This week in Bidenomics: Shh! Don’t upset the banks!
Now, we wait.
After Silicon Valley and Signature banks failed in early March, banking regulators swooped in to bail out depositors and stop a couple of isolated bank runs from swamping the whole financial system. It seems to have worked.
Yet the banking system remains uncomfortably fragile, and it could take months of nothing happening to know we’re in the clear. As a frame of reference, the first sign of trouble in the 2008 financial crash actually occurred in 2007, when two hedge funds collapsed. That was a year before the whole system unraveled. Investors thought the hedge fund failures were isolated events, but they turned out to be omens of the panic to come.
Nobody thinks the banking system is nearly as troubled as it was in 2008. But it is troubled. While bank runs have subsided, people are still moving money out of banks, at a pace that’s more like a walk than a run. Bank deposits have fallen by about $750 billion during the last year, with the pace of outflows accelerating in March. That’s a 4% year-over-year decline, the largest in records that go back to 1973.
People are moving money out of banks for two reasons. Money-market funds at brokerages such as Vanguard and Fidelity typically pay a higher interest rate than bank accounts, and when the Fed started raising rates a year ago many depositors started going after those higher returns. The two bank failures in early March highlighted the problem of uninsured deposits above the limit of $250,000, which may now be prompting people with deposits above that amount to shift their money around.
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Investors are now scouring a weekly Federal Reserve report known as the H.8 release, which comes out every Friday around 4.15 pm. The report includes aggregate data on bank assets and liabilities, including the amount of deposits in commercial banks. Declining deposits are worrisome. When deposits stabilize or rise, that will be a reassuring sign. The latest data show a notable drop during the first two weeks of March.
There’s also been a shift in deposits from smaller banks to bigger ones. For consumers, this might make sense, because a “too-big-to-fail” bank such as Citibank or JPMorgan Chase seems less likely to go belly up than a community bank. But this can obviously destabilize smaller institutions.
Silicon Valley Bank got into trouble because when some depositors pulled money for normal reasons, it had to sell securities with a low interest rate at a loss to cover the withdrawals. Banks typically hold such securities to term, incurring no loss. But SVB did a poor job managing interest-rate risk and preparing for the possibility of withdrawals that would force it into money-losing asset sales. Once SVB’s financial problems became apparent, the problem rapidly snowballed and the government took over.
Details are now spilling out about how regulators failed to intervene, as well. In Congressional testimony on March 28, the top Federal Reserve official responsible for bank supervision said the Fed had been aware of problems at SVB since the end of 2021. Those concerns intensified throughout 2022 and the beginning of 2023. Yet those regulators apparently didn’t realize that SVB’s problems were fatal, or, if they did, they failed to do anything about it. Why is still unclear.
The question now is how many SVBs are still in the system, poorly hedged, highly vulnerable to withdrawals and overseen by somnambulant supervisors. Maybe none. But maybe some. And the trick for regulators is they can’t just come out and say this or that bank needs some work, because that would trigger the very deposit run and stock selloff everybody wants to avoid.
On March 30, the Biden administration released a plan to tighten bank regulations that were weakened during the Trump administration, when a combination of legislative and regulatory changes eased the burden on banks with less than $250 billion in deposits. Biden wants to undo those changes, so that all banks with more than $10 billion in deposits must abide by the same rules. It’s possible that could have prevented the two recent bank failures by forcing better discipline onto them.
Biden will probably earn modest political points for tightening up on banks, which nobody really loves. But a wobbly banking sector could still impair the economy and cause Biden more headaches. Fewer deposits mean banks will have less money to lend, especially for local projects. Bank lending will tighten further because banks will act more conservatively and scrutinize borrowers more closely. This could make a recession more likely.
There is some reassuring news: In the University of Michigan’s latest consumer-confidence survey, people seem unconcerned about banking problems. But confidence dropped anyway, because of inflation. Once banks are no longer a problem, we can always go back to worrying about that.
Rick Newman is a senior columnist for Yahoo Finance. Follow him on Twitter at @rickjnewman
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