March 17, 2023
☘️ What a week. There's more banking news to consider today. We're also watching events unfold in France, which is mired in protests over President Emmanuel Macron's push to raise the retirement age to 64.
- From an American perspective, this seems...fine. When are you folks going to retire? Email us.
Today's newsletter is 1,203 words, 4.5 minutes
1 big thing: Emergency lending soars
The Fed's "lender of last resort" business is booming, as the collapse of Silicon Valley Bank last week set off one of the worst financial panics since 2008-09, Matt writes.
Why it matters: The surge of the discount window borrowing contextualizes the scale of the shock. The only thing comparable in recent memory is the great financial crisis.
Driving the news: The amount banks were borrowing from the Fed's "discount window" — its traditional channel of lending during a panic — exploded higher by $148.3 billion during the weekly period that ended Wednesday, a sign of just how focused banks were on securing cash as a flurry of bank runs broke out.
How it works: A key role of central banks is to lend to the financial system during panicky periods. At the window, banks must hand over high-quality assets, such as Treasury bonds, as collateral for loans.
Yes, but: This is only one part of the lending the Fed is doing to ease the financial stress. The Fed also has lent roughly $143 billion to the two failed banks that the FDIC took over last week and is now running.
What they're saying: JPMorgan economist Michael Feroli notes that the Fed has a total of $318 billion in loans out to the financial system right now, about half what it did during the financial crisis of 2008-09.
- "It is still a big number," he wrote yesterday in a note to clients.
- "The glass half-empty view is that banks need a lot of money. The glass half-full take is that the system is working as intended."
3. The FDIC's long game
As anyone who’s ever dealt with an insurance company knows: They like to minimize the amount they have to pay out in claims. The FDIC is no normal insurance company — but its actions last weekend are entirely consistent with a desire to save as much money as possible, Axios' Felix Salmon writes.
Why it matters: The FDIC on Sunday decided to bail out a set of Silicon Valley millionaires and billionaires who had substantial uninsured deposits at Silicon Valley Bank. That's great for the plutocrats in question — but it also turns out to be great for everyday Americans who pay through various bank fees for the FDIC insurance fund.
How it works: As depositors across the country watched SVB depositors bewailing their putative losses, they started to worry about their own money. Roughly half of all bank deposits are uninsured, and of those uninsured deposits, only about $1.1 trillion is housed at the giant too-big-to-fail institutions.
- That leaves some $1.5 trillion of uninsured deposits across the country, most of which are earning an underwhelming rate of interest.
- To put that number in context: A bank run of $0.04 trillion at SVB was historically unprecedented and managed to wipe out the 16th-largest bank in the country within the space of 24 hours.
Between the lines: Now that it's possible to get a 5% rate of interest just by keeping your money in Treasury bills, greed alone is enough to get Americans to move billions of dollars out of deposit accounts. Add fear — and that becomes a tsunami.
By the numbers: An important new paper sketches out the possible losses to the FDIC were Americans to start panicking and transferring their uninsured deposits out of regional banks.
- If half of uninsured deposits join a bank run, the authors estimate that 186 banks would fail, with close to 100% losses for uninsured depositors who didn't get their money out in time.
- The cost to the FDIC, even paying nothing to uninsured depositors, would be at least $10 billion and almost certainly much more.
Where it stands: By guaranteeing all of the uninsured deposits in SVB, the FDIC ensured that most of those depositors no longer felt any need to withdraw their money.
- The total cost to the FDIC of backstopping all deposits at both SVB and Signature Bank is not yet known, but it's almost certainly going to end up being smaller than the cost to the FDIC of multiple bank runs across the country — which was the alternative.
The bottom line: If this was a bailout, it was a selfish one on the part of the FDIC. And by massively reducing the risk of simultaneous bank runs at hundreds of banks around the country, it quite possibly prevented a full-blown banking crisis.
2. Catch up quick
4. The WFH debate just got more complicated
In a story in the Financial Times out yesterday, current and former Silicon Valley Bank employees cited the bank's commitment to remote work as one reason for its failure, Emily writes.
Why it matters: In the aftermath of the collapse of the 16th biggest bank in the country everyone is trying to understand what happened.
- Whether remote work led directly to a bank failure, or whether poorly-managed remote work was simply a sign of bigger problems at the company, we may never know. Either way, what happened at SVB will likely enter the broader debate about returning to the office.
Details: The banking industry has led the return to office charge for a while, and SVB was an outlier in its commitment to something different.
- The company's career site touted its flexible culture. "If our time working remotely has taught us anything, it’s that we can trust our employees to be productive from wherever they work," the site says.
- The executive team at SVB was spread out around the country, with CEO Greg Becker at times working from Hawaii, according to the FT.
- Yet, SVB included remote work as a risk to its business in its 2022 annual report — in part because of the IT issues posed when employees are dispersed around the country, but also for productivity reasons.
The big picture: Whether or not remote work succeeds in any organization depends a lot on how it's managed.
- "There are well-managed organizations that operate remotely," said Kevin Delaney, CEO of Charter, a media and research firm that works with companies on talent strategy. And some companies have abandoned remote work or hybrid work models because they weren't well-run, he said.
- Best Buy, an early pioneer, got rid of its hybrid work policy. (Read this 2021 New Yorker piece for more on that.)
- Yahoo famously called all its employees back to the office a decade ago, when a new CEO took the helm and tried to turn that sinking ship around.
The immediate cause of SVB's failure, as we've said before, was that the company didn't take into account the risks that a high-interest rate environment, coupled with its concentrated tech-heavy clientele, posed to its balance sheet.
- Then, its public communications around a needed capital raise incited panic, which led to an unprecedented viral bank run, as Axios' Eleanor Hawkins reported.
- It's certainly possible that if more executives were working in closer proximity those missteps would've been avoided. But it's hard to really know.
The bottom line: Companies looking for a reason to bring workers back to the office may find it in this piece.
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Markets is edited by Kate Marino and copy edited by Mickey Meece.