There's
When I hear the words "soft landing" in the economic context these days, this is the image that immediately comes to mind. On the one hand, the Federal Reserve's quest to quell inflation seems to be going reasonably well — headline and core inflation metrics are down year over year, and though the
That's the good news. The bad news is that conditions for banks — particularly larger banks — in the short- to medium-term are becoming increasingly perilous. We've by now become quite aware that banks in general have an interest rate risk problem — holding a large quantity of securities that bear interest rates below their current cost of funds,
Many of these same banks are also heavily invested in commercial real estate ventures — a sector that regulators
And on top of that you have credit ratings agencies circling the banking industry for
These headwinds are considerable, but not insurmountable — this isn't like a 2008 or 2020 scenario. But it is a backdrop of heightened tension, where banks have less room for maneuverability or mistakes, and things just aren't allowed to go wrong.
And it is against this backdrop that Federal Deposit Insurance Corp. Chair Martin Gruenberg
Those features include applying long-term unsecured debt — known as Total Loss Absorbing Capacity — to banks with more than $100 billion of assets, a bail-in capital provision outlined by the Basel III accords that the largest banks are already required to hold. Gruenberg also discussed a fundamental reconsideration of the living wills requirements, including the ability for banks in distress to rapidly create a virtual due diligence data room with "enough information for interested parties to bid on the bank or certain of its assets or operations." And the FDIC is also considering ways to make banks with a greater presence of uninsured deposits pay more for their deposit insurance.
Individually, all of this makes sense. Signature Bank didn't have a living will before it failed, so it would stand to reason that resolution of the bank would be easier if banks were required to have one, and if banks could bid on Silicon Valley Bank's assets individually that might have led to a speedier resolution. TLAC may have stabilized funding for Silicon Valley Bank and prevented the kinds of runs that ultimately led to its demise. I don't think anyone would object to banks with high rates of uninsured deposits paying some kind of premium for having riskier funding sources.
The challenge instead is that all of this is coming at once, and it is coming at a time when the administration at the highest levels is trying to paint a rosy and optimistic economic picture ahead of next year's election.
It's worth noting that while all of these things are being discussed today, whether and when these developments ultimately come home to roost will play a very big part in how soft a landing the banking system — and by extension the economy — ultimately experiences. The Basel III: Endgame proposal is still just a proposal, and even if it is left unchanged — a prospect I
So nothing is set in stone — banks can still weather this phase, however tenuous. But the margin for error seems to be increasingly slim — and that could mean the difference between a soft landing and a crash landing.