June 12, 2023 - On June 8th, the LSTA co-sponsored a webinar hosted by the National Association of Women Lawyers (NAWL) Women in Financial Services Affinity Group and Women in Start- ups Affinity Group, “After the Failures: What’s Next for the Banking Sector and Venture Lending?”. The LSTA’s Tess Virmani moderated the panel with Legal Strategist and Consultant Suzanne Alwan, Sarah Fergusson Chambless of Fenwick & West LLP, Jess Cheng of Wilson Sonsini Goodrich & Rosati and Margaret Tahyar of Davis Polk & Wardwell LLP.
On March 10th, SVB was put into FDIC receivership; then the FDIC created the Deposit Insurance National Bank of Santa Clara and transferred to it all insured deposits of SVB. On March 12th, Treasury Secretary Yellen granted a “systemic risk exception” which allows for all depositors – both insured and uninsured – to be protected. The FDIC approved the “systemic risk exception” for SVB and transferred all deposits and substantially all assets of SVB to a newly created, “bridge bank”. The regulators also shut down Signature Bank on March 12th, and last month, JPMorgan acquired First Republic Bank. Three US banks all collapsed within a short period of time. When there are collapses of this scale, there inevitably will be finger pointing and blame will be placed, and this time was no different. But perhaps trying to draw lessons from these recent bank failures is a red herring.
The US system of banking laws and regulations are generally pre-New Deal, and at their core, they are designed to protect against deposit runs. The passage of the Dodd-Frank Act after the Global Financial Crisis represented a paradigm shift in how we think about financial stability in banking regulation, and it created a concept of prudential supervision. This was an entirely novel way of looking at banking supervision.
SVB’s collapse represents a complex situation for liquidity. SVB seemed very liquid at the time, with many of its assets held in government securities; however, in an intense rising rate environment, those securities had lost their value, and SVB was forced to sell them at a time when those securities’ values had taken a hit. The staff on the ground cannot be criticized for having missed that interest rates had spiked and that they should, therefore, be focused on marketable securities. Those at the top of the banking supervisory structure should have been focused on that issue.
Like the broader banking sector, the FDIC is having problems attracting and retaining staff. A situation which will likely only be exacerbated after these collapses. With the outflow of talent already well underway, more staff at the regulators may decide to leave, attracted by salaries in, for example, private equity, private credit, or the crypto sector. Regulators will likely respond to the bank collapses by trying to clawback the compensation of the failed banks’ executives – driving more talent out of banking.
It is no longer accurate to say that mid-size regional banks need less supervision and less regulation and that the focus should stay on the large GSIBs. When deposits can flee quickly as we saw with the recent collapses, the regionals can have systemic impact, too. Thus, we shall likely see changes and enhanced supervision of mid-sized regional banks. But the problem will always be that in every crisis the regulators are fighting the last war. Furthermore, to effect reforms to a supervisory system behind closed doors will be incredibly difficult to achieve.
Whether congress decides to increase the statutory limit of deposit insurance of $250,000 remains to be seen. Currently, there is no consensus whether to increase the limit (perhaps to $1 million or $2 million) or have no limit, and this Congress will be unlikely to tackle this issue. Thus, while there are parallels to situations which arose during the Global Financial Crisis, no situation is identical or uniform, and unfortunately, regulators are left always fighting the last war. Click here for the supporting materials.
