The Tarbabys Blog

MarketWatch – Outside the Box

Opinion: Sen. Sherrod Brown: American consumers losing power over their savings and paychecks is an emergency, too.

The Consumer Financial Protection Bureau holds Wall Street and big banks accountable. The U.S. Supreme Court must protect it, writes Sen. Sherrod Brown.

Sherrod Brown – March 27, 2023

The collapse of Silicon Valley Bank sent shockwaves through the global economy and had the makings of another crisis. Depositors raced to withdraw money. Banks worried about the risk of contagion. I spent that weekend on the phone with small business owners in Ohio who didn’t know whether they’d be able to make payroll the next week. One woman was in tears, worried about whether she’d be able to pay her workers. 

The Federal Deposit Insurance Corporation (FDIC) and the Federal Reserve responded quickly, took control of the bank, and contained the fallout. Consumers’ and small businesses’ money was safe. That Ohio small business was able to get paychecks out.

The regulators were able to protect Americans’ money from incompetent bank executives because when Congress created the Federal Reserve in 1913 and the FDIC in 1933, it ensured that their funding structures would remain independent from politicians in Congress and free from political whims. 

But now, as the U.S. Supreme Court considers the case of Community Financial Services Association v. CFPB, these independent watchdogs’ ability to keep our financial system stable faces an existential threat.

The Consumer Financial Protection Bureau is the only agency solely dedicated to protecting the paychecks and savings of ordinary Americans, not Wall Street executives or venture capitalists. Corporate interests have armies of lobbyists fighting for every tax break, every exemption, every opportunity to be let off the hook for scamming customers and preying on families.

The CFPB’s funding structure is designed to be independent, just like the Fed and the FDIC.

Ordinary Americans don’t have those lobbyists. They don’t have that kind of power. The CFPB is supposed to be their voice — to fight for them. The CFPB’s funding structure is designed to be independent, just like the Fed and the FDIC. Otherwise, its ability to do the job would be subject to political whims and special interests — interests that we know are far too often at odds with what’s best for consumers.

Since its creation, the CFPB has returned $16 billion to more than 192 million consumers. It’s held Wall Street and big banks accountable for breaking the law and wronging their customers. It’s given working families more power to fight back when banks and shady lenders scam them out of their hard-earned money. 

The CFPB can do this good work because it’s funded independently and protected from partisan attacks, just as the Fed and the FDIC are. So why, then, does Wall Street claim that only the CFPB’s funding structure is unconstitutional?

Make no mistake — the only reason that Wall Street, its Republican allies in Congress, and overreaching courts have singled out the CFPB is because the agency doesn’t do their bidding. The CFPB doesn’t help Wall Street executives when they fail. It doesn’t extend them credit in favorable terms or offer them deposit insurance like the other regulators do. The CFPB’s funding structure isn’t unconstitutional — it just doesn’t work in Wall Street’s favor.

If the Supreme Court rules against the CFPB, the $16 billion returned to consumers could be clawed back. What would happen then — will America’s banks really go back to the customers they’ve wronged with a collection tin?

Invalidating the CFPB and its work would also put the U.S. economy — and especially the housing market — at risk.

Invalidating the CFPB and its work would also put the U.S. economy — and especially the housing market — at risk. For more than a decade, the CFPB has set rules of the road for mortgages and credit cards and so much else, and given tools to help industry follow them. If these rules and the regulator that interprets them disappear, markets will come to a standstill. 

By attacking the CFPB’s funding structure and putting consumers’ money at risk, Wall Street is putting the other financial regulators in danger, too. 

The Fifth Circuit’s faulty ruling against the CFPB is astounding in its absurdity — the court ruled that the authorities that other financial agencies, like the Federal Reserve and the FDIC, have over the economy do not compare to the CFPB’s authorities. In other words, the court is claiming that the CFPB supposedly has more power in the economy than the Fed.

That’s ridiculous. Look at the extraordinary steps taken to contain the failures of Silicon Valley Bank and Signature Bank — the idea that the CFPB could take action even close to as sweeping is laughable.

But we know why the Fifth Circuit put that absurd assertion in there — they recognize the damage this case could do to these other vital agencies, and to our whole economy.

Imagine what might happen if another series of banks failed and the FDIC did not have the funds to stop the crisis from spreading.

The FDIC’s own Inspector General has stated that the Fifth Circuit ruling could be applied to their agency. If that happens, the FDIC and other regulators could be subject to congressional budget deliberations, which we all know are far too partisan and have resulted in shutdowns. Imagine what might happen if another series of banks failed and the FDIC did not have the funds to stop the crisis from spreading, or the Deposit Insurance Fund to protect depositors’ money. Imagine if politicians caused a shutdown, and we were without a Federal Reserve. 

U.S. financial regulators are independently funded so that they can respond quickly when crises happen. It’s telling, though, that plenty of people in Washington don’t seem to consider the CFPB’s issues in the same category. Washington and Wall Street expect the government to spring into action when businesses’ money is put at risk. But when workers are scammed out of their paychecks, that’s not an emergency — it’s business as usual. 

When Wall Street’s abusive practices put consumers in crisis, the CFPB must have the funding and strength it needs to carry out its mission — to protect consumers’ hard-earned money. 

U.S. Sen. Sherrod Brown (D-OH) is chairman of the U.S. Senate Committee on Banking, Housing, and Urban Affairs.

More: Supreme Court to hear case that will decide the future of consumer financial protection

The Washington Post

Bye, banks: Recent turmoil is spurring many to move their money

Abha Bhattarai, The Washington Post – March 24, 2023

Dan Ushman isn’t sure where he’ll end up stashing his company’s money. But he’s been thinking a lot about it these days.

The start-up founder recently moved savings out of Silicon Valley Bank, whose spectacular collapse this month set off tremors across the financial industry, and parked it in accounts at Bank of America and Chase while he contemplates what’s next – brokerage accounts, perhaps, or money market funds, Treasury-backed trusts or certificate of deposit accounts.

The goal, he says, is simple: to reduce risk while maximizing interest.

“Having SVB collapse out from under us gave us a lot of pause,” said Ushman, 38, founder of a software firm in Chicago. “We’re thinking hard about how to spread our cash around. We want higher yields and safety. But the thing about business savings is that they’re savings until you need them, so we don’t want to lock anything up long-term.”

Across the country, millions of Americans are making similar calculations, trying to figure out how to best allocate their money following the implosion of two U.S. banks and the emergency takeover of European banking giant Credit Suisse last weekend, which set off fears of a global financial crisis.

The crisis so far doesn’t seem to have come, and the government has taken great pains to reassure depositors that bank accounts are safe. But that hasn’t stopped people from shifting their money around. Americans are moving hundreds of billions of dollars out of banks – especially smaller, regional banks – into larger institutions, as well as money market funds, government bonds, high-yield online savings accounts, even cryptocurrencies and gold.

In the two weeks since SVB’s dramatic collapse, investments in money market funds, a type of mutual fund focused on low-risk securities, have ballooned by nearly $240 billion, according to the Investment Company Institute. Yields on 2-year Treasury bonds have fallen 24 percent as a result of booming demand. Money market funds are not insured by the government the way bank accounts less than $250,000 are. But even riskier investments are thriving, too: Bitcoin prices have risen 40 percent, and gold is up about 10 percent.

Overall, an estimated $550 billion in deposits have moved from smaller and regional banks to large banks and money market funds in the past two weeks, according to an analysis by JPMorgan.

“Turmoil in the markets always puts money in motion,” said Danielle Lucht, a financial adviser in Cape Coral, Fla., who is fielding twice as many calls from clients as she was a few weeks ago. “The big concern right now is: Is my money safe? How can I make it safer? People who have cash in simple savings accounts are using this as an opportunity to move their money.”

About 12 percent of Americans say they have taken money out from the bank “because of the collapse of Silicon Valley Bank,” and 18 percent say they are considering doing so, according to a Yahoo News/YouGov poll released Tuesday. (It is also worth noting, though, that most people – 55 percent – said they are confident the banking system is safe.)

The recent shift builds on a trend that began a year ago, when the Federal Reserve began raising interest rates after years of keeping them near zero. Suddenly regular bank accounts – that pay very little, if any, interest – became much less attractive than other investments offering higher returns.

That steady movement out of bank accounts took on a life of its own this month after fears of bank failures led customers at SVB and Signature Bank of New York to take out billions of dollars in cash in a matter of a few hours. The result was a bank run that triggered the collapse of both institutions.

The Federal Reserve and other regulators were quick to step in with emergency measures aimed at stemming similar runs at other banks. But panic persists: This week, shares of PacWest Bancorp, a regional California institution, tumbled 17 percent after it said it had lost 20 percent of its deposits this year. Economists say that lack of confidence in a company’s stock can be self-fulfilling if it prompts customers to remove their money, leaving the bank in even worse shape.

At First Republic Bank, not even a $30 billion rescue package from the nation’s biggest banks has been enough to keep people from taking out their money. In all, customers have withdrawn about $70 billion in recent weeks, or roughly 40 percent of the bank’s deposits, the Wall Street Journal reported this week.

“People are looking around and saying, ‘I really don’t want to be uninsured,'” said Itamar Drechsler, a finance professor at the Wharton School at the University of Pennsylvania. “They’re buying government bonds and going to bigger banks at the expense of regionals.”

The federal government insures deposits of up to $250,000 in any given bank account, though there are looming questions about whether it might raise that cap or extend protection to all deposits as it did at SVB and Signature Bank of New York this month. Treasury Secretary Janet L. Yellen struggled to manage the fallout from remarks Wednesday over the extent to which the federal government could insure deposits over the limit at other banks if they failed; markets fell after she spoke, and she later amended her written testimony to stress that the government has “tools we could use again” and would be “prepared to take additional action if warranted.”

Still, the recent panic has been enough to spook those with large sums piled into traditional bank accounts. Brenton Wickam, 53, a commercial real estate investor in Silicon Valley, hadn’t thought twice about keeping his personal savings in one bank account – until recently.

When SVB collapsed, Wickam started getting a barrage of text messages all saying the same thing: “First Republic’s next.” That was particularly troubling to Wickam, who had been banking there for years.

Last week, he showed up at a local branch to begin moving his savings into new accounts, in $250,000 chunks so they’d be insured by the government. The leftover money he took to Wells Fargo, though he plans to invest it in money markets or Treasurys.

“I felt like the dumbest guy in the room, keeping all of my cash in one bank account,” Wickam said. “I’ve been around awhile – 2000, 2008, I’ve seen what a financial crisis looks like – but I was just being lazy.”

The exodus of deposits, particularly from smaller banks, is particularly worrisome because it could have a chilling effect on how much those institutions are able to loan. Nearly 70 percent of commercial real estate loans, for example, come from small and midsize banks, Fed data shows.

“The consequence of this is manyfold,” said Torsten Slok, chief economist at Apollo Global Management. “The reality is, banks finance themselves through deposits.”

A drop in deposits, he said, would mean banks have less money on hand to make loans. If someone walked in looking for a $40,000 car loan, for example, and a bank didn’t have much in deposits, it would have to borrow that money from wholesale markets, where interest rates have risen rapidly in the past year. As a result, borrowers could face higher interest rates and stricter standards, Slok said.

“If banks across the country suddenly say, ‘We’re going to tighten lending standards for anyone who would like to buy a car or a house or get a corporate loan’ – if they stop lending money out, you could have a sudden stop in the economy,” he said. “That begins to raise the risk of a recession.”

Fed Chair Jerome H. Powell pushed back against that fear this week, saying the banking system is “sound and resilient.”

“We took powerful actions with Treasury and the FDIC, which demonstrate that all depositor savings are safe and that the banking system is safe,” Powell said in a news conference on Wednesday. “Deposit flows in the banking system have stabilized over the last week.”

Verbal assurances aside, the interventions of regulators have raised more questions than answers for many Americans. They’ve also prompted many people to stop and consider their investment habits, since interest rates are at their highest level in 16 years.

“The silver lining in this debacle is that it’s caused people to pause and ask, ‘Is my money OK at the bank?,'” said Rick Salmeron, a financial adviser in Dallas, who has seen a rush toward high-yield online savings accounts. “They’re realizing, ‘Wow, I have all of this cash making a paltry 0.01 percent interest in the bank when I could be getting 3.5 percent.'”

Steve Miller, 51, a stay-at-home dad in Orange County, Calif., recently moved his family’s savings from a large bank to a Vanguard federal money market account. It wasn’t so much panic over recent bank failures that prompted the move, he said, but rather the realization that he could be earning much higher interest on his money. Now he’s earning 4.65 percent interest.

“We have always kept our cash reserves parked in the bank, but this was a good trigger,” he said. “It made me realize we could be earning much more by being invested in Treasury bills.”

The Washington Post’s Jeff Stein contributed to this report.