One year after the banking crisis: a battle over what needs to change

A year ago, the government and America’s largest banks joined forces in a rare moment of compassion.

They were forced into action after Silicon Valley Bank collapsed on March 10, 2023, quickly followed by two other lenders, First Republic and Signature Bank. Faced with the threat of a mounting crisis that could threaten the banking sector – the worst since 2008 – rivals and regulators have set up a massive bailout fund. Ultimately, all three ailing banks were declared bankrupt by the government and sold.

The biggest banks emerged from the period even bigger, having acquired accounts from their smaller rivals. But they have also become more confident in challenging regulators about what went wrong and what they should do to prevent future crises. Many bankers and their lobbyists are now rushing to describe the period as a crisis regional banking crisis, a term that tends to underestimate how concerned the sector was at the time.

One reason for the increased tensions is that government officials are proposing rule changes that lenders say will shrink their businesses and would not have done much to prevent the collapse of Silicon Valley Bank. Regulators say last year’s crisis proves changes are needed. They point to the increasing risks in the commercial and residential real estate markets the growing number of so-called problem banks, or those who score poorly on financial, operational or managerial weaknesses.

Here is the state of affairs, one year after the crisis:

What happened last spring?

Last March, Silicon Valley Bank went from being a darling of the banking world to bankruptcy in just a few days. The lender, which targeted venture capital clients and startups, had dabbled in what were considered safe investments, such as government bonds and mortgages, which turned sour in an era of higher interest rates.

That in itself may not have spelled disaster. But when nervous savers — many of whom had accounts larger than the $250,000 limit for government insurance — began withdrawing their money from the bank, executives failed to address their concerns, leading to a bank run.

Soon after, two other lenders – First Republic, which like Silicon Valley Bank had many clients in the startup sector, and the cryptocurrency-focused Signature Bank – also folded due to their own bank runs. Together, these three banks were larger than the 25 that failed during the 2008 financial crisis.

What became of the fallen banks?

Under standard procedure, government officials auctioned off the failed banks, with losses covered by a fund into which all banks pay. Silicon Valley Bank was purchased by First Citizens Bank. Many of Signature’s assets went to New York Community Bank (which has been facing its own problems of late), and First Republic was absorbed by JPMorgan Chase, the nation’s largest bank.

No savers lost money, even those with accounts that wouldn’t normally qualify for federal insurance.

What are regulators doing about it?

Many bank regulators are at least partially blaming the industry itself for lobbying for weaker rules in the years leading up to 2023. The Federal Reserve has also taken responsibility for its own lax supervision. Regulators say they are now paying more attention to mid-sized banks, recognizing that problems can quickly spread among banks with different geographic footprints and customer bases in an era when depositors can empty their accounts with the click of a button on a website or app.

Regulators are planning a variety of measures to rein in the banks. Part of this is an international agreement called ‘Basel III’, which requires large banks to hold more capital to offset the risks of loans and other obligations. Last week, Fed Chairman Jerome H. Powell, under pressure from the banking industry, indicated that regulators could scale back or rework that initiative.

In the United States, regulators are drafting so-called liquidity rules that focus on banks’ ability to quickly maintain cash levels in a crisis. Some of these rules, which have yet to be formally proposed but are expected to be introduced in the coming months, could address banks’ share of insured and uninsured depositors, a key issue during last year’s crisis.

Why are the big banks fighting so hard?

Suffice to say, the larger banks have indicated that they feel Basel III and other proposed regulations are punishing them. They have sent comment letters to regulators claiming that they helped stabilize the system last year, and that the costs of the proposed rules could ultimately hinder their lending or drive that business to less regulated non-bank lenders.

Perhaps the most visible U.S. banking leader, JPMorgan’s Jamie Dimon, told clients at a private conference two weeks ago that Silicon Valley Bank’s collapse could be repeated with another lender. According to a recording heard by The New York Times, Mr. Dimon said: “If interest rates rise and there is a major recession, you will have exactly the same problem with a different group of banks.”

He added: “I don’t think it will be systemic, other than when there is a run on the bank, people get scared. People panic. We have seen that happen. We have not solved that problem.”

What is the most immediate risk for banks?

Two words: real estate.

Many banks have set aside billions of dollars to cover expected losses on loans to commercial office building owners. The value of these buildings has fallen sharply since the pandemic as more and more people work remotely. Such problems have weighed most heavily on New York Community Bank, which last week accepted a rescue package from former Treasury Secretary Steven Mnuchin, among others, to stay afloat.