5 takeaways from the banking crisis fallout

June 1, 2023 4:27 PM

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The banking crisis set in motion by the failure of Silicon Valley Bank continues to reverberate across the industry as bankers try to figure out how to avoid having the same situation happen again. The FDIC has proposed introducing 'targeted' deposit insurance for certain business accounts. Meanwhile, regional banks are waking up to the need to increase their spending on risk management technology.

Here are five stories on the industry's response to the recent upheaval.

FDIC seeks reform of deposit insurance to stem tide of bank failures

The FDIC has proposed an overhaul of the deposit insurance coverage system to prevent future bank failures after the collapse of Silicon Valley, Signature and First Republic Banks.

Of the three options outlined in its recent proposal, the agency favors target deposit insurance for certain business accounts, but persuading Congress to act won't happen overnight.

"We think that for a deposit insurance increase to become law it needs an external push, like another significant bank failure," said Ian Katz, policy analyst at Capital Alpha Partners.

Read more:

'Targeted' deposit insurance could work. But it will have to wait.

Déjà vu for bank failures — and the industry’s response

Dodd-Frank banking rules have been on the books since 2010, but seemed to have minimal impact during the spate of recent bank failures, according to industry insiders.

"What is damning is there appears to have been no playbook," Karen Petrou, managing partner of Federal Financial Analytics, said. "If there was, it didn't work."

Opinions are rife on what happened and why, and what to do next. All agree that changes are needed, but arriving at real solutions may not be easy or fast.

Read more:

Dud-Frank? Post-2008 reforms played little role in bank resolutions.

Coastal appeal grows for fintechs after banks collapse

The trend of fintechs drifting inexorably to both coasts is set to continue following the recent bank failures, with startups running for cover to the major urban banking centers.

The divide is nothing new. "There's a perception you have to be on the coast," said Max Brickman, managing director of Heartland Ventures in Columbus, Ohio. "You end up going there, and then that leads to very few startups that are actually headquartered in the Midwest historically."

Some of those that do stay, however, are thriving, with a number of fintech success stories showing the promise that exists in the fly-over states, given the right factors.

Read more:

Banking crisis widens startups' geographic innovation gap

Regional banks hear March risk management wake-up call

Regional banks that have been prone to minimizing their spending on technology for risk assessment are now looking to invest in state-of-the-art solutions to mitigate risk in light of the recent banking crisis.

"Banks are suddenly saying, 'Risk management is a very key component of who we are as a bank,'" said Ronak Doshi, a partner at The Everest Group. "'It's not just the cost of doing business. It is the business.'"

Following this timely reminder of the importance of the need to analyze risk, regional banks are set to allocate significantly more funds towards the latest risk management technology.

Read more:

Banks expected to increase risk technology budgets after March crisis

Banks cry foul as deposits move to money market funds

Many banks think they have been competing for deposits with money market funds on an uneven playing field ever since the Fed introduced its Overnight Reverse Repurchase Program a decade ago.

Now, with deposits flooding into money market funds as a result of the banking crisis, the program is under renewed scrutiny by industry experts, such as Karen Petrou, managing partner at Federal Financial Analytics, who believe it favors the funds over banks to the detriment of the broader economy.

"The Fed is supporting funds flowing out of the banking system, where they support macroeconomic activities, into the funds sector, then looping them back into the Fed where they support the Fed's portfolio and government borrowing," said Petrou. "That's a really altered state that nobody's quite focused on."

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Bank crisis puts money market funds back in the spotlight