Brushing off a banking shock

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Mar 24, 2023 View in browser   By Zachary Warmbrodt Presented by Editor’s note: Morning Money is a free version of POLITICO Pro Financial Services morning newsletter, which is delivered to our subscribers each morning at 5:15 a.m. The POLITICO Pro platform combines the news you need with tools you can use to take action on the day’s biggest stories. Act on the news with POLITICO Pro. Dread is seeping into the economic outlook, and for good reason. Banking turmoil will force lenders to withhold credit, and it remains to be seen whether a more severe financial crisis is in the cards. The commercial real estate market — a driver of construction and growth — appears to be under pressure. And it’s all landing as the Federal Reserve continues its attack on inflation with rate hikes designed to slow the economy. It has the Fed signaling that the bottom could fall out after the first quarter. But some economists see a path in which the surprisingly resilient post-Covid economy might defy the odds once again. One obvious wildcard is the labor market, which added 815,000 jobs in January and February. “At the end of the day most of what the economy comes down to are jobs, jobs, jobs,” said RSM US chief economist Joe Brusuelas. “If unemployment doesn’t rise and wages continue to increase at the recent pace, there's a small chance that the economy could avoid a recession.” Another factor: the U.S. economy is less dependent than others on bank lending, according to an analysis from Institute of International Finance chief economist Robin Brooks, surfaced by former MM host Kate Davidson. That could also lower the odds of a recession. There’s another scenario that the markets might not appreciate: The banking turmoil, counterintuitively, could trigger actions that stimulate the economy. Unlimited Funds CEO Bob Elliott, who previously led research at hedge fund giant Bridgewater Associates, said mortgage rates are falling, easier monetary policy is being priced in and asset prices are flat to up, modestly. “If you add that all up, you look at it and say, it’s not obvious this is a negative for the economy,” he said. They’re factors that matter more than small bank lending, according to Elliott, which he said had already been slowing. Elliott describes the economy as a tanker ship that takes a lot to slow down. He’s skeptical that “a couple banks that frankly no one had ever heard of before the last two weeks” are enough to throw off macroeconomic momentum. “In the same way the Fed’s tightening has incrementally moderated economic growth, some of these credit problems are an incremental drag on growth, but you have to compare that to the underlying momentum in the economy, and that still looks pretty good.” “And so will this be enough to bring the economy down? When you pencil through all the numbers it seems like that's a low probability.” It’s Friday — Thanks for all the great feedback this week. Sam will be back Monday. So please keep us in the loop at ssutton@politico.com and zwarmbrodt@politico.com. A message from the American Bankers Association: The banking system works best when it works for all Americans. Thanks to initiatives like simple Bank On-certified accounts, the number of unbanked individuals in the U.S. is now at its lowest level ever. Today more than 41,000 bank branches offer these low-cost, easy-access accounts. Learn more about Bank On.   Driving the Day First in MM: Tim Scott leads GOP Fed inquiry on SVB — Senate Banking Republicans late Thursday asked Fed Chair Jerome Powell and San Francisco Fed President Mary Daly for extensive documentation related to the collapse of SVB. Sen. Scott, the panel’s ranking member, made the request in a letter signed by all of the committee’s Republicans. Among their asks: All SVB examination reports since January 2019. Records related to SVB’s uninsured deposits, interest rate risk, concentration risk and accelerated growth. Calendar entries going back to July 2022 for all Fed board members, the president and vice president of the SF Fed and all SVB examiners. Communications between the Fed, the New York Times and other media outlets related to SVB since March 9. (The letter cites NYT and WSJ reporting about problems on the Fed’s radar before SVB’s collapse.) “The American people deserve transparency and accountability from their government officials, and they are entitled to understand precisely what Federal Reserve officials knew about the apparent risks associated with SVB, when they knew it, and why they failed to act to prevent the bank failure from occurring,” the Republicans said. Scott and Senate Banking Chair Sherrod Brown earlier Thursday called on the former CEOs of SVB and Signature Bank to testify before the committee. Yellen: Government prepared to help banks ‘of any size’ — Treasury Secretary Janet Yellen told House lawmakers Thursday that the tools the administration and regulators used to stabilize the banking system earlier this month are ones that “we could use again for an institution of any size if we judge that its failure would pose a contagion risk.” Charles Schwab CEO Walt Bettinger told WSJ that the brokerage could continue to operate even if it lost most of its deposits over the next year. SVB buyers uneasy with loans — The FT reports that private credit investors combing through SVB’s $74 billion loan portfolio are finding big parts of it unappealing. Blackstone, Apollo, Carlyle, Sixth Street and HPS Investment Partners are among the investment groups weighing offers. Reuters reports that regional lender Citizens Financial is working on a bid for SVB’s private banking business. ESG rollback is over — House Republicans tried and failed Thursday to override the veto that blocked their attempt to repeal the Biden DOL’s environmental and social investing rule. They were unable to muster the two-thirds support required.   A message from the American Bankers Association:   Crypto Block shares plunge on fraud accusations — Shares of Jack Dorsey’s digital payments company fell by 15 percent after short seller Hindenburg Research alleged that it inflated its user base and facilitated fraudulent transactions, according to CNBC.   STEP INSIDE THE WEST WING: What's really happening in West Wing offices? Find out who's up, who's down, and who really has the president’s ear in our West Wing Playbook newsletter, the insider's guide to the Biden White House and Cabinet. For buzzy nuggets and details that you won't find anywhere else, subscribe today.     Regulatory Corner Credit Suisse, UBS targeted in Russia sanctions probe — Bloomberg reports that DOJ is looking at the Swiss banks in an investigation into whether financial professionals helped Russian oligarchs evade sanctions. A message from the American Bankers Association: The banking system works best when it works for all Americans. To promote financial inclusion and expand access to banking services, America’s banks are joining the Bank On movement. Now available in more than 41,000 bank branches in all 50 states, Bank On-certified accounts are low-cost and give unbanked individuals a viable path toward long-term financial security. Learn about Bank On’s impact here.   Fly Around JPMorgan, Citi, BofA warn staff to not poach clients from struggling banks — Reuters: “JPMorgan … told all employees they ‘should never give the appearance of exploiting a situation of stress or uncertainty,’ in a March 13 memo, extracts of which were seen by Reuters.” Banks tap Fed loans amid stress — NYT: “Two key programs together lent $163.9 billion this week, according to Fed data released on Wednesday — roughly in line with $164.8 billion a week earlier. That is much higher than normal.”   DOWNLOAD THE POLITICO MOBILE APP: Stay up to speed with the newly updated POLITICO mobile app, featuring timely political news, insights and analysis from the best journalists in the business. The sleek and navigable design offers a convenient way to access POLITICO's scoops and groundbreaking reporting. Don’t miss out on the app you can rely on for the news you need, reimagined. DOWNLOAD FOR iOS– DOWNLOAD FOR ANDROID.       Follow us on Twitter Mark McQuillian @mcqdc Ben White @morningmoneyben Victoria Guida @vtg2 Katy O'Donnell @katyodonnell_ Zachary Warmbrodt @Zachary Sam Sutton @samjsutton   Follow us

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