A year ago, the government and America’s largest banks joined forces in a rare moment of comity.
They were forced into action after Silicon Valley Bank collapsed on March 10, 2023, quickly followed by two other lenders, First Republic and Signature Bank. Faced with the threat of a billowing crisis that could threaten the banking industry — the worst one since 2008 — rivals and regulators put together a huge bailout fund. Eventually all three ailing banks were declared insolvent by the government and sold off.
The biggest banks emerged from the period even larger, after picking up accounts from their smaller rivals. But they have also grown more confident in challenging regulators on what went wrong and what to do to prevent future crises. Indeed, many bankers and their lobbyists now rush to describe the period as a regional banking crisis, a term that tends to understate how worried the industry was at the time.
One reason for the increased tensions is that government officials are proposing rule changes that lenders argue will crimp their businesses, and would not have done much to stem Silicon Valley Bank’s collapse. Regulators say that last year’s crisis proves that changes are needed. They point to the increasing risks in the commercial and residential real estate markets and the growing number of so-called problem banks, or those rated poorly for financial, operational or managerial weaknesses.
Here is the state of play, one year after the crisis:
What happened last spring?
In just a few days last March, Silicon Valley Bank went from a darling of the banking world to collapse. The lender, which catered to venture capital clients and start-ups, had loaded up on what was assumed to be safe investments like Treasury bonds and mortgages that were turning sour in an era of higher interest rates.
That might not itself have spelled doom. But when nervous depositors — many of whom had accounts larger than the $250,000 limit for government insurance — began to pull their money out of the bank, executives failed to assuage their concerns, leading to a bank run.
Soon after, two other lenders — First Republic, which like Silicon Valley Bank, had many clients in the start-up industry and the cryptocurrency-focused Signature Bank — also shut down, felled by bank runs of their own. Together, those three banks were larger than the 25 that failed during the 2008 financial crisis.
What became of the fallen banks?
Per standard procedure, government officials auctioned off the failed banks, with losses covered by a fund that all banks pay into. Silicon Valley Bank was purchased by First Citizens Bank. Many of Signature’s assets went to New York Community Bank (which has suffered its own problems lately), and First Republic was absorbed by JPMorgan Chase, the largest bank in the country.
No depositors lost money, even those with accounts that would not ordinarily have qualified for federal insurance.
What are regulators doing about it?
Many banking overseers at least partly blame the industry itself for lobbying for weaker rules in the years before 2023. The Federal Reserve has also taken responsibility for its own lax oversight. Regulators say they are now paying closer attention to midsize banks, recognizing that problems can quickly spread between banks with diverse geographic footprints and customer bases in an era when depositors can drain their accounts with the click of a button on a website or app.
Regulators plan a variety of measures to clamp down on banks. One part of that is an international accord called “Basel III” that will require large banks to hold more capital to offset risks posed by loans and other obligations. Last week, following pressure from the banking industry, the Fed chair, Jerome H. Powell, signaled that regulators could scale back or rework that initiative.
In the United States, regulators are drawing up so-called liquidity rules that focus on banks’ ability to quickly shore up cash in a crisis. Some of those rules, which have yet to be formally proposed but are expected to be rolled out in the coming months, may address banks’ proportion of insured and uninsured depositors, a major issue in last year’s crisis.
Why are the big banks fighting so hard?
Suffice it to say that the larger banks have signaled that they feel that the Basel III and other proposed regulations are punishing them. They have poured in comment letters to regulators arguing that they helped stabilize the system last year, and that the costs of the proposed rules may ultimately stymie their lending or drive that business to less regulated nonbank lenders.
Perhaps the most visible U.S. bank leader, Jamie Dimon of JPMorgan, told clients at a private conference two weeks ago that the collapse of Silicon Valley Bank could be repeated with another lender. According to a recording heard by The New York Times, Mr. Dimon said, “If rates go up and there is a major recession, you’re going to have exactly the same problem with a different set of banks.”
He added: “I don’t think it’s going to be systemic except for that when there is a run on the bank that people get scared. People panic. We’ve seen that happen. We haven’t solved that problem.”
What is the most immediate risk to banks?
Two words: real estate.
Many banks have been setting aside billions of dollars to cover anticipated losses in loans to owners of commercial office buildings. The value of those buildings has plummeted since the pandemic as more people work remotely. Such problems have weighed most prominently on New York Community Bank, which last week accepted a billion-dollar rescue package from former Treasury Secretary Steven Mnuchin, among others, to stay afloat.