The past couple of weeks have reignited fears about the growing banking crisis, which remains in the news cycle and continues to impact regional banks and institutions across the country. Since its inception in March, there remains a lot of confusion in the marketplace about what might be ahead from an economic and regulatory standpoint, as well as a lot of fear about whether or not this could morph into something similar to the financial crisis of 2008.
To help put the minds of private fund managers at ease as they work to navigate through these uncertain, and often times confusing, economic times, Silver’s CEO, Fizza Khan, sat down with Joe Fenech, Chief Investment Officer at GenOpp Capital Management, and Brad Caswell, Partner within the Investment Funds and Regulatory/Compliance practice at Linklaters LLP, to discuss what has happened, lessons learned and what might be ahead from a regulatory and investment standpoint. Below is a link to the recording of their discussion as well as some key takeaways:
- This is a banking panic, not a crisis! The perfect storm of events that came together to create this situation is mostly behind us now. The risk of a broader run on the system was minimized very early in the process after SVB collapsed in March.
- We should expect some action from the banking regulators. The administration has urged federal bank regulators to reinstate several measures adopted after the 2008 financial crisis, which include (i) the Liquidity Coverage Ratio (LCR); (ii) the requirement to submit an annual resolution plan (“living will”) to address how the bank could be unwound in the event of insolvency without transmitting systemic risk into the banking system; and (iii) more robust and more frequent supervisory stress tests for capital and liquidity.
- There’s been shots across the bow with regard to regulatory actions but there still remains a lot of confusion and speculation about what steps the SEC might take. New regulatory measures are being discussed that include significantly reducing the “phase-in” periods for more robust prudential regulations to take effect as a bank increases in size and expanding the requirement to issue a minimum amount of long-term loss-absorbing debt that, in the event of stress, can help protect depositors and the Deposit Insurance Fund. Additionally, Chair Gensler put out a very cryptic statement in April saying that they will pursue enforcement action vigorously. And banking industry groups (American Bankers Association), as well as certain industry leaders continue to push for the SEC to take action to help shore up confidence.
- A ban on short selling bank stocks won’t work, and Chair Gensler agrees. They drive liquidity lower and can actually feed into this whole fear and panic in the markets.
- This is NOT the next 2008 financial crisis! The precipitating factors that lead to the 2023 banking panic include: (1) the sudden withdrawal of liquidity from the financial system, which had an impact on all banks; (2) combined with the speculative tech and crypto implosion; and (3) the banks (SVB, First Republic and Signature Bank) that had concentrations of uninsured deposits. Whereas in 2008, the largest banks in the country were most risky because they were all connected due to the derivatives markets. The regional banks that we’re talking about here do not play that role because they simply aren’t connected like the global big banks were in 2008.
- Opportunities are emerging for private fund managers as the crisis fades away into the rearview mirror. The growth trend for credit funds and other alternatives (i.e., nonbank lenders) shows no signs of slowing down. There’s also been significant inflows in money market funds (MMFs), a level not seen since three years ago when investors redirected cash into MMFs amid the COVID-19 pandemic. However, MMFs are not FDIC insured — and further consolidation into MMFs raises its own risks.