themselves thrust into the public spotlight, banking was anything but tedious. For an industry underpinned by trust—the belief that customers’ deposits will be safe—the rapid implosion of Silicon Valley Bank and two other large regional institutions offered a heart-stopping glimpse of a less-than-boring financial sector. Now, regional banks are working to rebuild trust and explain all the ways they’re not like the high-flying companies that failed. And the industry is coalescing around a new image: stodgy, stuffy and dull.  “Banking should be boring,”  Politicians and academics have long made the case that regulators should force banks to be as uninteresting as possible.  In the wake of last year’s failures, Massachusetts Democratic Senator Elizabeth Warren told CNBC that she wanted banking to get back to “where it ought to be, and that is boring.”  Bloomberg 2 May 2024 https://www.bloomberg.com/news/articles/2024-05-02/why-banks...

 That central traditional trick of banks — that they fund themselves with safe short-term demand deposits, and use depositors’ money to invest in risky longer-term loans, with all of the run risk and regulatory supervision and It’s a Wonderful Life-ness that that involves — would you recreate that if you were starting over? Plenty of people — insurance companies, retirement savers — want to earn a return on their money and don’t need it anytime soon; their money can be locked up in long-term loans.  The money that people keep in the bank just to pay rent and buy sandwiches doesn’t need to be pooled and invested in risky loans; it should just sit in the vault. This idea — that bank deposits should just sit in the vault (or, realistically, in electronic money at the Federal Reserve), while risky loans should be funded by long-term investors who intend to take those risks — is sometimes called “narrow banking.”  All those crises! The traditional business of banking is necess...

The relatively small bank, the first to fail this year Republic First  had about $4 billion in deposits at the end of January.  Founded in 1988, Republic First was smaller than the midsize banks that collapsed last year — including First Republic Bank and Silicon Valley Bank, whose assets each topped $200 billion.  The F.D.I.C. expects the cost to the Deposit Insurance Fund to be $667 million. New York Times 26 April 2024 https://www.nytimes.com/2024/04/26/business/republic-first-bank-failure.html The Bank Run of 2023 Could Easily Happen Again Bill Dudley Bloomberg 1 april 2024 https://englundmacro.blogspot.com/2024/04/the-bank-run-of-2023-could-easily.html

PBB, as it’s known, is heavily exposed to US commercial real estate and struggling to address a problem all too common among banks: Investors are worried that it might not have enough equity to absorb its potential losses.   Equity is the bedrock of the financial system, the capital that shareholders provide to make loans and to take the first hit if things go wrong. Without it, banks are insolvent. They lack the resources to pay depositors and other creditors. Yet PBB insists it’s still well capitalized — and by regulators’ preferred measures, it is. The bank reported a Common Equity Tier 1 Ratio of 15.7% as of Dec. 31, well above the regulatory minimum of 8.4%. How can a bank be so obviously in trouble while officially fine?  The answer is in the way regulators evaluate capital adequacy. Pretty much every failed bank in recent years had an excellent risk-weighted capital ratio right up to the end.  Silicon Valley Bank’s Common Equity Tier 1 ratio was 12% in Decembe...

 Regulators have yet to address the system’s vulnerability to sudden depositor withdrawals. The SVB debacle exposed three weaknesses.  First, depositors pulled their money much faster than assumed by requirements such as the liquidity coverage ratio, intended to ensure that banks have enough cash and easy-to-sell assets to survive 30 days of withdrawals.  Second, the Federal Reserve couldn’t provide sufficient emergency discount-window loans, because banks hadn’t pledged enough collateral to the Fed.  Third, uninsured depositors had ample reason to run, because they couldn’t be sure the government would make them whole: Such bailouts can happen only after a bank fails and regulators judge that the situation is bad enough to invoke the “systemic risk exception.” The Fed can require banks to pre-pledge enough collateral (such as securities and consumer and commercial loans) to cover all their runnable liabilities.  The central bank would be willing to lend against...

 after more signs of trouble at that lender and a smaller peer revived fears about the stability of the sector a year after a string of high-profile failures.  Now waves of commercial real-estate loans are set to come due, threatening to put more pressure on the smaller banks that hold high concentrations of them.  NYCB shares traded below $4 a piece on Friday, down from around $10 earlier this year. Wall Street Journal 1 March 2024  https://www.wsj.com/finance/banking/new-york-community-bancorp-names-new-risk-and-audit-executives-10d6b9cc Moody’s cuts New York Community Bancorp’s credit rating to junk https://englundmacro.blogspot.com/2024/02/moodys-cuts-new-york-community-bancorps.html

Supervisors are looking at what banks are doing to mitigate potential losses, how they are reporting risks to their boards and senior management, and whether they have enough reserves and capital to handle CRE loan losses, said Michael Barr, the Fed’s vice chair for supervision With more office and apartment buildings headed for distress, the central bank issued guidelines on Thursday for its annual stress tests that put extra emphasis on identifying risks in commercial property. Barr is leading efforts to tighten scrutiny after the Fed faced criticism by its inspector general after the failure of Silicon Valley Bank a year ago.  Supervisors’ mid-size bank examination approach as applied to SVB “did not evolve with SVB’s growth and increased complexity,” and did not effectively transition the firm to the large bank examination process, according to the inspector general office. Bloomberg 16 February 2024 Regulators Eye Commercial Real Estate Risk, Bank Downgrades, Fed's Barr Says -...

Lenders with a lot of uninsured deposits should be required to have high-quality assets ready at the Fed’s emergency lending facility. Bank runs remain thankfully rare, largely because deposits up to $250,000 are guaranteed by the Federal Deposit Insurance Corp.  Yet customers with larger, uninsured balances are still prone to flee at signs of danger.  Those deposits amounted to almost 45% of the total as of 2022. (In NYCB’s case, the latest figures were $22.9 billion, or 28%.)  Some uninsured deposits are in business accounts used to pay workers and suppliers; it’s the other, nonoperational accounts that tend to be flightiest in a crisis. The Federal Reserve’s traditional tool for this task is the discount window. The problem is that the window has acquired a stigma over the years, making banks reluctant to access it for fear of spooking creditors, depositors and investors.  Instead, they’ve turned to alternative lenders such as the Federal Home Loan Banks, public-p...