After SVB, Bank Runs and the Capitol Hill Fireworks … Now What?

The hearings on Capitol Hill are over.  At least for the moment.

The klieg lights have been switched off, the testimonies have been read, the lawmakers have grilled the regulators. And so, the question remains for the banks and the FinTechs:

Now what? What’s next?

And: Who’s ultimately responsible for changes to be made in the wake of the Silicon Valley Bank and Signature Bank collapses?

With bank runs a fresh consideration for the banking sector, the ripple effect has been palpable — more than $100 billion in deposits left smaller banks in the space of a week, shifting to marquee names like J.P. Morgan.

Amias Gerety, partner at QED Investors, told Karen Webster in the third conversation in as many weeks that “it shouldn’t be the policy of the United States that we only want deposits in the 25 largest banks.  I hope the policy debate is less about finger pointing and more about what type of banking system we want, and the policies we need to get there.”

The Ripple Effects

A true bank run led to SVB’s downfall. And the words “deposit insurance” have not been uttered this frequently since the Great Financial Crisis of 2008.

Gerety told Webster that while many observers advocate for universal deposit insurance, smaller banks do not want the insurance cap to be lifted beyond the now-entrenched $250,000 (and he noted that the FDIC’s insurance fund is already risk-adjusted).

“Smaller banks are 95% funded with deposits,” he said, “so it’s difficult for them to get to a mindset where deposits are, fundamentally, public money.  They don’t want to feel they are agents of the state.”

They’re already grappling with deposit flight. For the smaller players, fewer deposits in the till mean there’s a lessened ability to make loans, credit tightens, higher interest rates are needed to bring deposits back, and banks find their margins squeezed.

The Blame Game

Right now there’s a lot of finger-pointing and no shortage of scrutiny on regulators. Last week, Vice Chairman for Supervision of the Board of Governors of the Federal Reserve System Michael Barr made statements before the House Financial Services Committee. The failures identified were many: bank management failure, supervisory failure, and failure on the part of the regulatory system.

Some observers may relish pointing the finger at the Fed’s current top brass.  The problems at those banks were identified months ago as the banks grew rapidly.

On the Hill, the loudest voices have been from the polar opposite ends of the political spectrum. Critics from the “far right” and “far left” have criticized the Fed, trying to undermine the institutional power of regulators in general, place blame with the former administration and sow doubt about the capability of the government across the board.

“It’s part of the ideological agenda — and you’re going to keep seeing people say that ‘regulators screwed up.’”

But, as Gerety noted — with an aside that Barr was Gerety’s boss when Gerety started in his previous role at the Treasury Department in the middle of the last decade — “the forces that put this all in place happened long before Michael got to the Fed.”

And, he said, regulators and policy makers face a difficult quandary: It’s hard to know how long to give regulators time to fix a problem, even with banks that have had a low rating from supervisors. The Fed could have stepped in to force SVB to sell assets (and cement losses), which would have undermined trust.

But, “if you believed there was not going to be a run on SVB,” he said, “then nine to 12 months to work through those problems was not a particularly ‘short’ amount of time…it’s hard to imagine a world where these problems could have been solved three times as fast.”

An Opportunity for FinTechs

Innovation can play a role in offering insured deposits even as policy remains in flux, and can help lure clients with more than $250,000 — typically enterprises and startups — away from keeping everything in the largest banks.

“When banking is in crisis,” maintained Gerety, “it creates opportunities for FinTechs.” By way of example, among others, Treasury Prime (where he sits on the board) is integrated with multiple networks — and FinTechs can offer customers deposit insurance that runs into the tens of millions of dollars (by matching excess deposits with banks that want those funds).

In the end — especially in a world that might guarantee all deposits — customer service will be key.

The FinTechs that have proven to be adept at easing account opening — the neobanks and small business banking platforms — are already proving to be beneficiaries of the SVB collapse.

“Features are king,” he said, “and people want that move to digital. That’s going to continue to be a tailwind.”

The emergence of tech-driven banking, and making it easier for the startup economy to have places to park its money, can give rise to what Gerety termed the “circle of deposit life.” (Apologies to Disney’s Lion King, here.)  The virtuous circle is one where deposits get sucked out of community banks and moved to regional banks, and then money centers suck the deposits out of regional banks.  The neobanks grab them from the money centers, and then through the FinTechs the funds all go back to community banks.

“With community banking,” he said, “we can see a flowering of bank FinTech startups that are properly capitalized, and properly scaled, to become sustainable, high customer service models.” FinTech infrastructure can be leveraged to connect customers and financial services providers through marketplace and app-driven models. ChatGPT and AI will prove to be a game changer, too, he predicted — yet another piece of infrastructure that allows businesses to be built on customer connections.

There is, and will be, significant opportunity for FinTechs to address additional problems in the financial system, making sure that money moves more transparently and with speed.

“These are not policy solutions,” he said, “but they are market-reaction solutions. Both are necessary.”

Pulling the Regulatory Levers

For the moment, he said, we’re likely to see a pullback in credit extended to businesses — and consumers, too.  Local economic challenges are likely to dominate headlines over the next six to 12 months (and hopefully there’ll be no financial tsunami in the offing).

Over the longer term, regulators may hammer out some significant shifts in financial services.  A prudent policy approach, he said, may require deposit insurance to be paid for by the account holders themselves — akin to insuring their property or homes.

Regulation also could take a multi-pronged approach, he said. Up for debate will be whether “capital stacks” at banks need to be adjusted — spanning the equity, debt and other holdings that are used to judge risk and soundness of the bank itself. (SVB, of course, saw its bank run caused by losses on its safest assets, namely, bonds.)

The third piece of the puzzle — and the most hotly contested area, he said — lies with the “substantive regulations” governing financial services.  Should there be tighter controls on different types of assets, and should there be different controls on deposit concentration?  It’s more likely we’ll see changes to deposit insurance and capital requirements than those substantive regulatory changes.

But, as Gerety told Webster, “the Fed can do anything.  They have plenty of authority under current law.”

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