Way back in 1986, the pop band The Bangles had their pulse on what was to come in the banking sector 37 years later.
It a familiar refrain in financial services, a lyric we’re all singing these days:
Just another Manic Monday.
Back in March, on a hectic start to a week in the middle of that month, regulators took over as Silicon Valley Bank and Signature Bank collapsed.
And, of course, they insured bank deposits beyond the traditional $250,000 cap, setting up a fierce debate on bailouts and bank runs, and bank failures too.
And, of course, on May 1 — yes, a Monday — JPMorgan snapped up essentially all of the assets of First Republic Bank.
As Amias Gerety, partner at QED Investors, told Karen Webster, this time around, things were not as frantic as they were less than two months ago.
“Regulators are probably breathing a sigh of relief,” Gerety said, “because this was a calmer moment.”
The collapse and takeover of FRB did not, as he put it, “become a cultural moment. It doesn’t appear that the ‘bank run dynamics’ have been metastasizing.”
But a bit of caution is warranted. The measures taken by regulators through the past several weeks may have done nothing to stem the flow of deposits toward the biggest banks, especially from the business banking accounts and individual, wealthier households that tend to have deposit accounts above $250,000.
“It remains TBD [to be determined] how good a deal JPMorgan got,” Gerety said. But right now, he said, the takeaway from Monday is that JPMorgan is the savior.
And presents a fundamental problem.
“The big getting bigger — well, that’s the real policy question of the day,” Gerety said. It’s a mistake for the public to believe that the biggest banks are the safest — risks abound, and if one of those marquee names fails, there’s no obvious buyer waiting in the wings.
See more: McHenry Questions FDIC’s Response to Banking Failures
The rapid-fire failures of SVB, of Signature and of FRB have demonstrated the success of the banking system overall, but further instability poses the question of who steps in next. JPMorgan is unlikely to keep entering the fray to scoop up smaller players, and there’s no guarantee that we’ll see consortiums of private equity and investor groups banding together, as we saw during the last crisis with, say, IndyMac.
There’s another reason to worry about the flight of deposits to bigger banks, Gerety said: “The diversity of our banking system is a huge strength.”
The data has yet to come in to ascertain whether smaller and regional banks have seen their deposit flight stop or at least slow — and the actions of May 1 might send depositors back out again in hopes of parking their funds with the big banks that they perceive as being safe.
The questions surrounding deposit guarantees — explicit vs. implicit — and the continuing specter of deposit flight beg an examination as to whether providers are experiencing a Minsky moment.
Named after economist Hyman Minsky, the concept is that firms take on more and more leverage … and then something snaps.
“Every boom has the seeds of its own bust inside of it,” Gerety said, and the spate of bank failures through the past few months are reflective of the macro pressures coming to bear on the banking system.
The Federal Reserve is in the midst of ratcheting up interest rates, unwinding several years of 0% interest rates, a pandemic, and all manner of risky bets on various lending portfolios throughout the U.S. economy.
We’re not really at a Minsky-like moment, at least not yet, within financial services, Gerety said.
But given enough time, we might get there — at least for individual banks — as consumers vote with their feet and go to the companies that cement their trust.
“There’s a potential moment,” he said, “that we’re seeing here around the franchise value” of banks.
Simply put, banking is supposed to be a relationship business — and it’s the relationships that matter in a world where the products themselves are commoditized. A loan that’s at one bank, at 4.5%, is the same as a loan at another bank at 4.5%.
Read more: Regulators Blame Signature for Own Failure and Themselves for SVB’s
In the past, customers have had sticky relationships with their banks. The stickiness was a result of the fact that it was, usually, just too hard to move one’s money. FinTechs have reduced the frictions for transfers, for taking one’s account from one provider to another. Bank runs, he said, have shown just how fickle loyalty can be.
FinTech user experiences have demonstrated that a better user experience exists, and is valuable.
FinTechs, he said, “have shown that a better user experience — something that’s worthy of loyalty — is out there,” Gerety said. “And it’s the reduction of friction that’s going to expose the difference between stickiness and loyalty.”
Banks, in the pursuit of products that are more differentiated, he said, can partner with FinTechs, and establish deep software integrations that lead to true innovation.
He offered up the example of treasury bills, which in the current environment are offering higher yields and lower risk, where FinTechs are removing the frictions that would otherwise keep enterprises and even individual consumers from using those instruments in their cash management strategies. Atomic and Treasury Prime have been working together, he said, to make buying those bills simpler online, with point and click functionality.
One day, years hence, the definitive book will be written on these seismic few weeks within banking (Gerety joked that there might be some gifted storyteller toiling away in a basement of the San Francisco Fed).
At the moment, though, it’s incumbent on policymakers, he said, to send the message that the banking system is safe, and to promote that competition — to make sure that it’s not just the biggest banks and the midsized banks that survive.
That’s no easy task, said Gerety, who made the following observation to Webster: The weaknesses in bank earnings, the weaknesses showing up in their portfolios, has only just begun.
See also: First Republic Deal Beefs Up JPMorgan’s Affluent Customer Ecosystem
Over the near term, he predicted, we’ll see “much tougher” action plans from bank supervisors.
A harbinger of what’s to come can be found in Federal Reserve Vice Chair for Supervision Michael S. Barr’s call for tougher standards and greater scrutiny of interest rate risk, liquidity risk and capital requirements. The banks will take steps to shore up their balance sheets, run some loans off their books, take the earnings from those loan runoffs, and trade aggressively where they can.
Those actions don’t require legislation and so will be among the low-hanging fruit that can help effect some change in the banking sector over the next few months and years. We’ve only seen thus far that the government provides effective guarantees in a crisis — and as Gerety put it, we shouldn’t live in a world of implicit guarantees.
“There does need to be some discussion about deposit insurance,” said Gerety, who cautioned that regulators may have stemmed the recent tides of panic, but should be careful not to rest on their laurels. That discussion will involve not just regulators but will echo up and down the marble hills of Congress, too. It’s not obvious that Bank of America, for example, is safer for uninsured deposits than anywhere else.
Beyond that debate, for the banks, he said, “The future is coming at us all pretty fast.” By partnering with FinTechs to understand consumers’ needs and “delivering banking through comfortable software applications might be just the way to reestablish loyalty.”
View the interview: After SVB, Bank Runs and the Capitol Hill Fireworks … Now What?
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