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Almost no one understands how banks and bank accounts work — and the government isn't helping. 

Why it matters: All stable banking systems stand on a solid bedrock of trust. When that trust is eroded, only government can rebuild it. The problem is that government actions haven't managed to rebuild the trust that was lost over the long weekend of March 10. 

The big picture: The failure of Silicon Valley Bank destabilized much of the U.S. and even global banking industry by causing a massive psychological recalibration of what constitutes a "safe" place to hold money. 

Deposits are information-insensitive assets — they're, literally, money in the bank. When people even ask whether they're safe or not, that thwarts financial-stability goals. 

Flashback: SVB deposits might be safe now, but for a whole day on Friday March 10, they weren't. The bank was taken over by the FDIC before most of its branches opened in California, and for the rest of that day — plus all of Saturday and nearly all of Sunday — customers with more than $250,000 in the bank were objectively terrified that they might lose most of their money. 

That fear wasn't entirely rational. People who understand how both bank balance sheets and the FDIC work knew that at a minimum uninsured depositors would have access on Monday morning to more than enough money to make payroll, and would ultimately lose little if anything.

Many rich and influential VCs and Silicon Valley thought leaders, it turns out, don't understand how bank balance sheets and the FDIC work. 

Be smart: Fear is highly contagious, and the VCs' fears spread rapidly in a way that has proved hard to quash. 

The virality of worries about deposit safety was turbocharged by the fact that it was never particularly rational in the first place to have enormous sums just sitting on deposit at a bank — not when T-bills can yield as much as 5%. 

SVB's failure therefore acted as a wake-up call that made cash-rich individuals and companies realize their money wasn't working for them and could — should — be invested more wisely elsewhere.

From the point of view of a bank, of course, that kind of outflow is very hard to distinguish from a bank run.  

What they said: "Today we are taking decisive actions to protect the U.S. economy by strengthening public confidence in our banking system" said the government's press release on the Sunday after SVB failed.

The catch: There's no magical "public confidence" button Treasury or the Fed can push. Instead, what we got were dry press releases saying things like "the BTFP will be an additional source of liquidity against high-quality securities."

In other words: The government relied on journalists to reshape the press releases into a compelling English-language message of "don't panic, there's nothing to worry about." 

Be smart: That's just not what journalists do. 

Journalists, by nature, seek out exciting news. Panicked depositors are news, especially when they cause bank stocks to plunge. So are plunging bank stocks. Reporting on both causes more people to withdraw their deposits, not fewer.

"Meh, move along, nothing to see here" is not a headline you'll ever see — and even if it did appear, it probably wouldn't reassure anybody.

 The bottom line: If the government's aim here is to lull depositors back into their prior state of complacency, it isn't working. 

Go deeper: To reassure Americans their deposits are safe, bring in the politicians

To reassure Americans their deposits are safe, bring in the politicians

The government’s failure to restore trust in the banking system

The government hasn’t managed to restore it.

Illustration of a nervous bald eagle with a sweat drop on its face.

Banking

Stock market

After a record economic expansion, the coronavirus pandemic sent the U.S. economy into a recession as unemployment soared to staggering heights. The country now faces urgent questions about how much stimulus is needed for reeling consumers and businesses, and what a recovery might look like.

Economy & Business

The government's initial strategy, on the weekend that SVB failed, was simply to assert that public confidence in the banking system was strong, in hopes that confidence would thereby magically manifest. When that failed, the Plan B comms strategy seemed as though it wasn't entirely thought through.

Why it matters: Every bank in the country, with the possible exception of the ultra-giants sitting on more than $1 trillion in assets, now has depositors worried about the safety of their money. The banks need the government to reassure those depositors — and the government isn't doing a great job.

The big picture: The comms strategy has been spearheaded by Treasury secretary Janet Yellen and Fed chair Jay Powell, both of whom are technocrats who lean instinctively and vocationally toward carefully chosen words. 

Neither of them is a politician with a natural facility for communicating directly with the general public.   

Where it stands: After the initial intervention failed to stanch the outflow of deposits from regional banks, there were three main attempts to reassure depositors. 

The first was a speech by Yellen to the American Bankers Association in which she averred a "resolute commitment to take the necessary steps to ensure that depositors’ savings and the banking system remain safe."

The second was testimony by Yellen to Senate on Wednesday in which she used the exact same words. (Those words were then tweaked slightly on Thursday, for a subcommittee of the House Appropriations Committee, but the message didn't really change.) 

The third was the press conference by Powell after the Fed's rate-hike announcement, in which he said that "all depositors' savings and the banking system are safe."

The catch: These statements were hardly unambiguous. 

When the Economist's Simon Rabinovitch asked Powell whether we are now in a situation where "de facto deposit insurance covers all savings," Powell could have just said yes. Instead, he demurred, replying: "Well, I'm not saying anything more than I'm saying."

Yellen also undercut her message by telling one senator that "I have not considered or discussed anything having to do with blanket insurance or guarantees of all deposits.”

That statement sent regional bank stocks tumbling. 

Between the lines: All of the messages were buried within longer communications that covered a lot of ground; none of them were simple and succinct standalone statements.

 Yellen and Powell seem to be trying to communicate that, at least for the time being, any bank failure would have potentially systemic ramifications, and that they would therefore cover uninsured depositors in exactly the same way they did with SVB and Signature. For unclear reasons, however, they seem unwilling to say that explicitly.

FDIC insurance covers deposits to at least $250,000 — SVB and Signature are examples of it going much higher than that. Depositors want to be told explicitly that other bank failures would also raise the systemic risk of deposit flight, triggering unlimited insurance. 

The intrigue: The communicator-in-chief, President Joe Biden, has so far said nothing at all on the subject. Neither has the only other elected politician in the executive branch, Vice President Kamala Harris.

Our thought bubble, from Axios Communicators' Eleanor Hawkins: Clear communication here would require less in the way of acronyms, jargon, and numbers — and more in the way of narrative. 

A simple, clear, unhedged and unambiguous statement from the president, echoed repeatedly by Yellen and Powell, would go a very long way.

Go deeper: The government’s failure to restore trust in the banking system

Leaders like Yellen and Powell are more like technocrats than suave communicators.

an illustration of an executive chair with a megaphone laying on it 

Good bankers know the industry they serve. They know its idiosyncrasies, its cast of characters, its business cycles. They help their clients through good years and bad — and are rewarded with deep loyalty and fat deposit accounts. 

Why it matters: The industry that bankers know differs from bank to bank — but it's never banking. A wine-industry relationship banker at Silicon Valley Bank has to know much more about malolactic fermentation than about Tier 1 capital adequacy ratios. 

Even at the CEO level, someone like SVB's Greg Becker found himself on the board of the San Francisco Fed not because he was an expert in banking, but because he had extraordinary visibility into California's technology industry. 

With hindsight, that was an egregious conflict, given that the San Francisco Fed was SVB's primary regulator. All the same, bankers really do have an unrivaled level of insight into what's going on with companies that are too small to have gone public — including Silicon Valley startups.

The big picture: Capital markets and investment banks are very good at providing banking services to big public companies — but only about 15% of American jobs are at big public companies. 

Commercial banks therefore provide a crucial and irreplaceable service — and, as is natural in all industries, they tend to specialize. 

Silicon Valley Bank banked Silicon Valley, as its name implied, as well as the California wine industry. Signature Bank banked Broadway. Silvergate banked crypto. 

Such relationships take time to build and nurture, which is one reason the federal government is keen to sell SVB and Signature as going concerns — and is a reason it's not trying to rescue Silvergate, which operated in an industry that authorities broadly want to be cut off from the regulated financial system. 

Between the lines: In countries dominated by three or four massive universal banks, there's less idiosyncratic industry risk when a single mid-sized bank fails. But the U.S. has made a policy decision that it doesn't want its biggest banks to get any bigger than they already are — which means many more smaller banks with a broad range of specialties.

Where it stands: Risk management is a cost center for banks, not a profit center. The way to rise up the ranks at a commercial bank is to make money for your employer — and the way to do that is to know your customers and their needs really well. 

When commercial banks fail, outsiders are often shocked at how badly they handled things like interest rate risk or deposit concentration risk. But those jobs are done only at the top of the org chart — and the people who rise that far tend to do so not because of their understanding of how banking works, but because of their understanding of other industries entirely. 

The bottom line: There's an obvious financial-stability reason for regulators to want to minimize bank failures. But there's also a grassroots economic reason. Regional banks like SVB and Signature are deeply embedded in local industry, and without them many industries would find themselves in deep trouble. 

What banks are good at

They're experts on many things — but not on banking

Animated illustration of a suited person's hand in a thumbs up balancing a sparkling golden coin rotating 

The spike in the number of individuals directly holding Treasury bills makes it more likely that the government will find its way to raising the debt ceiling. 

Why it matters: The biggest reason the debt ceiling is such a big political problem is that most Americans don't care about it, and most of those who do think that its existence is a good thing and that it shouldn't be raised. 

Holders of T-bills, by contrast, are acutely aware of the necessity that the government pays its debts in full and on time. 

Between the lines: The kind of people who are engaged enough to buy T-bills also tend to be voters with relatively unfettered access to their local member of Congress. After all, very few people buy T-bills unless they're first maxed out on their $10,000 allocation of I-bonds. 

The bottom line: Raising the debt ceiling is still not going to be easy. But the current flight to quality out of bank deposits and into Treasury securities definitely helps.

A theory on T-bills and the debt ceiling

Illustration of a stack of bills crushing Uncle Sam's hat.

Debt ceiling

Here's a riddle for you. Shares in First Republic Bank closed at $31.21 on Monday, and opened at $49.69 on Tuesday — an overnight spike of 59%. There was no news about the bank over the course of the intervening hours. So why did the stock move so much?

The answer: The stock moved so much because there was no news about the bank over the course of the intervening hours. But also, once banks start to get into trouble, the share price naturally becomes incredibly volatile, just because their balance sheet leverage is so enormous at that point.  

Between the lines: There are a lot of possible futures for any given company, and a stock price can be thought of as a kind of weighted average of all of them, discounted by a similarly probabilistic range of discount rates. 

At times like these, certain banks start to become the subject of worries that they might get taken over by the FDIC overnight and ultimately sold to a new owner.

When that happens, depositors (account holders) are generally unaffected, while shareholders are generally wiped out. The bank lives on — do a blood test on JPMorgan and you'll find WaMu DNA in there somewhere — but that's no solace to its former owners.

In other words: It doesn't matter how valuable Signature Bank or SVB end up being to their future owners, whoever that might be. All that value accrues to the new shareholders, while the old shareholders remain zeroed out.

How it works: When markets closed on Monday, there was some non-negligible chance that federal authorities would look at First Republic's deposit outflows and take it over before markets opened on Tuesday. 

That possibility was reflected in its Monday share price — so when Tuesday morning arrived and nothing had happened, the stock price, no longer reflecting the probability of a Monday-evening failure, went up. 

The big picture: Banks are some of the most levered businesses in America — they have vastly more debt than equity. That's just how fractional-reserve banking works. 

Debt is normally a combination of total deposits, bonds outstanding, and various other instruments like repos; equity is normally gauged using measures like Tier 1 capital.

Take a typical boring bank like PNC Bank. Its capital is about $43.5 billion, while its deposits alone — all of which are unsecured liabilities of the bank — are ten times that sum. 

The bottom line: Because equity value is such a small sliver of a bank's overall capital stack, bank shares tend to be particularly volatile, especially when market capitalization falls well below book value. 

Why First Republic shares went on a rollercoaster ride

Banking is a high-leverage business — volatility comes with the territory

Data: U.S. Treasury; Chart: Axios Visuals

With T-bills yielding 5%, it's hardly any wonder there's been a huge surge of enthusiasm for them, even when the main website for purchasing them feels like it's stuck in 1998.  

State of play: The above chart shows the number of people buying T-bills on TreasuryDirect through February, before the banking crisis. 

In March, of course, millions of Americans with deposit accounts holding more than $250,000 realized that (a) a lot of their money was uninsured; and (b) they could get much better interest rates just by buying T-bills. 

Here's a contest: The number of people buying T-bills through TreasuryDirect was 189,823 in February. 

What do you think it's going to be in March? Reply to markets@axios.com with your best guess, and the person who comes closest* will win a signed copy of my forthcoming book. 

The winner will be announced on either April 15 or April 22, depending on when Treasury releases the March data.

*Just, closest. None of this "Price is Right" stuff about not going over. That's just silly.

Americans are piling into T-bills

Bond markets

Illustration of a pile of money in front of abstract shapes.

Macro

Axios Macro

Consumers pulled back on spending at retail stores last month, after a burst of spending in January that was even stronger than previously estimated.

Driving the news: Shoppers spent less at furniture stores, restaurants and elsewhere, as retail sales fell 0.4% in February, according to data released by the Commerce Department on Wednesday. The figures are not adjusted for inflation.

That followed a strong 3.2% jump in retail sales for January, which was revised slightly higher.

Why it matters: The year began with ultra-strong consumer spending in January, which suggested, along with other economic indicators that month, that demand was heating up.  

But slowed consumer spending shows that did not continue, at least not across the board.

Separate data that the Labor Department released Wednesday showed an unexpected decline in wholesale prices in February, which may suggest easing price pressures for consumers in the months ahead.

Retail sales drop in February after consumer spending surge

There was also a surprising drop in wholesale prices, which may suggest easing inflation pressures.

Photo: Gabby Jones/Bloomberg via Getty Images

Consumers

Retail

Federal Reserve governor Michelle Bowman on Tuesday said the U.S. banking system remained on solid footing in the first public speech from a policymaker after the high-profile failures of Silicon Valley Bank and Signature Bank.

Why it matters: Bowman made short remarks acknowledging the fallout from those bank closures, which forced the Fed and other regulators to step in with emergency measures, during a speech that focused on innovation in the banking system.

What they're saying: "The U.S. banking system remains resilient and on a solid foundation, with strong capital and liquidity throughout the system," Bowman said, adding that the Fed "continues to carefully monitor developments in financial markets and across the financial system."

Bowman did not reference what implications, if any, the bank failures would have on the Fed's interest rate policy decision later this month. 

The Fed entered a "blackout period," which limits the extend to which officials can speak publicly, as Silicon Valley Bank was taken over by regulators last Friday.

Details: Bowman spoke at a conference hosted by the Independent Community Bankers of America, a trade association for small banks.

In the speech that focused on innovation within the banking system, Bowman said it was "absolutely critical that innovation not distract banks and regulators from the traditional risks that are omnipresent in the business of banking, particularly credit, liquidity, concentration, and interest rate risk." 

"[M]any traditional risks can be mitigated with appropriate risk-management and liquidity planning practices, and effective supervision, and without stifling the ability of banks to innovate."

The big picture: Regulators have become targets in a blame game underway in Washington around what could have been done to prevent the banking crisis in the first place.

The Fed said on Monday that it would conduct a review of how Silicon Valley Bank was regulated and supervised, with results released publicly by May 1. 

The Fed moved to loosen certain regulations for mid-sized banks in 2019. Bowman, who was appointed to the post by former President Donald Trump, voted in favor of that ruling — as did all other Fed officials, except Lael Brainard (who is now a top economic official at the White House).

Top Fed official says banking system remains "resilient" after bank failures

The comments came in the first the first public speech from a policymaker after the high-profile failures of Silicon Valley Bank and Signature Bank.

Federal Reserve governor Michelle Bowman speaks during a Fed Listens event in Washington, D.C. last year. Photo: Al Drago/Bloomberg via Getty Images

Silicon Valley Bank

President Biden has made the COVID-19 crisis and a post-Trump return to national unity and traditional democratic ideals his top priorities. From vaccinations to stimulus to schools, Biden is seeking bipartisan compromise while showing a willingness to use executive authority and bare Democratic majorities in the U.S. House and Senate to implement his policies. Republican leaders are navigating deep party divisions over if and how to move beyond former President Trump.

Politics & Policy

From the Valley to D.C., Big Tech players like Facebook, Google and Amazon are under more scrutiny than ever as new technology develops and privacy and antitrust concerns grow in lockstep with companies’ ambitions.

Technology

Monday was one for the ages in financial markets, especially for bonds. The two-year Treasury yield fell precipitously, part of the biggest three-day drop in that rate since the 1987 stock market crash.

It reflected some mix of panicked, flight-to-quality Treasury purchases, and an assessment that the Fed won't be able to push rates as high as had seemed likely a few days ago amid banking turmoil.

Driving the news: Tuesday, however, the swings have partly reversed. The two-year yield was up 0.29 percentage points at 11:45am EDT, to 4.32%.

Relatedly, futures markets swung violently Monday, pricing in significant odds the Fed will not hike at its meeting next week, as has been long-telegraphed.

But Tuesday morning, they've swung back the other way, with 86% odds of a quarter-point rate hike.

Between the lines: All sorts of markets — including bank stocks and volatility indicators — are flashing the same signs Tuesday: Conditions look less scary than they did Monday.

The absence of any new signs of bank runs or further bank seizures is viewed, in and of itself, as good news. 

If the government rescues announced over the weekend successfully prevented the kind of wholesale panic some had feared, then it makes sense for some of the more dire risks markets priced on Monday to fade away.

Yes, but: When financial instability is unleashed, it rarely is contained with a single bold announcement. And the speed at which things have happened since Thursday is a reminder that the economic narrative can be upended practically overnight.

A more benign message from markets

All sorts of markets are flashing the same signs: Conditions look less scary than they did Monday.

Somehow this was only a week ago. Photo: Aaron Schwartz/Xinhua via Getty Images

Prices continued to rise at a quick pace last month: the Consumer Price Index rose 0.4% in February, slowing only slightly from the prior month, the government said on Tuesday.

Why it matters: Inflation has dropped from last year's peak, though there are still signs that underlying price pressures continue to run strong — a development that reflects the challenging task ahead for the Federal Reserve.

Fed officials were watching this data release closely, along with other government data, looking for confirmation of whether or not economic activity continued to heat up last month in a way that might force them to raise interest rates more aggressively at its upcoming policy meeting.

But that decision might be complicated by the collapse of Silicon Valley Bank and Signature Bank, which forced the Fed to step in with emergency measures to backstop the banking system.

By the numbers: In the 12 months through February, the overall Consumer Price Index rose 6%, compared to 6.4% in January.

Excluding food and energy costs, which can be volatile from month-to-month, the index rose 0.5% last month — quicker than the 0.4% increase in January. Over the year ending in February, this core index increased 5.5%, compared to 5.6% the prior month.

Details: Food, energy, and furniture were among the categories that saw prices rise, while used car and trucks saw prices decline outright over the month.

The shelter index, which includes rental costs, continued to rise swiftly last month: 0.8%, compared to January's 0.7% rise.

The category is weighted heavily in the index — for months, it has put upward pressure on the overall and core index. Private-sector data shows shelter costs have decreased, but that hasn't made it to the official CPI data yet.

Where it stands: The Fed is also closely watching a specific measure of inflation, a core reading of the services sector that excludes shelter.

Officials say that's where inflation might be stickiest because that sector includes businesses most likely to pass along higher labor costs to consumers.

Editor's note: This is a developing story. Please check back for updates.

Consumer prices continued to rise quickly in February

Fed officials were watching this data release closely.

Inflation

Jobs

Closer

Axios Closer

First, it was electronics — then it was cars — and now it's AI: The semiconductor chip is entering a new stratospheric phase.

Why it matters: Pandemic-era supply chain breakdowns and national security concerns cast a spotlight on the need for more chip capacity and, in particular, more domestic production.

Driving the news: After the bell Wednesday, chip giant Nvidia projected revenue of $11 billion for its fiscal second-quarter running through July, astonishing analysts and investors and driving the company's stock up more than 22% today.

Bank of America analyst Vivek Arya called it "remarkable" and said it was $4 billion more than the consensus among analysts.

Wedbush Securities analyst Dan Ives described it as a "jaw dropping" outlook and said it "shows the historical demand for AI happening now in the enterprise and consumer landscape."

And Morgan Stanley analyst Joe Moore noted that Nvidia has historically been conservative about projecting revenue during growth times.

Quick take: If you thought the boom in demand for smartphone, automotive and crypto processing power was big, wait until you see this.

Companies are scrambling to order chips to fuel their generative AI ambitions after Open AI's release of ChatGPT set Wall Street abuzz.

And that means nothing but good things for Nvidia.

What they're saying: Competition is booming, but "we envision Nvidia maintaining its status as the industry standard for the foreseeable future given its competitive moat and the urgency with which customers are developing/deploying increasingly complex AI models," Goldman Sachs analyst Toshiya Hari wrote Thursday in a research note.

The intrigue: The AI chip boom isn't exactly new: Nvidia saw it coming a long time ago. 

“The age of AI is in full throttle," Nvidia CEO Jensen Huang was quoted as saying in 2020.

The big question: Will the chips be made in the U.S.?

Only 12% of semiconductor chips overall were made in the U.S. in 2022, down from 37% in 1990, according to the Semiconductor Industry Association.

In 2022, President Joe Biden signed into law the bipartisan CHIPS and Science Act, incentivizing companies to make chips here — and that's what's happening with investments from companies like Intel, Samsung and Taiwan Semiconductor Manufacturing Company, the latter of which manufactures the advanced AI chips that Nvidia designs and sells.

The White House noted at the time that chips are needed to "keep the United States the leader in the industries of tomorrow, including ... artificial intelligence."

But skeptics say the demand for chips will be so extraordinary that it will difficult for U.S.-based efforts to expand quickly enough.

The bottom line: The AI future depends on the speed with which chips can be developed, advanced and manufactured — and companies that are already doing it have a huge leg up.

AI future depends on semiconductor chips from companies like Nvidia

Illustration of a computer chip on an abstract background of circuitry patterns. 

Artificial intelligence

Trouble in the commercial real estate sector — including office buildings across the country that stand largely unoccupied — is a possible risk to the U.S. financial system, according to the Federal Reserve’s latest Financial Stability report released on Monday.

Why it matters: A huge shift in where white-collar staff decides to work is rippling through the commercial real estate market, with warnings that sharp drops in property valuations will follow as office space demand slumps.

That could spell trouble for the already battered financial sector, with uncertainty about the ultimate effect on the economy

What they're saying: "[T]he magnitude of a correction in property values could be sizable and therefore lead to credit losses" for holders of commercial real estate debt, officials write in the "Financial Stability Report."

The Fed also said that the sharp jump in borrowing costs over the past year increases the risk that commercial mortgage borrowers won't be able to refinance their loans as they come due.

The intrigue: Worries about the sector prompted officials to more closely monitor the performance of commercial real estate loans, a disclosure made public in the report — which, unlike the last report, features a special section on commercial real estate-related risks.

The Fed's bank supervisors — those charged with day-to-day oversight of lenders — also have "expanded examination procedures" for banks with "significant" exposure to commercial real estate.

Details: Mortgages for non-farm, non-residential commercial real estate — which includes offices — are a small slice of total assets held by banks, according to the Fed. But those mortgages represent one-fifth of total assets for the smallest banks (with some of those firms, of course, having more exposure than others).

But the Fed also acknowledges something of a blind spot on assessing the health of the market: Banks hold roughly 60% of these loans, but there's limited information on how the loans held by other entities (besides banks) are performing, the report said.

What to watch: The Fed's quarterly survey of loan officers, released yesterday, suggests that banks are more wary than they have been in years about extending credit for commercial real estate projects — a shift that has accelerated since early 2022.

Loan standards are now nearly the tightest since at least the 2008 global financial crisis — outmatched only during the onset of the pandemic.

Demand for these loans, meanwhile, has collapsed: the share of banks reporting stronger demand fell to the lowest on record. 

The bottom line: In a survey that accompanied the Fed's stability report, commercial real estate was mentioned by some market participants as a "possible trigger for systemic risk" — making the list of top-cited concerns, alongside inflation, banking sector stress and the debt limit. 

Why the Federal Reserve is watching commercial real estate

Worries about the sector prompted Fed officials to more closely monitor the performance of commercial real estate loans.

Illustration of a shaking eyes emoji rising from behind a cubicle wall.

Real estate

Stocks are closing in on their highs for the year as the S&P 500 recovers ground lost amid the Silicon Valley Bank bust. 

By the numbers: The S&P 500 closed Tuesday up 8.2% since we put the awful year of '22 in the rearview. 

Stocks are approaching their 2023 highs

This year's drop in longer-term interest rates goosed tech stocks that benefit from falling rates.

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