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    New World Bank President Ajay Banga Leads at a Pivotal Moment

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    The incoming president will be under pressure to juggle the global institution’s ambitions to combat climate change and fight poverty.Ajay Banga officially became the 14th president of the World Bank on Friday and urged staff to join him in developing a “new playbook” for a global institution whose relevance has come into question in recent years.The ascension of Mr. Banga to be the next leader of the bank comes at a pivotal moment in its 77-year history. The global pandemic reversed decades of progress in poverty reduction, Russia’s war in Ukraine continues to be a threat to economic stability and the World Bank is under new pressure to become a more ambitious player in the fight against climate change.“Making good on our ambition will require us to evolve to maximize resources and write a new playbook, to think creatively, take informed risks and forge new partnerships with civil society and multilateral institutions,” Mr. Banga wrote in a note to staff that was viewed by The New York Times.Mr. Banga was nominated by President Biden in February after the resignation of David Malpass, the outgoing World Bank president who had been selected by former President Donald J. Trump. The World Bank’s executive board approved Mr. Banga in May following an extensive listening tour that included visits to eight countries and dozens of meetings with government officials around the world.In his message to staff, Mr. Banga defined the bank’s mission as aspiring to “create a world free from poverty on a livable planet.”It is the second part of that mission by which Mr. Banga will be likely be judged.Mr. Malpass left the job a year early after failing to sufficiently demonstrate his commitment to combating global warming amid a renewed emphasis from the Biden administration broadening the bank’s focus on the environment.However, Mr. Banga, a former chief executive of Mastercard, does not bring extensive climate credentials to the job and will be under pressure to demonstrate progress on the bank’s environmental agenda. He has described the tasks of dealing with climate change and poverty as intertwined.“The World Bank’s challenge is clear: It must pursue both climate adaptation and mitigation; it must reach out to lower-income countries without turning its back on middle-income countries; it must think globally but recognize national and regional needs; it must embrace risk but do so prudently,” Mr. Banga wrote in a statement to World Bank’s executive board that accompanied his memo to staff.Activists protest during meetings of the International Monetary Fund and World Bank in April.Yuri Gripas for The New York TimesClimate activists plan to appear outside the World Bank on Friday and attempt to hand postcards to staff with demands that they want Mr. Banga to heed during his first 100 days on the job. They continue to be frustrated that the World Bank finances coal, oil and gas projects despite its pledges to prioritize clean energy projects.Mr. Banga is expected to use his expertise to amplify the resources of the World Bank and build new partnerships between the private and public sectors. The former finance executive added in his memo that accomplishing the World Bank’s many goals will require an annual global investment of trillions of dollars.Mr. Banga will also face a difficult diplomatic task as he seeks to satisfy the climate ambitions of the United States and Europe while facing skepticism from some developing countries. He will also confront the delicate task of urging China, a major World Bank shareholder and creditor, to allow poor countries that have borrowed huge sums from Beijing to restructure their debts.The World Bank president is traditionally chosen by the United States; the managing director of the International Monetary Fund is selected by the European Union.Mr. Banga met on Thursday with Treasury Secretary Janet L. Yellen. They discussed ways to refine how the bank operates and make it more agile and responsive, according to a summary of their conversation released by the Treasury Department. More

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    Late-Night Negotiating Frenzy Left First Republic in JPMorgan’s Control

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    The resolution of First Republic Bank came after a frantic night of deal making by government officials and executives at the country’s biggest bank.Lawmakers and regulators have spent years erecting laws and rules meant to limit the power and size of the largest U.S. banks. But those efforts were cast aside in a frantic late-night effort by government officials to contain a banking crisis by seizing and selling First Republic Bank to the country’s biggest bank, JPMorgan Chase.At about 1 a.m. Monday, hours after the Federal Deposit Insurance Corporation had been expected to announce a buyer for the troubled regional lender, government officials informed JPMorgan executives that they had won the right to take over First Republic and the accounts of its well-heeled customers, most of them in wealthy coastal cities and suburbs.The F.D.I.C.’s decision appears, for now, to have quelled nearly two months of simmering turmoil in the banking sector that followed the sudden collapse of Silicon Valley Bank and Signature Bank in early March. “This part of the crisis is over,” Jamie Dimon, JPMorgan’s chief executive, told analysts on Monday in a conference call to discuss the acquisition.For Mr. Dimon, it was a reprise of his role in the 2008 financial crisis when JPMorgan acquired Bear Stearns and Washington Mutual at the behest of federal regulators.But the resolution of First Republic has also brought to the fore long-running debates about whether some banks have become too big too fail partly because regulators have allowed or even encouraged them to acquire smaller financial institutions, especially during crises.“Regulators view them as adults and business partners,” said Tyler Gellasch, president of Healthy Markets Association, a Washington-based group that advocates greater transparency in the financial system, referring to big banks like JPMorgan. “They are too big to fail and they are afforded the privilege of being so.”He added that JPMorgan was likely to make a lot of money from the acquisition. JPMorgan said on Monday that it expected the deal to raise its profits this year by $500 million.JPMorgan will pay the F.D.I.C. $10.6 billion to acquire First Republic. The government agency expects to cover a loss of about $13 billion on First Republic’s assets.`Normally a bank cannot acquire another bank if doing so would allow it to control more than 10 percent of the nation’s bank deposits — a threshold JPMorgan had already reached before buying First Republic. But the law includes an exception for the acquisition of a failing bank.The F.D.I.C. sounded out banks to see if they would be willing to take First Republic’s uninsured deposits and if their primary regulator would allow them to do so, according to two people familiar with the process. On Friday afternoon, the regulator invited the banks into a virtual data room to look at First Republic’s financials, the two people said. The government agency, which was working with the investment bank Guggenheim Securities, had plenty of time to prepare for the auction. First Republic had been struggling since the failure of Silicon Valley Bank, despite receiving a $30 billion lifeline in March from 11 of the country’s largest banks, an effort led by Mr. Dimon of JPMorgan.By the afternoon of April 24, it had became increasingly clear that First Republic couldn’t stand on its own. That day, the bank revealed in its quarterly earnings report that it had lost $102 billion in customer deposits in the last weeks of March, or more than half what it had at the end of December.Ahead of the earnings release, First Republic’s lawyers and other advisers told the bank’s senior executives not to answer any questions on the company’s conference call, according to a person briefed on the matter, because of the bank’s dire situation.The revelations in the report and the executives’ silence spooked investors, who dumped its already beaten-down stock.When the F.D.I.C. began the process to sell First Republic, several bidders including PNC Financial Services, Fifth Third Bancorp, Citizens Financial Group and JPMorgan expressed an interest. Analysts and executives at those banks began going through First Republic’s data to figure out how much they would be willing to bid and submitted bids by early afternoon Sunday.Regulators and Guggenheim then returned to the four bidders, asking them for their best and final offers by 7 p.m. E.T. Each bank, including JPMorgan Chase, improved its offer, two of the people said.Regulators had indicated that they planned to announce a winner by 8 p.m., before markets in Asia opened. PNC executives had spent much of the weekend at the bank’s Pittsburgh headquarters putting together its bid. Executives at Citizens, which is based in Providence, R.I., gathered in offices in Connecticut and Massachusetts. But 8 p.m. rolled by with no word from the F.D.I.C. Several hours of silence followed.For the three smaller banks, the deal would have been transformative, giving them a much bigger presence in wealthy places like the San Francisco Bay Area and New York City. PNC, which is the sixth-largest U.S. bank, would have bolstered its position to challenge the nation’s four large commercial lenders — JPMorgan, Bank of America, Citigroup and Wells Fargo.Ultimately, JPMorgan not only offered more money than others and agreed to buy the vast majority of the bank, two people familiar with the process said. Regulators also were more inclined to accept the bank’s offer because JPMorgan was likely to have an easier time integrating First Republic’s branches into its business and managing the smaller bank’s loans and mortgages either by holding onto them or selling them, the two people said.As the executives at the smaller banks waited for their phones to ring, the F.D.I.C. and its advisers continued to negotiate with Mr. Dimon and his team, who were seeking assurances that the government would safeguard JPMorgan against losses, according to one of the people.At around 3 a.m., the F.D.I.C. announced that JPMorgan would acquire First Republic.An F.D.I.C. spokesman declined to comment on other bidders. In its statement, the agency said, “The resolution of First Republic Bank involved a highly competitive bidding process and resulted in a transaction consistent with the least-cost requirements of the Federal Deposit Insurance Act.” The announcement was widely praised in the financial industry. Robin Vince, the president and chief executive of Bank of New York Mellon, said in an interview that it felt “like a cloud has been lifted.”Some financial analysts cautioned that the celebrations might be overdone.Many banks still have hundreds of billions of dollars in unrealized losses on Treasury bonds and mortgage-backed securities purchased when interest rates were very low. Some of those bond investments are now worth much less because the Federal Reserve has sharply raised rates to bring down inflation.Christopher Whalen of Whalen Global Advisors said the Fed fueled some of the problems at banks like First Republic with an easy money policy that led them to load up on bonds that are now performing poorly. “This problem will not go away until the Fed drops interest rates,” he said. “Otherwise, we’ll see more banks fail.”But Mr. Whalen’s view is a minority opinion. The growing consensus is that the failures of Silicon Valley, Signature and now First Republic will not lead to a repeat of the 2008 financial crisis that brought down Bear Stearns, Lehman Brothers and Washington Mutual.The assets of the three banks that failed this year are greater than of the 25 banks that failed in 2008 after adjusting for inflation. But 465 banks failed in total from 2008 to 2012.One unresolved issue is how to deal with banks that still have a high percentage of uninsured deposits — money from customers well in excess of the $250,000 federally insured cap on deposits. The F.D.I.C. on Monday recommended that Congress consider expanding its ability to protect deposits.Many investors and depositors are already assuming that the government will step in to protect all deposits at any failing institution by invoking a systemic risk exception — something they did with Silicon Valley Bank and Signature Bank. But that’s easy to do when it is just a few banks that run into trouble and more difficult if many banks have problems.Another looming concern is that midsize banks will pull back on lending to preserve capital if they are subject to the kind of bank runs that took place at Silicon Valley Bank and First Republic. Depositors might also move their savings to money market funds, which tend to offer higher returns than savings or checking accounts.Midsize banks also need to brace for more exacting oversight from the Fed and the F.D.I.C., which criticized themselves in reports released last week about the bank failures in March.Regional and community banks are the main source of financing for the commercial real estate industry, which encompasses office buildings, apartment complexes and shopping centers. An unwillingness by banks to lend to developers could stymie plans for new construction.Any pullback in lending could lead to a slowdown in economic growth or a recession.Some experts said that despite those challenges and concerns about big banks getting bigger, regulators have done an admirable job in restoring stability to the financial system.“It was an extremely difficult situation, and given how difficult it was, I think it was well done,” said Sheila Bair, who was chair of the F.D.I.C. during the 2008 financial crisis. “It means that big banks becoming bigger when smaller banks begin to fail is inevitable,” she added.Reporting was contributed by More

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    First Republic Lurches as It Struggles to Find a Savior

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    The bank is sitting on big losses and paying more to borrow money than it is making on its loans to homeowners and businesses.First Republic Bank is sliding dangerously into a financial maelstrom, one from which an exit appears increasingly difficult.Hardly a household name until a few weeks ago, First Republic is now a top concern for investors and bankers on Wall Street and officials in Washington. The likeliest outcome for the bank, people close to the situation said, would need to involve the federal government, alone or in some combination with a private investor.While the bank, with 88 branches focused mostly on the coasts, is still open for business, no one connected to it, including its executives and some board members, would say how much longer it could exist in its current form.First Republic, based in San Francisco, has been widely seen as the most in-danger bank since Silicon Valley Bank and Signature Bank collapsed last month. Like Silicon Valley Bank, it catered to the well-off — a group of customers able to pull their money en masse — and amassed a hoard of loans and assets whose value has suffered in an era of rising interest rates.Yet while SVB and Signature survived just days under pressure, First Republic has neither fallen nor thrived. It has withstood a deposit flight and a cratering stock price. Every attempt by the bank’s executives and advisers to project confidence appears to have had the opposite effect.The bank’s founder and executive chairman, Jim Herbert, until recently one of the more admired figures in the industry, has disappeared from public view. On March 13, Jim Cramer, the CNBC host, said on the air that Mr. Herbert had told him that the bank was doing “business as usual,” and that there were “not any sizable number of people wanting their money.”That was belied by the bank’s earnings report this week, which stated that “First Republic began experiencing unprecedented deposit outflows” on March 10.Neither Mr. Herbert nor the bank’s representatives would comment Wednesday, as First Republic’s stock continued a harrowing slide, dropping about 30 percent to close the day at just $5.69 — down from about $150 a year earlier. On Tuesday, the stock plummeted 49 percent. The company is now worth a little more than $1 billion, or about one-twentieth its valuation before the banking turmoil began in March.In what has become a disquieting pattern, the New York Stock Exchange halted trading in the shares 16 times on Wednesday because volatility thresholds were triggered.

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    First Republic Bank’s share price
    Source: FactSetBy The New York TimesStock prices are always an imperfect measure of a lender’s health, and there are strict rules about what types of entities can acquire a bank. Still, First Republic’s stock slide means that its branches and $103 billion in deposits could be bought for, theoretically, an amount less than the market capitalization of Portillo’s, the Chicago-area hot dog purveyor. Of course, any company that buys First Republic would be taking on multibillion-dollar losses on its loan portfolio and assets.The bank is more likely to fall into the hands of the government. That outcome would likely wipe out shareholders and put the bank’s fate in the hands of the Federal Deposit Insurance Corporation.The F.D.I.C. by its own rules guarantees that deposit accounts only up to $250,000 will be made whole, though in practice — and in the case of SVB and Signature — it can make accounts of all sizes whole if several top government officials invoke a special legal provision. Of First Republic’s remaining deposits, roughly half, or nearly $50 billion, were over the insured threshold as of March 31, including the $30 billion deposited by big banks in March.In conversations with industry and government officials, First Republic’s advisers have proposed various restructuring solutions that would involve the government, in one form or another, according to people familiar with the matter. The government could seek to minimize a buyer’s financial risk, the people said, asking not to be identified.Thus far, the Biden administration and Federal Reserve appear to have demurred. Policy experts have said officials would find it more difficult to intervene to save First Republic because of restrictions Congress enacted after the 2008 financial crisis.As a result, six weeks of efforts by First Republic and its advisers to sell all or part of its business have not resulted in a viable plan to save the bank — at least thus far.The state of affairs became plain after the close of trading on Monday, when First Republic announced first-quarter results that showed that it had lost $102 billion in customer deposits since early March. Those withdrawals were slightly ameliorated by the coordinated emergency move of 11 large U.S. banks to temporarily deposit $30 billion into First Republic.To plug the hole, First Republic borrowed $92 billion, mostly from the Fed and government-backed lending groups, essentially replacing its deposits with loans. While the move helped keep the bank going, it essentially undermined its business model, replacing relatively cheap deposits with more expensive loans.The bank is paying more in interest to the government on that new debt than it is earning on its long-term investments, which include mortgage loans to its well-heeled customers on the coasts, funding for real estate projects and the like.One of the biggest parts of the bank’s business was offering large home loans with attractive interest rates to affluent people. And unlike other banks that make a lot of mortgages, First Republic kept many of those loans rather than packaging them into mortgage-backed securities and selling them to investors. At the end of December, the bank had nearly $103 billion in home loans on its books, up from $80 billion a year earlier.But most of those loans were made when the mortgage interest rates were much lower than they are today. That means those loans are worth a lot less, and anybody looking to buy First Republic would be taking on those losses.It is not clear what First Republic can realistically do to make itself or its assets more attractive to a buyer.Among the only tangible changes that the bank has committed to is cutting as much as 25 percent of its staff and slashing executive compensation by an unspecified amount. On its earnings call, First Republic’s executives declined to take questions and spoke for just 12 minutes. More

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    Pressure Mounts on China to Offer Debt Relief to Poor Countries Facing Default

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    There was optimism at the spring meetings of the I.M.F. and World Bank that China will make concessions over restructuring its loans.WASHINGTON — China, under growing pressure from top international policymakers, appeared to indicate this week that it is ready to make concessions that would unlock a global effort to restructure hundreds of billions of dollars of debt owed by poor countries.China has lent more than $500 billion to developing countries through its lending program, making it one of the world’s largest creditors. Many of those countries, including several in Africa, have struggled economically in the wake of the pandemic and face the possibility of defaulting on their debt payments. Their problems have been compounded by rising interest rates and disruptions to supplies of food and energy as a result of Russia’s war in Ukraine.The United States, along with other Western nations, has been pressing China to allow some of those countries to restructure their debt and reduce the amount that they owe. But for more than two years, China has insisted that other creditors and multilateral lenders absorb financial losses as part of any restructuring, bogging down a critical loan relief process and threatening to push millions of people in developing countries deeper into poverty.A breakthrough would offer an economic lifeline to vulnerable nations at a time of sluggish growth and uncertain financial stability, and it would signal a renewed interest from China in economic diplomacy.Economists and development experts are watching carefully to determine if China is serious about easing the loan forgiveness logjam and if its talk will be followed by action. By some calculations, the world’s poor countries owe around $200 billion to wealthy nations, multilateral development banks and private creditors. Leaders of the world’s advanced economies have been grappling in recent months with how to avert financial crises in teetering markets such as Zambia, Sri Lanka and Ghana.Africa’s private and public external debt has increased more than fivefold over the last two decades to about $700 billion and Chinese lenders account for 12 percent of that total, according to Chatham House, the London policy institute. Researchers for the Debt Relief for Green and Inclusive Recovery Project estimated in a recent report that 61 emerging market and developing economies were facing debt distress, and that more than $800 billion in debt must be restructured.Leaders of the world’s advanced economies have been grappling in recent months with how to avert financial crises in teetering markets such as Sri Lanka.Dinuka Liyanawatte/Reuters“China is facing increasing pressure from every quarter, including from other emerging market economies, to play a more constructive role in the negotiations over debt restructuring,” said Eswar Prasad, a former head of the International Monetary Fund’s China division, who said China’s intransigence had left it “increasingly isolated.”There were indications this week that China was prepared to end that isolation as top economic officials from around the world convened at the spring meetings of the I.M.F. and World Bank. Participants expressed optimism that representatives from Beijing appeared to be ready to back off its insistence that multilateral lenders such as the World Bank, which provides low-interest loans and grants to poor countries, accept losses in the debt restructuring.“My sense from the current context is we’re moving on to new steps,” David Malpass, the departing World Bank president, said at a news conference on Thursday, pointing to “progress on equal burden sharing.”Kristalina Georgieva, the I.M.F.’s managing director, said she was “very encouraged” that a “common understanding” had been reached that could accelerate relief for countries such as Zambia, Ghana, Ethiopia and Sri Lanka.“I always say the proof of the pudding is in the eating,” Ms. Georgieva said.To restructure a country’s debt, creditors generally must agree to a combination of lowering the interest rate on the loan, extending the duration of the loan or writing off some of what is owed. China, which has faced an array of domestic economic challenges over the last three years, has been reluctant to take losses on debt and has pushed for other lenders, such as the World Bank, to incur losses.The urgency for a resolution was palpable among countries that are most in need of relief. Zambia defaulted in 2020 and has been trying to restructure $8.4 billion that it owes through a program established by the Group of 20 nations. It owes about $6 billion to Chinese lenders, and its total debt to foreign lenders is approaching $20 billion.On Friday, Ghana’s finance minister, Ken Ofori-Atta, lamented that 33 African nations were saddled with interest payments that approached or exceeded what their governments spent on health and education.Yuri Gripas for The New York Times“Zambia urgently needs debt relief,” Situmbeko Musokotwane, Zambia’s finance minister, told The New York Times. “Delay on debt restructuring puts our currency under pressure, excludes Zambia from capital markets and makes it difficult to attract much-needed foreign direct investment.”Ghana appealed to the Group of 20 nations this year for debt relief through a fledgling program known as the Common Framework after securing preliminary approval for a $3 billion loan from the I.M.F. That money is contingent on Ghana’s receiving assurances that it can restructure the approximately $30 billion that it owes to foreign lenders. Officials from Ghana have been meeting with their Chinese counterparts about restructuring the $2 billion that it owes China.On Friday, Ghana’s finance minister, Ken Ofori-Atta, lamented that 33 African nations were saddled with interest payments that approached or exceeded what their governments spent on health and education and expressed disappointment that advanced economies had been slow to act.“Honestly, it is disheartening to watch Africa struggle in this way, especially considering the potential loss of productivity over the next decade should African economies buckle under the weight of suffocating debts,” Mr. Ofori-Atta said at an Atlantic Council event on Friday.But it remains uncertain how far China is willing to go.Brad Setser, a senior fellow at the Council on Foreign Relations, said that it was not clear what financial terms Beijing would accept when restructuring debt but that it appeared to be taking a “positive step” that would remove “a financially unwarranted roadblock to any progress.”Treasury Secretary Janet Yellen at a farm in Zambia in January. She said this week that she would continue to press her Chinese counterparts to make the restructuring process work better.Fatima Hussein/Associated PressBut given the grinding pace of the talks, big investors in emerging markets are not counting on quick resolutions.“We are starting to see tokens of flexibility from China on their stance in sovereign debt restructuring, but complexities abound,” said Yacov Arnopolin, emerging markets portfolio manager at PIMCO. “Near term, we don’t expect a clear-cut solution on China’s willingness to take losses.”China’s reluctance has been another source of tension with the United States, which has expressed concern that Beijing’s onerous lending terms and refusal to renegotiate have amplified the financial problems that developing countries are facing. Treasury Secretary Janet L. Yellen said this week that she would continue to press her Chinese counterparts to improve the restructuring process but that she was encouraged that China had recently expressed a willingness to help Sri Lanka restructure its debt.People familiar with Chinese economic policymaking said domestic politics had made it hard for China to make difficult decisions last autumn and over the winter about accepting possible losses on its loans.In October, the Communist Party held its once-in-five-years national congress and chose a new team of senior party officials to work with Xi Jinping, the country’s top leader. Maneuvering then began to reshuffle the government’s senior ranks, which had been expected during the annual session of the National People’s Congress in early March, although some changes of financial policymakers were unexpectedly delayed.China is now ready to focus on addressing a wide range of economic issues, including international debt, the people said. However, Beijing still faces other challenges that may limit its willingness to bargain, including a commercial banking system that faces very heavy losses on loans to real estate developers and does not want to accept large losses on loans to developing countries at the same time.Chinese officials offered support for the debt relief initiatives in broad terms this week.Wang Wenbin, a spokesman for the Chinese Foreign Ministry, said on Friday that China had put forward a three-point proposal that included calling for the I.M.F. to more quickly share its debt sustainability assessments for countries that need relief, and for creditors to detail how they will carry out the restructurings on “comparable terms.”After a meeting in Washington between Yi Gang, China’s central bank governor, and Mr. Musokotwane of Zambia, the Chinese central bank released a brief statement.“They exchanged views on issues of common concern including bilateral financial cooperation,” it said.Keith Bradsher More

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    Bank Turmoil Squeezes Borrowers, Raising Fears of a Slowdown

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    Economists are watching for the aftereffects of recent bank collapses across many industries. How bad could it get?Sarah Puil needs to buy $500,000 to $1 million of premium wine and other inventory by the end of the year to make into the specialty blends that her company sells and ships to customers around the country. But after the collapse of Silicon Valley Bank started a chain reaction that is causing many types of funding to dry up, she is not sure where she is going to get the cash.Boxt, her three-year-old purveyor of upscale boxed wine, is at a vulnerable stage in which access to credit is crucial to its growth and ability to keep producing its red, white and rosé offerings.As banks and other investors retrench because of the turmoil, Ms. Puil and fellow entrepreneurs are finding that borrowing and raising money are more difficult and expensive.“It’s all we’re talking about,” she said. The demise of the bank, a major lender to the tech and wine industries, “accelerated the tightening of venture capital — that’s the big thing,” she said.Boxt’s worries offer a hint of the economic fallout facing borrowers across the country as credit becomes harder to get. It is too soon to say how much the banking tumult could slow the economy, but early evidence points to increased caution among banks and investors.Taking out big mortgages is getting harder, industry experts report. The commercial real estate industry is bracing for trouble as the midsize banks that service it become more cautious and less willing to lend. Used car loans are more expensive. And a recent survey by the Federal Reserve Bank of Dallas showed a sizable share of banks in the region reporting stricter credit standards.The question now is whether banks and other lenders will pull back so much that the U.S. economy crashes into a severe recession. Until comprehensive data is released — a Federal Reserve survey of loan officers nationwide is due in early May — economists are parsing stories from small businesses, mortgage originators and construction firms to get a sense of the scale of the disruption. Interviews with more than a dozen experts across a variety of industries suggested that the effects are beginning to take hold and could intensify.“People are for the first time in some time using the ‘c’ words: credit crunch,” said Anirban Basu, chief economist at Associated Builders and Contractors, a trade association. “What I’m hearing — and what I’m beginning to hear from contractors — is that credit is beginning to tighten.”Silicon Valley Bank’s collapse on March 10 sent shock waves across the banking world: Signature Bank failed on March 12, First Republic required a $30 billion cash injection from other banks on March 16 and, in Europe, Credit Suisse was sold to its biggest rival in a hastily brokered deal on March 19.The situation seems to have stabilized, but depositors have continued to drain cash from bank accounts and put it into money market funds and other investments. Early Fed data on the banking system, released each Friday, has suggested that commercial and industrial lending and real estate lending both declined meaningfully through late March.When banks lose deposits, they lose a source of cheap funding. That can make them less willing and able to extend loans. The threat of future turmoil can also make banks more cautious.When lending becomes more difficult and expensive, fewer businesses expand, more projects fail and hiring slows — laying the groundwork for a broader economic slowdown.Bags of a rosé wine blend. Boxt’s worries about its access to credit offer a hint of the economic fallout facing borrowers.Tamir Kalifa for The New York TimesThat sequence is why officials at the Fed believe the recent upheaval will cause at least some damage to the economy, though nobody is sure how much.Any slowdown will intensify conditions that were already getting tougher for borrowers. The Fed has been raising interest rates for the past year, making money more expensive to borrow, and labor market data released on Friday offered the latest evidence that demand is beginning to slow enough to cool the economy, weighing on hiring and wage gains.Still, many Fed officials had come into March anticipating that they might lift rates a few more times in 2023 until inflation comes under control. Now, the banking fallout may restrain the economy enough to make further moves less urgent, or even unnecessary.“It is too soon to determine the extent of these effects and therefore too soon to tell how monetary policy should respond,” Jerome H. Powell, the Fed chair, said at a news conference last month.Aftershocks are already surfacing. Commercial real estate borrowers rely heavily on midsize regional banks, which have been particularly hard-hit by the turbulence. Those banks were already become pickier as interest rate increases bit, said Stephen Buschbom, research director at Trepp, a commercial real estate research firm. Anecdotally, Silicon Valley Bank’s blowup is making it worse.“It’s not easy to get a loan commitment is the bottom line,” Mr. Buschbom said.Tougher credit could bedevil a sector that was already suffering: Office real estate has struggled in the pandemic as many city workers have eschewed their desks. Mr. Buschbom says he thinks many borrowers will struggle to renew their loans, forcing some into what’s known as special servicing, where they pay interest but not principal. And as distress trickles through the industry, it could worsen the pain for midsize banks.The problems could mean less business for contractors like Brett McMahon, chief executive of the concrete construction firm Miller & Long in Bethesda, Md.“I don’t think it’s 2008, 2009 — that was such an extraordinarily severe event,” Mr. McMahon said. But he thinks the bank blowups are going to intensify the tightening of credit. He’s being cautious, trying to eke more time out of aging machines. He expects to pause hiring by the end of the year.“Most contractors will tell you that 2023 looks decent,” he said. “But 2024: Who the hell knows?”When it comes to the residential real estate market, jumbo loans — those above about $700,000 or $1 million, depending on the market — were already becoming more expensive. Now, Michael Fratantoni, the chief economist at the Mortgage Bankers Association, has been hearing from bankers that deposit outflows in the wake of Silicon Valley Bank’s demise mean banks have less room to create and hold such loans.Ali Mafi, a Redfin real estate agent, has noticed big banks tightening their standards a bit for borrowers in San Francisco. It’s nothing like the 2008 financial crisis, but over the past few weeks, they have begun asking that would-be borrowers keep a couple of more months of mortgage payments in their bank accounts.Still, he hopes the fallout will not be extreme: Some mortgage rates have eased as investors anticipate fewer Fed rate moves, which is combining with higher stock prices and a drop in local house prices to counteract some of the banking issues.Auto loan interest rates have risen sharply, based on credit application data from March analyzed by Cox Automotive. Borrowing costs for used cars rose more than three-quarters of a percentage point in a month, said Jonathan Smoke, Cox’s chief economist. New car loans also became more expensive, though not as significantly.“The auto market is going to have some challenges,” Mr. Smoke said. But there’s a silver lining: “We haven’t seen appreciable declines in approval rates.”Ms. Puil, right, joined other senior company executives in preparing the packaging for wine shipments at Boxt’s fulfillment center in Austin, Texas.Tamir Kalifa for The New York TimesThere are also reasons for hope in the wine industry. Winemakers have been on “tenterhooks” since Silicon Valley Bank’s collapse, said Douglas MacKenzie, a partner at the consulting firm Kearney, partly because many big banks “don’t know the difference between a $100 case of sauvignon and a $2,000 case” when it comes to valuing collateral that can be “quite liquid, no pun intended.”But he noted that the Bank of Marin, a regional lender, had been running ads in trade magazines saying it was open to new customers. There is also interest in the private equity industry, with which he works.And Ms. Puil at Boxt is determined to get through the crunch.“I’m going to find that money,” she said. Failing because of a lack of credit “can’t be how this story ends.” More

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    Support Grows to Have Russia Pay for Ukraine’s Rebuilding

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    Although U.S. officials have cautioned against seizing Russia’s reserves in foreign banks, others say it’s “crazy” not to after Moscow’s war of aggression.When the World Bank released its latest damage assessment of war-torn Ukraine this week, it announced that the price of recovery and rebuilding had grown to $411 billion. What it didn’t say, though, was who would pay for it.To Ukraine, the answer seems obvious: Confiscate the roughly $300 billion in Russian Central Bank assets that Western banks have frozen since the invasion last year. As the war grinds on, the idea has gained supporters.The European Union has already declared its desire to use the Kremlin’s bankroll to pay for reconstruction in Ukraine. At the urging of a handful of Eastern European and Baltic nations, the bloc convened a working group last month to assess the possibility of grabbing that money as well as frozen assets owned by private individuals who have run afoul of European sanctions.“In principle, it is clear-cut: Russia must pay for the reconstruction of Ukraine,” said Sweden’s prime minister, Ulf Kristersson, who holds the presidency of the Council of the European Union.At the same time, he noted, turning that principle into practice is fraught. “This must be done in accordance with E.U. and international law, and there is currently no direct model for this,” Mr. Kristersson said.The working group, which has a two-year mandate, is scheduled to meet in Brussels next week.Other top officials, in the United States and elsewhere, have sounded more skeptical. After visiting Kyiv last month, Treasury Secretary Janet L. Yellen reiterated her warnings of formidable legal obstacles. The Swiss government declared that confiscating private Russian assets from banks would violate Switzerland’s Constitution as well as international agreements.The legal debate is just one skein in the tangle of moral, political and economic concerns that the potential seizure of Russia’s reserves poses.Departing a Mass in Lviv, Ukraine. Some U.S. officials worry about side effects from seizing assets in order to rebuild the country. Maciek Nabrdalik for The New York TimesMs. Yellen and others have argued that seizing Russia’s accounts could undermine faith in the dollar, the most widely used currency for the world’s trade and transactions. Foreign nations might be more reluctant to keep money in U.S. banks or make investments, fearing that it could be seized. At the same time, experts worry that such a move could put American and European assets held in other countries at higher risk of expropriation in the future if there is an international dispute.There are also concerns that seizure would erode faith in the system of international laws and agreements that Western governments have championed most vocally.But Russia’s pummeling of Ukraine’s infrastructure, charges of war crimes against President Vladimir V. Putin, and the difficulty of squeezing Russia economically when demand for its energy and other exports remains high have helped the idea gain ground.Also, there is the uncomfortable realization that the cost of rebuilding Ukraine once the war is over will far outstrip the amount that even wealthy allies like the United States and Europe may be willing to give.The United States, the European Union, Britain and other allies have funneled billions of dollars into Ukraine’s war effort, as well as tanks, missiles, ammunition, drones and other military equipment. And this week the International Monetary Fund approved its biggest loan yet — $15.6 billion — just to keep Ukraine’s battered economy afloat.But public support for continued funding is not inexhaustible.“If it’s difficult to get funding now for maintaining the infrastructure or housing, why is it going to be easier to get funding later?” asked Tymofiy Mylovanov, the president of the Kyiv School of Economics and a former government minister.It’s hard enough for Ukraine to get money and equipment “while we are being killed,” Mr. Mylovanov said. “Once we’re not being killed, we’ll have difficulty getting anything.”Laurence Tribe, a university professor of constitutional law at Harvard, has argued that a 1977 law, the International Emergency Economic Powers Act, gives the U.S. president the authority to confiscate sovereign Russian assets and repurpose them for Ukraine.The U.S. authorities previously seized Iraqi and Iranian assets and redirected them to compensate victims of violence, settle lawsuits or provide financial assistance.Mr. Tribe concedes that calculations about the ripple effect on the dollar or invested assets will ultimately matter more to policymakers than legal ones. But he finds those broader political concerns unpersuasive.“It’s crazy to argue that it’s more destabilizing to have assets seized than to have wars of aggression,” Mr. Tribe said in an interview on Friday. “The survival of the global economy is far more threatened by the way Russia behaved” than by any financial retaliation.And, he added, taking billions of dollars is much more meaningful either as a deterrent or punishment than bringing war crime charges.A destroyed garage in Hostomel, a Kyiv suburb. Prominent Americans like Laurence Tribe and Lawrence Summers argue that seizing Russian assets would be the right thing to do.Emile Ducke for The New York TimesOther prominent voices in the United States have endorsed the notion. Lawrence H. Summers, a former Treasury secretary; Robert B. Zoellick, a former president of the World Bank and U.S. trade representative; and Philip D. Zelikow, a historian at University of Virginia and a former State Department counselor, made their case this week in an opinion piece in The Washington Post.“Transferring frozen Russian reserves would be morally right, strategically wise and politically expedient,” they wrote.A few countries in addition to Ukraine have taken steps to pry loose foreign assets owned by Russian individuals and entities and use the money for reconstruction. In December, the Canadian government began the process of seizing $26 million owned by the Russian oligarch Roman Abramovich after passing a law easing the forfeiture of private Russian assets from individuals who are under sanctions.A federal judge in Manhattan gave the go-ahead last month to confiscate $5.4 million from another Russian businessman facing sanctions, Konstantin Malofeev. And Estonia is also seeking to pass legislation that would give the government there similar powers.But Mr. Tribe, Mr. Summers and others argue that the main focus should be not on seizing private assets, which would be legally much more complicated and time-consuming, but on the hundreds of billions owned by Russia’s central bank.Wherever the money comes from, the bill keeps growing. Over the past year, Ukraine’s economy has shrunk by a third. The war has pushed more than seven million people into poverty, the World Bank reported, and reversed 15 years of development progress. More

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    Banks Are Borrowing More From the Fed: What to Know

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    As turmoil sweeps the United States financial system, banks are turning to the Federal Reserve for loans to get them through the squeeze.Banks are turning to the Federal Reserve’s loan programs to access funding as turmoil sweeps the financial system in the wake several high-profile bank failures.The collapse of Silicon Valley Bank on March 10 followed by Signature Bank on March 12 prompted depositors to pull their money from some banks and sent the stock prices for financial firms on a roller-coaster ride. The tumult has left some institutions looking for a ready source of cash — either to pay back customers or to make sure they have enough money on hand to weather a rough patch.That is where the Fed comes in. The central bank was founded in 1913 partly to serve as a backstop to the banking system — it can loan financial institutions money against their assets in a pinch, which can help banks raise cash more quickly than they would be able to if they had to sell those securities on the open market.But the Fed is now going further than that: Central bankers on March 12 created a program that is lending to banks against their financial assets as if those securities were still worth their original value. Why? As the Fed has raised interest rates to contain inflation over the past year, bonds and mortgage debt that paid lower rate of interest became less valuable.By lending against the assets at their original price instead of their lower market value, the Fed can insulate banks from having to sell those securities at big losses. That could reassure depositors and stave off bank runs.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. The report usually shows banks borrowing less than $10 billion at the Fed’s so-called “discount window” program.The elevated lending underlines a troubling reality: Stress continues to course through the banking system. The question is whether the government’s response, including a new central bank lending program, will be enough to quell it.A Little HistoryBefore diving into what the fresh figures mean, it’s important to understand how the Fed’s lending programs work.The first, and more traditional, is the discount window, affectionately called “disco” by financial wonks. It is the Fed’s original tool: At its founding, the central bank didn’t buy and sell securities as it does today, but it could lend to banks against collateral.In the modern era, though, borrowing from the discount window has been stigmatized. There is a perception in the financial industry that if a big bank taps it, it must be a sign of distress. Borrower identities are released, though it’s on a two-year delay. Its most frequent users are community banks, though some big regional lenders like Bancorp used it in 2020 at the onset of the pandemic. Fed officials have tweaked the program’s terms over the years to try to make it more attractive during times of trouble, but with mixed results.Enter the Fed’s new facility, which is like the discount window on steroids. Officially called the Bank Term Funding Program, it leverages emergency lending powers that the Fed has had since the Great Depression — ones that the central bank can use in “extraordinary and exigent” circumstances with the sign-off of the Treasury secretary. Through it, the Fed is lending against Treasuries and mortgage-backed securities valued at their original price for up to a year.Policymakers seem to hope that the program will help reduce interest rate risk in the banking system — the problem of the day — while also getting around the stigma of borrowing from the discount window.Banks are Borrowing More Than UsualThe backstops seem to be working:  During the recent turmoil, banks are using both programs.Discount window borrowing climbed to $110.2 billion as of Wednesday, down slightly from $152.9 billion the previous week — when the turmoil started. Those figures are abnormally elevated: Discount window borrowing had stood at just $4.6 billion the week before the tumult began.The new program also had borrowers. As of Wednesday, banks were borrowing $53.7 billion, according to the Fed data. The previous week, it stood at $11.9 billion. The names of specific borrowers will not be released until 2025.The Borrowing Could Be a Sign of TroubleThe next issue is perhaps more critical: Analysts are trying to parse whether it is a good thing that banks are turning to these programs, or whether the stepped up borrowing is a sign that their problems remain serious.“You still have some banks that feel the need to tap these facilities,” said Subadra Rajappa, head of U.S. rates strategy at Société Générale. “There’s definitely cash moving from the banking sector and into other investments, or into the biggest banks.”While Silicon Valley Bank had some obvious weaknesses that regulation experts said were not widely shared across the banking system, its failure has prodded people to look more closely at banks — and depositors have been punishing those with similarities to the failed institutions by withdrawing their cash. PacWest Bancorp has been among the struggling banks. The company said this week that it had borrowed $10.5 billion from the Fed’s discount window.Or the Borrowing Could Be a Good SignThe fact that banks feel comfortable using these tools might reassure depositors and financial markets that cash will keep flowing, which might help avert further troubles.In the past, borrowing from the Fed carried a stigma because it signaled a bank might be in trouble. This time around, the securities the banks hold aren’t at risk of defaulting, they are just worth less in the bond market as a result of the rapid increase in interest rates.“For me, this is a very different situation to what I have seen in the past,” said Greg Peters, co-chief investment officer at PGIM Fixed Income. More

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    A Big Question for the Fed: What Went Wrong With Bank Oversight?

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    As the Federal Reserve reviews the failure of Silicon Valley Bank, and Congress prepares for hearings, bank oversight is getting a closer look.WASHINGTON — Jerome H. Powell is likely to face more than the typical questions about the Federal Reserve’s latest interest rate decision on Wednesday. The central bank chair will almost certainly be grilled about how and why his institution failed to stop problems at Silicon Valley Bank before it was too late.The collapse of Silicon Valley Bank, the largest bank failure since 2008, has prompted intense scrutiny of the Fed’s oversight as many wonder why the bank’s vulnerabilities were not promptly fixed.Many of the bank’s weaknesses seem, in hindsight, as if they should have been obvious to its regulators at the Fed. An outsize share of its deposits were over the $250,000 insurance limit, making depositors more likely to flee at the first sign of trouble and leaving the bank susceptible to runs.The bank had also grown rapidly, and its depositors were heavily concentrated in the volatile technology industry. It held a lot of long-term bonds, which lose market value when the Fed raises interest rates, as it has over the past year. Still, the bank had done little to protect itself against an increase in borrowing costs.Governors at the Fed Board in Washington allowed the bank to merge with a small bank in June 2021, after the first warning signs had surfaced and just months before Fed supervisors in San Francisco began to issue a volley of warnings about the company’s poor risk management. In 2022, the Fed repeatedly flagged problems to executives and barred the firm from growing through acquisition.But the Fed did not react decisively enough to prevent the bank’s problems from leading to its demise, a failure that has sent destabilizing jitters through the rest of the American financial system.Mr. Powell is likely to face several questions: What went wrong? Did examiners at the Federal Reserve Bank of San Francisco fail to flag risks aggressively enough? Did the Fed’s board fail to follow up on noted weaknesses? Or was the lapse indicative of a broader problem — that is, did existing rules and oversight make it difficult to quickly address important flaws?Some Democrats have blamed regulatory rollbacks put into effect by the Fed in 2019 for weakening the system, and have pointed a finger at Mr. Powell.Julia Nikhinson for The New York TimesThe Fed has already announced a review of the bank’s collapse, with the inquiry set to conclude by May 1.“The events surrounding Silicon Valley Bank demand a thorough, transparent and swift review by the Federal Reserve,” Mr. Powell said in a statement last week.Congress is also planning to dig into what went awry, with committees in both the Senate and House planning hearings next week on the recent bank collapses.Investors and experts in financial regulation have been racing to figure out what went wrong even before the conclusion of those inquiries. Silicon Valley Bank had a business model that made it unusually vulnerable to a wave of rapid withdrawals. Even so, if its demise is evidence of a blind spot in how banks are overseen, then weaknesses could be more broadly spread throughout the banking system.“The SVB failure has not only gotten people asking the question, ‘Gee, are other banks in similar enough circumstances that they could be in danger?’” said Daniel Tarullo, a former Fed governor who oversaw post-2008 regulation and who is now a professor at Harvard. “It’s also been a wake-up call to look at banks generally.”Politicians have already begun assigning blame. Some Democrats have blasted regulatory rollbacks passed in 2018, and put into effect by the Fed in 2019, for weakening the system, and they have pointed a finger at Mr. Powell for failing to stop them.At the same time, a few Republicans have tried to lay the blame firmly with the San Francisco Fed, arguing that the blowup shouldn’t necessarily lead to more onerous regulation.“There’s a lot, obviously, that we don’t know yet,” said Lev Menand, who studies money and banking at Columbia Law School.Understanding what happened at Silicon Valley Bank requires understanding how bank oversight works — and particularly how it has evolved since the late 2010s.Different American regulators oversee different banks, but the Federal Reserve has jurisdiction over large bank holding companies, state member banks, foreign banks operating in the United States and some regional banks.The Fed’s Board of Governors, which is made up of seven politically appointed officials, is responsible for shaping regulations and setting out the basic rules that govern bank supervision. But day-to-day monitoring of banks is carried out by supervisors at the Fed’s 12 regional banks.President Barack Obama with, to his left, Sen. Christopher Dodd and Representative Barney Frank in 2010, after signing the Dodd-Frank financial reform act.Doug Mills/The New York TimesBefore the 2008 financial crisis, those quasi-private regional branches had a lot of discretion when it came to bank oversight. But in the wake of that meltdown, the supervision came to be run more centrally out of Washington. The Dodd-Frank law carved out a new role for one of the Fed’s governors — vice chair for bank supervision — giving the central bank’s examiners around the country a more clear-cut and formal boss.The idea was to make bank oversight both stricter and more fail-safe. Dodd-Frank also ramped up capital and liquidity requirements, forcing many banks to police their risk and keep easy-to-tap money on hand, and it instituted regular stress tests that served as health checkups for the biggest banks.But by the time the Fed’s first official vice chair for supervision was confirmed in 2017, the regulatory pendulum had swung back in the opposite direction. Randal K. Quarles, a pick by President Donald J. Trump, came into office pledging to pare back bank rules that many Republicans, in particular, deemed too onerous.“After the first wave of reform, and with the benefit of experience and reflection, some refinements will undoubtedly be in order,” Mr. Quarles said at his confirmation hearing.Some of those refinements came straight from Congress. In 2018, Republicans and many Democrats passed a law that lightened regulations on small banks. But the law did more than just relieve community banks. It also lifted the floor at which many strict bank rules kicked in, to $250 billion in assets.Mr. Quarles pushed the relief even further. For instance, banks with between $250 billion and $700 billion in assets were allowed to opt out of counting unrealized losses — the change in the market value of older bonds — from their capital calculations. While that would not have mattered in SVB’s case, given that the bank was beneath the $250 billion threshold, some Fed officials at the time warned that it and other changes could leave the banking system more vulnerable.Lael Brainard, who was then a Fed governor and now directs the National Economic Council, warned in a dissent that “distress of even noncomplex large banking organizations generally manifests first in liquidity stress and quickly transmits contagion through the financial system.”Randal K. Quarles, who was picked by President Donald J. Trump and started at the Fed in 2017, came into office pledging to pare back bank rules that were by then deemed too onerous.Tom Williams/CQ Roll Call, via Associated PressOther Fed officials, including Mr. Powell, voted for the changes.It is unclear how much any of the adjustments mattered in the case of Silicon Valley Bank. The bank most likely would have faced a stress test earlier had those changes not gone into place. Still, those annual assessments have rarely tested for the interest rate risks that undid the firm.Some have cited another of Mr. Quarles’s changes as potentially more consequential: He tried to make everyday bank supervision more predictable, leaving less of it up to individual examiners.While Mr. Quarles has said he failed to change supervision much, people both within and outside the Fed system have suggested that his mere shift in emphasis may have mattered.“That ethos might have been why supervisors felt like they couldn’t do more here,” said Peter Conti-Brown, an expert in financial regulation and a Fed historian at the University of Pennsylvania.Mr. Quarles, who stepped down from his position in October 2021, pushed back on the contention that he had made changes to supervision that allowed weaknesses to grow at Silicon Valley Bank.“I gave up the reins as vice chair for supervision a year and a half ago,” he said.Fed supervisors began to flag Silicon Valley Bank’s problems in earnest in the fall of 2021, after the bank had grown and faced a more extensive review. That process resulted in six citations, often called “matters requiring attention,” which are meant to spur executives to act. Additional deficiencies were identified in early 2023, shortly before the failure.A critical question, said Mr. Menand, is “were the supervisors content to spot problems and wait for them to be remediated?”But he noted that when it came to “bringing out the big guns” — backing up stern warnings with legal enforcement — supervisors must, in many ways, rely on the Fed Board in Washington. If bank leadership thought the Board was unlikely to react to their deficiencies, it might have made them less keen to fix the problems.Banks often have issues flagged by their supervisors, and those concerns are not always immediately resolved. In a rating system that tests for capital planning, liquidity risk management and governance and controls, consistently only about half of large banking institutions score as “satisfactory” across all three.But in the wake of Silicon Valley Bank’s collapse, how bank oversight is performed at the Fed could be in for some changes. Michael Barr, who President Biden appointed as the Fed’s vice chair for supervision, was carrying out a “holistic review” of bank oversight even before the failures. Either that or the review of what happened at SVB is now more likely to end in tighter controls, particularly at large regional banks.“There’s a lot of buck-passing,” said Mr. Conti-Brown. “I think it was likely a joint failure, and that’s part of the design of the system.” More