Earlier this year, in March, you will recall how over the course of just a few days, three small-to-mid sized US banks failed. The triggers for their failures varied: SVB went down after it realized MTM losses on its long durations USTs; Silvergate and Signature, both holding significant exposures to crypto assets, followed suit. And then later, across the Atlantic, Credit Suisse collapsed.
It’s a well-known fact that regulators typically try to resolve a banking crisis over the weekend.
Consider that: only a 48-hour window to delve through reams of data. Broker a rescue. Attempt to stem a potential contagion. And arrive at a decision before Monday rolls in.
Against such a backdrop, it is safe to assume that speed takes precedence over accuracy. And ‘guesstimates’ trump the most detailed of valuation models. (What else can explain UBS recording a $29 billion negative goodwill on its Credit Suisse acquisition? or JPM’s grand bargain price on its First Republic acquisition?)
That first act in March was also characterized by Jerome Powell laying the blame for the collapse of these banks squarely on the bank management’s failings.
Beyond that, not much really came through from the US regulators, on steps to be taken to avoid a chaos of this nature in the future.
Until late last month, that is.
On August 29th, a clutch of US regulators, including the Department of Treasury, the office of the Comptroller of the Currency, the Federal Reserve System, and the FDIC, released a consultation paper, that proposed for:
“certain large depository institution holding companies, U.S. intermediate holding companies of foreign banking organizations, and certain insured depository institutions, to issue and maintain outstanding a minimum amount of long-term debt.”
The consultation paper goes on to say that:
“The proposed rule would improve the resolvability of these banking organizations in case of failure, may reduce costs to the Deposit Insurance Fund, and mitigate financial stability and contagion risks by reducing the risk of loss to uninsured depositors”
This echoes similar views from FINMA in early August.
The line of thought is clear: banking regulators are nudging the industry in the direction of “Bail-ins” (“Bail-outs” help to keep creditors from taking losses while “Bail-ins” mandate that creditors take losses).
A Bail-in has its fair shares of pros and cons (but that’s a story for another day), but the regulatory direction is clear: shift the costs of a bank’s failure closer to where it originated from ─ its shareholders and creditors (and away from the general public’s coffers!).
It’s also a vote from the US regulators and FINMA for lesser chaos (and less frenetic weekends 😉) during the resolution of the next banking crisis.
