United States regulators have put large banks on notice that tougher oversight is coming, after the Federal Reserve and Federal Deposit Insurance Corp issued detailed reports on what went wrong and where their supervisors came up short in the run-up to the two biggest bank failures since the Great Financial Crisis.
On Friday, the US Fed issued a detailed and scathing assessment of its failure to identify problems and push for fixes at Silicon Valley Bank before the lender’s collapse and promised tougher supervision and stricter rules for banks.
“SVB’s failure demonstrates that there are weaknesses in regulation and supervision that must be addressed,” Barr said in a letter accompanying a 114-page report supplemented by confidential materials that are typically not made public.
“Our first area of focus will be to improve the speed, force, and agility of supervision,” he said. “Our experience following SVB’s failure demonstrated that it is appropriate to have stronger standards apply to a broader set of firms.”
Shortly after the release of the Fed’s report, the FDIC delivered a 63-page account of its failings in the collapse of New York-based Signature Bank and those of its management, to fix persistent weaknesses in liquidity risk management and overreliance on uninsured deposits. Both SVB and Signature failed last month.
“In retrospect, the FDIC could have acted sooner and more forcefully to compel the bank’s management and its board to address these deficiencies more quickly and more thoroughly,” it said.
Both reports said the banks’ managers were primarily to blame for prioritising growth and ignoring basic risks that set the stage for the failures.
And while they both identified supervisory lapses – the Fed’s report was particularly scathing – both stopped short of laying the responsibility for the failures at the feet of any specific senior leaders inside their oversight ranks.
Poor management
While it was the regional bank’s own mismanagement of basic risks that was at the root of SVB’s downfall, the Fed said, supervisors of SVB did not fully appreciate the problems, delaying their responses to gather more evidence even as weaknesses mounted, and failed to appropriately escalate certain deficiencies when they were identified.
At the time of its failure, SVB had 31 unaddressed citations on its safety and soundness, triple what its peers in the banking sector had, the report said.
One particularly effective change the Fed could make on supervision would be to put mitigants in place quickly in response to serious issues on capital, liquidity or management, a senior Fed official said.
Increased capital and liquidity requirements also would have bolstered SVB’s resilience, the Fed added.
Barr said as a consequence of the failure, the central bank will re-examine how it supervises and regulates liquidity risk, beginning with the risks of uninsured deposits.
It also said it would look at tying executive compensation to management’s addressing of supervisory weaknesses.
Before the twin failures in March, banking regulators had focused most of their supervisory firepower on the very biggest US banks that were seen as critical to financial stability.
The Fed’s report signalled that it will look to subject banks with more than $100bn in assets to stricter rules.
Regulators shut SVB on March 10 after customers withdrew $42bn on the previous day and queued requests for another $100bn the following morning.
The historic run triggered massive deposit outflows at other regional banks that were seen to have similar weaknesses, including a large proportion of uninsured deposits and big holdings of long-term securities that had lost market value as the Fed raised short-term interest rates.
New York-based Signature Bank failed two days later. Its failure, the FDIC said in its report which was released also on Friday, was caused by “poor management” and a pursuit of “rapid, unrestrained growth” with little regard for risk management.
Just as critically, the FDIC said it did not have enough staff to do the work of supervising the bank.
Since 2020, an average of 40 percent of positions in the FDIC’s large bank supervisory staff in the New York region were vacant or filled by temporary employees, the report said.
Signature lost 20 percent of its total deposits in a matter of hours on the day that SVB failed, FDIC Chair Martin Gruenberg has said.
Similar to SVB, Signature examiners reported weak corporate governance practices and failures by bank management to address shortcomings identified by supervisors, including the firm’s reliance on uninsured deposits.
Change in supervisory practices
The realisation that smaller banks are capable not only of causing ructions in the broader financial system but of doing it at such speed has forced a rethink.
“Contagion from the failure of SVB threatened the ability of a broader range of banks to provide financial services and access to credit for individuals, families and businesses,” Barr said. “Weaknesses in supervision and regulation must be fixed.”
In its report, the Fed said that from 2018 to 2021, its supervisory practices shifted and there were increased expectations for supervisors to accumulate more evidence before considering taking action. Staff interviewed as part of the Fed’s review reported pressure during this period to reduce burdens on firms and demonstrate due process, the report said.
From 2016 to 2022, as assets in the banking sector grew 37 percent, the Fed’s supervision headcount declined by 3 percent, according to the report.
As SVB itself grew, the Fed did not step up its supervisory game quickly enough, the report showed, allowing weaknesses to fester as executives left them unaddressed, even after staff finally did downgrade the bank’s confidential rating to “not well-managed”.
While the fallout from the failures of SVB and Signature has slowed, some firms are still feeling the effects. San Francisco-based First Republic Bank is struggling for survival after reporting this week that its deposit outflows after the SVB and Signature collapses exceeded $100bn.
TOKYO (AP) — Japanese technology group SoftBank swung back to profitability in the July-September quarter, boosted by positive results in its Vision Fund investments.
Tokyo-based SoftBank Group Corp. reported Tuesday a fiscal second quarter profit of nearly 1.18 trillion yen ($7.7 billion), compared with a 931 billion yen loss in the year-earlier period.
Quarterly sales edged up about 6% to nearly 1.77 trillion yen ($11.5 billion).
SoftBank credited income from royalties and licensing related to its holdings in Arm, a computer chip-designing company, whose business spans smartphones, data centers, networking equipment, automotive, consumer electronic devices, and AI applications.
The results were also helped by the absence of losses related to SoftBank’s investment in office-space sharing venture WeWork, which hit the previous fiscal year.
WeWork, which filed for Chapter 11 bankruptcy protection in 2023, emerged from Chapter 11 in June.
SoftBank has benefitted in recent months from rising share prices in some investment, such as U.S.-based e-commerce company Coupang, Chinese mobility provider DiDi Global and Bytedance, the Chinese developer of TikTok.
SoftBank’s financial results tend to swing wildly, partly because of its sprawling investment portfolio that includes search engine Yahoo, Chinese retailer Alibaba, and artificial intelligence company Nvidia.
SoftBank makes investments in a variety of companies that it groups together in a series of Vision Funds.
The company’s founder, Masayoshi Son, is a pioneer in technology investment in Japan. SoftBank Group does not give earnings forecasts.
Shopify Inc. executives brushed off concerns that incoming U.S. President Donald Trump will be a major detriment to many of the company’s merchants.
“There’s nothing in what we’ve heard from Trump, nor would there have been anything from (Democratic candidate) Kamala (Harris), which we think impacts the overall state of new business formation and entrepreneurship,” Shopify’s chief financial officer Jeff Hoffmeister told analysts on a call Tuesday.
“We still feel really good about all the merchants out there, all the entrepreneurs that want to start new businesses and that’s obviously not going to change with the administration.”
Hoffmeister’s comments come a week after Trump, a Republican businessman, trounced Harris in an election that will soon return him to the Oval Office.
On the campaign trail, he threatened to impose tariffs of 60 per cent on imports from China and roughly 10 per cent to 20 per cent on goods from all other countries.
If the president-elect makes good on the promise, many worry the cost of operating will soar for companies, including customers of Shopify, which sells e-commerce software to small businesses but also brands as big as Kylie Cosmetics and Victoria’s Secret.
These merchants may feel they have no choice but to pass on the increases to customers, perhaps sparking more inflation.
If Trump’s tariffs do come to fruition, Shopify’s president Harley Finkelstein pointed out China is “not a huge area” for Shopify.
However, “we can’t anticipate what every presidential administration is going to do,” he cautioned.
He likened the uncertainty facing the business community to the COVID-19 pandemic where Shopify had to help companies migrate online.
“Our job is no matter what comes the way of our merchants, we provide them with tools and service and support for them to navigate it really well,” he said.
Finkelstein was questioned about the forthcoming U.S. leadership change on a call meant to delve into Shopify’s latest earnings, which sent shares soaring 27 per cent to $158.63 shortly after Tuesday’s market open.
The Ottawa-based company, which keeps its books in U.S. dollars, reported US$828 million in net income for its third quarter, up from US$718 million in the same quarter last year, as its revenue rose 26 per cent.
Revenue for the period ended Sept. 30 totalled US$2.16 billion, up from US$1.71 billion a year earlier.
Subscription solutions revenue reached US$610 million, up from US$486 million in the same quarter last year.
Merchant solutions revenue amounted to US$1.55 billion, up from US$1.23 billion.
Shopify’s net income excluding the impact of equity investments totalled US$344 million for the quarter, up from US$173 million in the same quarter last year.
Daniel Chan, a TD Cowen analyst, said the results show Shopify has a leadership position in the e-commerce world and “a continued ability to gain market share.”
In its outlook for its fourth quarter of 2024, the company said it expects revenue to grow at a mid-to-high-twenties percentage rate on a year-over-year basis.
“Q4 guidance suggests Shopify will finish the year strong, with better-than-expected revenue growth and operating margin,” Chan pointed out in a note to investors.
This report by The Canadian Press was first published Nov. 12, 2024.
TORONTO – RioCan Real Estate Investment Trust says it has cut almost 10 per cent of its staff as it deals with a slowdown in the condo market and overall pushes for greater efficiency.
The company says the cuts, which amount to around 60 employees based on its last annual filing, will mean about $9 million in restructuring charges and should translate to about $8 million in annualized cash savings.
The job cuts come as RioCan and others scale back condo development plans as the market softens, but chief executive Jonathan Gitlin says the reductions were from a companywide efficiency effort.
RioCan says it doesn’t plan to start any new construction of mixed-use properties this year and well into 2025 as it adjusts to the shifting market demand.
The company reported a net income of $96.9 million in the third quarter, up from a loss of $73.5 million last year, as it saw a $159 million boost from a favourable change in the fair value of investment properties.
RioCan reported what it says is a record-breaking 97.8 per cent occupancy rate in the quarter including retail committed occupancy of 98.6 per cent.
This report by The Canadian Press was first published Nov. 12, 2024.
