Policy Newsletter

Banking turmoil persists without systemic response

May 4, 2023
The Carta Policy Team

Topline

  • Release of SVB, Signature Bank reports coincides with another bank collapse

  • SEC expands Form PF reporting requirements 

  • Debt limit approaches June deadline with both sides digging in

  • White House zeros in on artificial intelligence

Shoring up the banking system…now and in the long-term

SVB. Signature Bank. First Republic. Despite these massive bank failures, “the banking system is sound and it’s resilient—it’s got strong capital [and] liquidity,” Federal Reserve Chair Jerome Powell noted in the press conference following this week’s FOMC meeting. His comments come on the heels of reports issued by the Federal Reserve and Federal Deposit Insurance Corporation (FDIC) on the banking turmoil, and while another bank—PacWest—is teetering. The broader regional bank ecosystem is under substantial pressure. 

In their reports, the Fed and FDIC outlined the timeline of events, failures in bank leadership, and supervisory shortcomings. For both SVB and Signature Bank, the regulators blamed management while noting that bank supervisors did not appreciate the extent of the risks and vulnerabilities and did not take sufficient action. The FDIC acknowledges its supervisory team was understaffed and did not at times complete targeted reviews. The Fed claims that recent regulatory tailoring policy impeded its supervision. Both agencies made thoughtful recommendations for greater risk identification and supervisory behaviors. If adopted, they may make the banking system more resilient. But they are medium-term solutions to bank supervision; they will not necessarily stabilize banks in the near term.

Current turmoil and immediate question

As we have seen, pressure is moving from one institution to the next—from SVB to First Republic to PacWest. A one-off approach to each struggling institution may be insufficient. The ongoing threat is depositor concerns that lead to widespread outflows out of regional banks and into the nation’s largest institutions. Expect more conversations about a temporary expansion of deposit insurance to stave off further bank runs. 

To that end, the FDIC recommended three possible paths forward: 

  • Limited coverage: Maintain the current or slightly elevated levels of deposit insurance.

  • Unlimited coverage: Fully insure all deposits.

  • Targeted coverage: Expand on current levels by extending additional deposit insurance to certain other accounts, such as business payment accounts.

The FDIC is backing the targeted coverage approach, which will require congressional action to implement.

Why it matters: The banking turmoil has yet to be contained. Moving forward, policymakers will hold hearings on regulatory reports, though they may need to take short-term actions such as extending deposit insurance to stabilize the system before they can embark on the longer-term reform proposed to improve supervision and bank management. Don’t expect Congress to pass regulatory reform, but do expect regulators to ratchet up standards and take a more aggressive supervisory posture on banks. Meanwhile, key pillars of the venture financing ecosystem (SVB, First Republic) have fallen, and we expect credit conditions to tighten further even as equity financing declines. 

SEC expands Form PF reporting requirements for certain private fund advisers

This week, the SEC voted along party lines to expand the detail and timeliness of information that SEC-registered private fund advisers report to the SEC on Form PF, a confidential reporting form designed to assist regulators in assessing and monitoring systemic risk. At a high level, the new Form PF amendments would require:

  • Quarterly reporting for all Form PF filers ($150M AUM) following certain events, including the removal of a general partner, certain fund termination events, and adviser-led secondary transactions. The final rules are more feasible for the industry, as the earlier proposal would have required one-day reporting.

  • Current reporting for large hedge funds ($1.5B AUM) for events indicating significant stress, including extraordinary losses. Reports must be filed as soon as practicable but not later than 72 hours after the event occurs. 

  • Enhanced reporting for large private equity fund advisers ($2B in AUM), including additional reporting information around fund strategies, leverage, and GP/LP clawback on an annual basis. The proposal would have required all Form PF filers to report some of this info within a day, and would have reduced the large PE threshold from $2B to $1.5B. 

Funds will have six months to begin complying with the new current and quarterly reporting requirements and one year to comply with the enhanced reporting requirements for large private equity advisers.

Why it matters: The SEC has increased its scrutiny around the private fund advisers (and private markets more generally) in an effort to increase transparency and address the growth of the industry, and we expect SEC private market regulatory, enforcement, and oversight activity to ramp up in the coming weeks. Any day now, the Commission is expected to approve its private fund adviser proposal, which would significantly change the way the private fund industry–including venture capital–operates and is regulated. On a positive note, the Form PF changes were pared back from the original proposal in response to industry comments, though there is no guarantee this trend will continue in future rulemakings.

Debt limit dance nears its conclusion (one way or the other…)

The United States could breach the debt ceiling as early as June 1, according to the Treasury Department’s new estimate of the “X date.” House Republicans passed a bill last week to raise the debt ceiling into 2024, but it included policy riders and spending cuts that Democrats will not support. President Biden invited House and Senate leadership to attend a May 9 meeting on the debt limit, hoping to move the parties towards a breakthrough in negotiations. 

Why it matters: The debt ceiling has loomed over Washington for months, but Secretary Yellen’s declaration signaled the default could happen earlier than expected—it also crystalized a deadline. Democrats continue to push for a clean increase in the debt limit, and Republicans seek spending cuts in return. Treasury asserts a default could plunge the country into a financial crisis of historic proportion. In addition to affecting government-funded programs, a default could result in a downgrade of U.S. credit rating, which would spike borrowing costs. Conditions will likely need to get worse before a deal comes together.

White House zeros in on AI

On Thursday, the CEOs of Alphabet, Anthropic, Microsoft, and OpenAI met with Vice President Kamala Harris to discuss the administration’s recent actions regarding AI, including the upcoming release of draft policy guidance on the use of AI systems by the U.S. government. The administration’s statement has a strong focus on “responsible innovation” and the mitigation of potential risk – particularly in regards to privacy concerns and potential bias embedded in AI systems. Meanwhile, Congress also continues to grapple with how to handle AI. Senate Majority Leader Chuck Schumer recently circulated a broad AI framework to allow the technology to develop responsibly. While there is considerable overlap among policymakers competing AI proposals, there appears to be little coordination. Do not expect legislation to be enacted in the near-term.

Why it matters: AI is quickly becoming a priority for both the Biden Administration and Congress. While the administration publicly acknowledges the need to allow for responsible innovation, many of their recent actions suggest that they are primarily focused on mitigating potential risks associated with AI technology, such as potential bias embedded in AI systems as well as privacy concerns. In the next few months, expect more opportunities for public comment related to proposed AI regulation—and more chaos on the Hill as members push their solutions to regulate the growth of AI.

Carta releases State of Private Markets report

This week, Carta published its State of Private Markets for Q1 2023. This quarterly report outlines key trends in the private markets from Q1, and discusses the positive signs that could be indicating a venture spring. There’s also an addendum to the report that provides industry-specific details on Q1 fundraising, found here

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