Banking Regulators Prepare for Tough Questions from Lawmakers

Regulators in the hot seat

Starting on Tuesday, representatives from three of the country’s top banking regulators — the F.D.I.C., the Fed and the Treasury Department — will testify before Congress about how problems at Silicon Valley Bank were allowed to metastasize and threaten the U.S. banking system.

Expect sharp questions at the hearings, especially as regulators point the finger at SVB’s management, while lawmakers ask whether banking authorities were asleep at the switch.

Was it a matter of executive failures? Michael Barr, the Fed’s top banking overseer, plans to cite management’s failure to, well, “effectively manage its interest rate and liquidity risk,” according to prepared testimony released ahead of today’s hearing before the Senate Banking Committee. (In other words, the lender didn’t hedge its bond portfolio against rising interest rates, and didn’t hedge against having a start-up-heavy client base that might run at the first sign of trouble.)

Or was it because regulators weren’t paying attention? Left unsaid in Mr. Barr’s testimony was that Fed supervisors and staff members rated SVB satisfactory for liquidity last year — even after problems, including with liquidity risk management, had already been raised. Meanwhile, Martin Gruenberg, the chair of the F.D.I.C., will testify that regulators are awakening to the potentially cataclysmic consequences that the failures of midsize lenders like SVB and Signature Bank can cause.

While Mr. Barr is spearheading the Fed’s review into SVB’s collapse, some politicians want an independent review.

There are still questions about what comes next, particularly as lenders like First Republic are still teetering and in search of aid. Nellie Liang, Treasury’s under secretary for domestic finance, will defend the resiliency of U.S. banks, but senators are likely to press on what more can be done.

Some lawmakers want banking regulators to bolster deposit insurance above the current $250,000 cap, especially since so many banks now have customer accounts that far exceed that limit. Mr. Gruenberg said that the F.D.I.C. would consider changing those limits.

Some Democratic senators, including Elizabeth Warren of Massachusetts, are expected to press again on whether Trump-era rollbacks of banking regulation need to be undone. Mr. Barr is already considering whether stricter regulatory requirements, including tighter capital and liquidity standards, could prevent trouble at midsize lenders. “All of these changes are in the scope of our review,” he plans to say.

Some lawmakers may take the opposite political approach: Could future bank crises be resolved more quickly through letting nonbank investment firms bid on assets or by setting aside qualms about consolidation and letting bigger lenders acquire failing ones?

In other banking crisis news: SVB’s collapse has chilled start-up funding. Did the F.D.I.C. have to sweeten the terms of the SVB rescue to revive a “stale” deal? And the governor of the Bank of England said that Britain’s banks would be resilient enough to withstand further rises in interest rates.

HERE’S WHAT’S HAPPENING

Benjamin Netanyahu delays a contentious judicial overhaul. The Israeli prime minister backed down, at least temporarily, from an effort to give the government more control over the judiciary, after protests that shut swaths of the country (and pressure from the Biden administration). It’s unclear what Mr. Netanyahu, whose allies still want the overhaul, will do next.

Disney prepares to lay off 7,000 workers. The long-awaited move, which will take place in three stages over the next few months, is meant to cut $5.5 billion in costs. Among the divisions hit: the 50-person team focusing on the metaverse, The Wall Street Journal reports.

Alibaba will split itself six ways. The Chinese internet giant said it will divide itself into core businesses including artificial intelligence and e-commerce — and each can pursue “independent fund-raising and I.P.O.s when they are ready,” the C.E.O., Daniel Zhang, said. The announcement came after Jack Ma, Alibaba’s co-founder, reappeared in China, signaling that regulators there may be easing a crackdown on tech.

BioNTech falls from pandemic heights. The drugmaker behind Pfizer’s blockbuster Covid vaccine forecast that revenue from the shots would slide to about €5 billion ($5.4 billion) this year, from €17 billion in 2022. It’s one of many businesses that boomed in the pandemic — think Zoom and Peloton — now tumbling back to earth. (One exception: Crocs shoes.)

Russia tells Western companies they must pay to leave. A Moscow commission on foreign investments ruled that businesses trying to exit must make a donation directly to the Russian state budget. For hundreds of international companies still considering whether to cut ties with Russia over the invasion of Ukraine, it’s an additional complication: Leaving, too, could fund Moscow’s war effort.

Turning the screws on Binance

U.S. regulators are stepping up their crackdown of the unregulated corners of the cryptocurrency market after a wave of high-profile bankruptcies, led by the collapse of the crypto exchange FTX.

On Thursday, the Commodity Futures Trading Commission filed a lawsuit in a Chicago federal court against Binance and two top executives: Changpeng Zhao, the founder, and a former chief compliance officer, Samuel Lim.

The complaint accuses Binance of running an illegal shadow operation that let U.S.-based customers trade on a platform that does not have permission to operate in the country. It says the company guided users to virtual private networks, or VPNs, to cloak their identity and where they logged in, and implemented a “VIP Handling” program for U.S.-based corporate customers. Other charges: Binance is accused of turning a blind eye to money laundering, and to the “potentially illegal activities” of some users, like Hamas, a Palestinian militant group under U.S. sanctions.

“The defendants’ own emails and chats reflect that Binance’s compliance efforts have been a sham and Binance deliberately chose — over and over — to place profits over following the law,” said Gretchen Lowe, the agency’s chief counsel. (Twitter was buzzing over the fact investigators gained access to Mr. Zhao’s cellphone chat logs and his Signal account.)

Mr. Zhao called the complaint “unexpected and disappointing,” adding that Binance had complied with U.S. law enforcement requests to freeze or seize millions in suspicious funds on its exchange. His initial response to the complaint was to tweet the number four, shorthand to his 3.9 million followers to ignore the news.

The agency is seeking fines, disgorgement of trading profits and outright bans for Mr. Zhao and his companies. Binance coin, the firm’s in-house token, has fallen 6 percent since the suit was announced. Still, the token has soared more than 25 percent this year.

The latest complaint adds to a heap of legal troubles. Binance is reportedly being investigated by the Justice Department for potentially violating money-laundering and sanctions laws, and by the S.E.C. for possible trading violations.

Elsewhere in crypto:

Michael Saylor, the crypto-bull founder of MicroStrategy, tweeted on Thursday that the company had repaid a $205 million loan to Silvergate, the collapsed crypto-friendly bank, and that it had purchased a further 6,455 Bitcoin at an average price of $23,238 — implying a 16 percent profit over this morning’s Bitcoin price.

FTX gave privileged access to new tokens to executives of Genesis, a business partner that collapsed in January, The Financial Times reports.

“We did not buy Credit Suisse only to close it.”

— Ralph Hamers, C.E.O. of UBS, writing in an internal memo that the Swiss banking giant views the acquisition of its ailing crosstown rival as a growth opportunity.

China’s new debt diplomacy

After years of providing high-interest loans as part of its international infrastructure project, the Belt and Road Initiative, China has a new role: bailout lender. Beijing has become one of the world’s biggest bilateral lenders of last resort to countries that have geopolitical significance or natural resources that China needs.

China provided $40.5 billion of emergency funding to distressed countries in 2021, according to AidData, a research institute at the College of William & Mary. By comparison, the I.M.F. lent $68.6 billion over the same period.

The emergency loans reflect China’s growing economic might and international influence, writes The Times’s Keith Bradsher:

In many ways, China has replaced the United States in bailing out indebted low- and middle-income countries. The U.S. Treasury’s last sizable rescue loan to a middle-income country was a $1.5 billion credit to Uruguay in 2002. The Federal Reserve still provides very short-term financing to other industrialized countries when they need extra dollars for a few days or weeks.

China’s emerging position as a lender of last resort reflects its evolving status as an economic superpower at a time of global weakness. Dozens of countries are struggling to pay their debts, as a slowing economy and rising interest rates push many nations to the brink.

THE SPEED READ

Deals

The hot new sector for I.P.O. investors: Middle Eastern companies. (FT)

The investment firm CVC and the hedge fund Elliott Management have reportedly offered to buy parts of Cineworld, the movie theater operator that filed for bankruptcy in September. (Sky News)

The SPAC market may be moribund, but Ares Management is reportedly considering raising $400 million for a new blank-check fund. (Bloomberg)

Policy

French financial prosecutors are reportedly searching five banks as part of a probe into tax fraud and money laundering, including Société Générale, HSBC, BNP Paribas and Natixis. (Bloomberg)

California lawmakers approved a first-in-the-nation price gouging law targeting oil companies. (AP)

The E.U. reportedly plans to give member countries an option to ban Russian liquid natural gas imports, without having to impose new sanctions. (Bloomberg)

President Biden signed an executive order restricting the U.S. government’s use of commercial spyware, which other countries have deployed against dissidents, journalists and activists. (NYT)

Best of the rest

Lyft’s co-founders are stepping back from daily management as the ride-hailing company loses ground to its archrival, Uber. (WSJ)

CNN is reportedly close to signing up the CBS morning anchor Gayle King and the ex-basketball star Charles Barkley for a prime-time show, as the news channel’s ratings continue to drop. (Variety)

Uber Eats is culling the number of online-only restaurants on its platform. (WSJ)

“Why do Americans own AR-15s?” (WaPo)

Those pictures of Pope Francis in a swag white parka? They’re A.I.-generated — and a sign of potential misinformation campaigns to come. (The Verge)

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