The Feds 'Mea Culpa' on SVB; First Republic Latest Bank Collapse?
TF: #16: Plus Cross River Bank Get's a Cease and Desist/ Consent Order from FDIC
It’s been an interesting week to say the least. The economy is cooling with GDP rising just 1.1% in Q1. The financial system seems to be on shaky ground with the fifth bank collapse in the last 60 days expected to be announced on Sunday. The tech industry continues to shed jobs with AI taking the brunt of the blame and the Fed seems intent on raising rates to prove inflation is “transitory". All that is making a looming recession look all the more likely.
Fed Mea Culpa on SVB: Calls for More Regulatory Power
This week The Federal Reserve released a damning “post-mortem” report on the failure of Silicon Valley Bank (SVB), detailing what most people already knew: this was largely a "textbook case" of mismanagement at SVB, with senior leadership being held accountable for failing to manage basic interest rate and liquidity risks. Interestingly the report also looked inwards at The Fed’s role in failing to curb the failure. While it did a passable job of taking some of the blame, it seemed to be more interested in increasing its remit moving forward than taking true accountability.
The four key takeaways of the report include:
SVBs board of directors and management failed to manage their risks (not a surprise to anyone).
Despite multiple warnings (SVB had a shocking 31 unaddressed safe and soundness warnings, more than three times that of its peers), central bank supervisors failed to act.
When supervisors did identify vulnerabilities, they did not take sufficient steps to ensure that SVB fixed those problems quickly enough.
The Board’s approach in response to the Economic Growth, Regulatory Relief, and Consumer Protection Act (EGRRCPA) and a shift in the stance of supervisory policy impeded effective supervision by reducing standards, increasing complexity, and promoting a less assertive supervisory approach (there it is).
While #s 2 and 3 are pretty damning, they spent the vast majority of the report focusing on #4 and detailing a need to shore up more power. They did, however, make a fairly juvenile attempt to provide sample “recommendations” that stretch the definition of that word, including:
“Our first area of focus will be to improve the speed, force, and agility of supervision.”
“We need to develop a culture that empowers supervisors to act in the face of uncertainty.”
“Once issues are identified, they should be addressed more quickly, both by the bank and by supervisors.”
“Last, we need to guard against complacency.”
While the report does go into some generic specifics, it is largely stuffed with much of this filler language that doesn’t frankly help anyone. At 118 pages long, it could probably have been about 10% of the length. Not a surprise for a pseudo-government report.
The TL:DR I took from the report:
When the private sector fails, the executives are fired and shareholders are wiped out.
When the government fails, it was someone else’s fault, no one is held accountable and they get…more power?
“Sound Banking System.”
The Fed also wants to point out that, despite appearances, all is well in the banking system. From the opening paragraph:
“Our banking system is sound and resilient, with strong capital and liquidity. And in some respects, SVB was an outlier because of the extent of its highly concentrated business model, interest rate risk, and high level of reliance on uninsured deposits…”
Meanwhile, in the last 60 days, we’ve lost:
Silicon Valley Bank (2nd largest US bank failure on record)
Silvergate Bank
Signature Bank
Credit Suisse
First Republic Bank (highly likely)
The US financial services industry is currently facing an urgent crisis. As I detailed after the SVB failure, banking is largely based on confidence. Most people lost confidence in The Feds ability to diagnose and tame inflation last year. Now they seem to be losing the public’s confidence needed to protect the banking sector from a contagion.
Buckle up.
First Republic Fire Sale 🔥
Meanwhile, U.S. regulators are trying to execute a sale of First Republic Bank (FRC.N) over the weekend. The auction is being run by the FDIC - with more than a dozen banks expected to take part in the bidding - and expectations are that the successful bidder will be announced on Sunday night before Asian markets open. The FDIC is also expected to simultaneously announce it had seized the lender over the weekend.
First Republic, known for banking high-net-worth customers, came under pressure after the SVB collapse and had to take a $30 billion lifeline from 11 Wall Street banks in March. Though focused more on the consumer segment it was similar to SVB in that its affluent customer base meant that a high percentage (68%) of deposits were over the $250,000 FDIC insurance cap and thus not protected. The stock plunged this week after the San Francisco-based bank reported it saw more than $100 billion in deposits leave in the first quarter.
By Friday, First Republic's market value had hit a low of $557 million, down from its peak of $40 billion in November 2021, spurring the FDIC to take action.
Crypto and Fintech Friendly Cross River Bank Gets Consent Order
New Jersey based Cross River Bank received a cease and desist/ consent order from the FDIC this week for engaging in “unsafe” or “unsound” banking practices with regard to its compliance with fair lending laws and regulations in 2021. While the bank did not admit or deny wrongdoing under the order, it was directed to "self-correct" the perceived weaknesses. Specifically, the consent order calls out the following transgressions:
Requiring borrowers to sign loan documents without knowing the essential terms and conditions of the loan;
Failing to inform borrowers that certain major creditors will not negotiate debts with FDR and including related debt settlement fees into C+ Loans, when in fact, borrowers had to negotiate such debts themselves;
Misrepresenting to consumers that the C+ Loans would result in the settlement of all their debts within 30 to 45 days or 30 to 90 days, which was not true for nearly half of the consumers; and
Misrepresenting that the consumers' creditworthiness would improve by obtaining a C+ Loan.
It is worth noting that Cross River Bank is known to work with a number of cryptocurrency companies, including crypto exchange Coinbase and USDC issuer Circle, and has previously described itself; as pursuing a “crypto first” strategy to TechCrunch in March 2022.
While it doesn’t appear this consent order was related to their crypto business, it will be interesting to learn more considering the broader crackdown on the sector from regulators this year.
One thing is for sure; after a shaky few months in the banking sector, it appears we are not yet out of the woods.
Tweet of the Week 🐤
I’ve written a lot (here, here) about “Operation Chokepoint 2.0” and why, if true, that is not how we want our regulators to act in a nation that espouses both innovation and freedom. Seems the former Chairman of the FDIC agrees.
Twitter is not all memes and shitposts (but yeah, there’s also that!). A well-curated timeline can provide a straight-to-the-source education. Check out my FintechTweeps for a curated list of Fintwit’s best & follow me @rsconway for more (Twitter).
Chart of the Week 📈
As venture backed companies grow more of the equity is reserved for employees. That is fairly intuitive. But how much? Well, below is a benchmark for founders by stage based on Carta data.
Podcast I’m digging 🎧
Fintech Business Weekly publisher Jason Mikula and Fintech Takes Alex Johnson recap the latest news in fintech and banking, directing Apple’s high-yield savings account, Netherland-based neobank Bunq coming to the US, Plaid’s newly launched real-time payment capability and more.
Great listen as always.
Fintech Update 📊
Acorns acquires kid-focused fintech GoHenry to expand in Europe.
Fed Says It Failed to Act on Problems That Led to SVB Collapse.
A Revolut stakeholder cut the value of its stake in the fintech firm by 46%.
Klarna and Block slam ‘outdated’ UK buy now, pay later regulation proposals.
Crypto Update 📊
Circle Unveils New Method for Moving USDC Between Blockchains.
Chairman of the U.S. House Financial Services Committee says “Will Have Crypto Bill in 2 Months”, a week after grilling SEC head Gensler.
Binance battles regulators, while its VC keeps growing.
Crypto Is 'Absolutely' at War Against Gensler, Warren: Blockchain Association CEO.
Mastercard teaming with Solana, Polygon on new Crypto Credential standards.
Beyond the Ledge: Long Reads of the Week 📚
Long Take: Combining AI agents, like AutoGPT, with Web3 chains will create self-driving money. (PAID CONTENT: Fintech Blueprint)
Thriving In The Next Era of BaaS: Fintech Takes.
US Money Transmitter License 101.
There Are Gaps In The US Real-Time Payment System. Who Will Fill Them? (Rocio Wu, Forbes).
a16z State of Crypto 2023.
Down the Rabbit Hole: Canonical Reads 🐰🕳
The Infrastructure and App Cycle: Strategic Thinking for Emerging Infrastructure Providers.
2023 State of Crypto Report (a16z Crypto).
Out With the Speculators in With the Builders: David Marcus
BaaS Is No Silver Bullet for Community Banks, De Novos, Analysis Shows.
The Fintech Formula: A Data-Driven Blueprint for Creating Enduring Value
That’s a Wrap 🎬
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Until next week, fare thee well friends.
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