May 15 (Reuters) – Market volatility in recent weeks has prompted banking regulators to do things they didn’t want to do, such as allow the largest US bank to overinflate. You may have their hand again.
Take the case of the Federal Deposit Insurance Corporation (FDIC), one of the main regulators of banks. In a December 2021 statement, Chairman Martin Gruenberg said the sale of some troubled banks to the likes of JPMorgan Chase & Co (JPM.N) during the 2008 financial crisis had “raised long-term financial stability risks.”
This has made regulators wary of further consolidation. On the weekend in March when the FDIC took over a Silicon Valley bank after a lender run sent a broader depository flight to safety, some of America’s biggest banks were initially under the impression that their bids would not. You’re welcome, according to insiders. Subject.
One source said they were not allowed into the data room until it was too late to make an offer.
A month and a half later, when First Republic failed, the FDIC had to sell it to JPMorgan because it was the lowest-cost option for a deposit insurance fund.
An FDIC spokesperson said the agency has not excluded so-called systemically important global banks (G-SIBs) from bidding on the Silicon Valley bank and has called on them to do so. The speed of the collapse meant that it took the agency some time to set up a data room, delaying the process. The spokesperson said the G-SIBs chose not to bid, indicating a lack of interest in the asset.
Gruenberg did not comment.
The dysfunctional regional banking sector is deeply problematic. These banks provide credit to large swaths of the American economy, and a flight of deposits has forced them to stop lending. Three US banks collapsed and stocks of some others took a hit in their wake, with the KBW Regional Banking Index (.KRX) down about 30% since March 8.
An uncertain economic outlook on the back of tightening monetary policy and other risks, such as declining commercial real estate values and the US debt ceiling debate, add to the pressure. Continued pressure on these banks could push the economy into recession.
Although things have largely calmed down since March, investors have refused to put an end to the crisis.
So regulators, bankers and other experts are coming up with ideas for additional steps Washington can take to stem the crisis. These ideas range from accelerating the pace of bank deal approvals to increasing deposit guarantees and scrutinizing investors betting that stocks will decline.
But those options either encourage things regulators don’t want, like creating bigger banks or irresponsible behavior, or are steps that haven’t really worked in the past, like restricting short selling, according to banking experts. Some would also require legislative approval, which is difficult to do in a divided Congress.
That leaves regulators with tools that treat symptoms, but have unwanted side effects and don’t provide a cure.
They have provided banks with a lifeline that gives them enough cash to meet deposit withdrawals, for example. But the problem now is a crisis of confidence, with some investors questioning the ability of some of these lenders to make money over the long term.
Therefore, when one bank fails, another bank enters the focus of the market, creating a vicious circle and pressuring regulators to intervene again.
Treasury Secretary Janet Yellen said on Saturday that almost all banks have access to sufficient liquidity but pressure on earnings could lead to some mid-sized bank deals.
“That’s something I think the regulators would be open to if it happened,” she said.
(Reporting by Paritosh Bansal and Nupur Anand) Editing by Anna Driver
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