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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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    How a Trump-Era Rollback Mattered for Silicon Valley Bank’s Demise

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    An under-the-radar change to the way regional banks are supervised may have helped the bank’s rapidly growing risks to go unresolved.WASHINGTON — Silicon Valley Bank was growing steadily in 2018 and 2019 — and supervisors at its primary overseer, the Federal Reserve Bank of San Francisco, were preparing it for a stricter oversight group, one in which specialists from around the Fed system would vet its risks and point out weak spots.But a decision from officials in Washington halted that move.The Federal Reserve Board — which sets the Fed’s standards for banking regulation — was in the process of putting into effect a bipartisan 2018 law that aimed to make regulation less onerous for small and midsize banks. As the board did that, Randal K. Quarles, the Trump-appointed vice chair for supervision, and his colleagues also chose to recalibrate how banks were supervised in line with the new requirements.As a result, Silicon Valley Bank’s move to the more rigorous oversight group would be delayed. The bank would previously have advanced to the Large and Foreign Bank Organization group after its assets had averaged more than $50 billion for a year; now, that shift would not come until it consistently averaged more than $100 billion in assets.The change proved fateful. Silicon Valley Bank did not fully move to the stronger oversight group until late 2021. Its assets had nearly doubled over the course of that year, to about $200 billion, by the time it came under more intense supervision.By that point, many of the issues that would cause its demise had already begun festering. Those included a customer base heavily dependent on the success of the technology industry, an unusually large share of deposits above the $250,000 limit that the government insures in the event of a bank collapse and an executive team that paid little attention to risk management.Those weak spots appear to have gone unresolved when Silicon Valley Bank was being overseen the way that small and regional banks are: by a small team of supervisors who were in some cases generalists.When the bank finally entered more sophisticated supervision for big banks in late 2021, putting it under the purview of a bigger team of specialist bank overseers with input from around the Fed system, it was immediately issued six citations. Those flagged various problems, including how it was managing its ability to raise cash quickly in times of trouble. By the next summer, its management was rated deficient, and by early 2023, intense scrutiny of the bank had stretched to the Fed’s highest reaches.Big questions remain about why supervisors didn’t do more to ensure that shortcomings were addressed once they became alarmed enough to begin issuing citations. The Fed is conducting an internal investigation of what happened, with results expected on May 1.Michael Barr, the Fed’s vice chair for supervision, told lawmakers this week that by the time Silicon Valley Bank came under intense oversight and problems were fully recognized, “in a sense, it was already very late in the process.”Shuran Huang for The New York TimesBut the picture that is emerging is one in which a slow reaction in 2022 was not the sole problem: Silicon Valley Bank’s difficulties also appear to have come to the fore too late to fix them easily, in part because of the Trump-era rollbacks. By deciding to move banks into large-bank oversight much later, Mr. Quarles and his colleagues had created a system that treated even sizable and rapidly ballooning banks with a light touch when it came to how aggressively they were monitored.That has caught the attention of officials from the Fed and the White House as they sort through the fallout left by Silicon Valley Bank’s collapse on March 10 and ask what lessons should be learned.“The way the Federal Reserve’s regulation set up the structure for approach to supervision treated firms in the $50 to $100 billion range with lower levels of requirements,” Michael Barr, the Fed’s vice chair for supervision, told lawmakers this week. By the time Silicon Valley Bank’s problems were fully recognized, he said, “in a sense, it was already very late in the process.”About five people were supervising Silicon Valley Bank in the years before its move up to big-bank oversight, according to a person familiar with the matter. The bank was subject to quarterly reviews, and its overseers could choose to put it through horizontal reviews — thorough check-ins that test for a particular weakness by comparing a bank with firms of similar size. But those would not have been a standard part of its oversight, based on the way the Fed runs supervision for small and regional banks.As the bank grew and moved up to large-bank oversight, the size of the supervisory team dedicated to it swelled. By the time it failed, about 20 people were working on Silicon Valley Bank’s supervision, Mr. Barr said this week. It had been put through horizontal reviews, which had flagged serious risks.But such warnings often take time to translate into action. Although the bank’s overseers started pointing out big issues in late 2021, banks typically get leeway to fix problems before they are penalized.“One of the defining features of supervision is that it is an iterative process,” said Kathryn Judge, a financial regulation expert at Columbia Law School.The Fed’s response to the problems at Silicon Valley Bank seemed to be halting even after it recognized risks. Surprisingly, the firm was given a satisfactory liquidity rating in early 2022, after regulators had begun flagging problems, Mr. Barr acknowledged this week. Several people familiar with how supervising operates found that unusual.“We’re trying to understand how that is consistent with the other material,” Mr. Barr said this week. “The question is, why wasn’t that escalated and why wasn’t further action taken?”Yet the high liquidity rating could also tie back to the bank’s delayed move to the large bank supervision group. Bank supervisors sometimes treat a bank more gently during its first year of tougher oversight, one person said, as it adjusts to more onerous regulator attention.There was also turmoil in the San Francisco Fed’s supervisory ranks around the time that Silicon Valley Bank’s risks were growing.Aaron Wojack for The New York TimesThere was also turmoil in the San Francisco Fed’s supervisory ranks around the time that Silicon Valley Bank’s risks were growing. Mary Daly, the president of the reserve bank, had called a meeting in 2019 with a number of the bank supervisory group’s leaders to insist that they work on improving employee satisfaction scores, according to people with knowledge of the event. The meeting was previously reported by Bloomberg.Of all the San Francisco Fed employees, bank supervisors had the lowest satisfaction ratings, with employees reporting that they might face retribution if they spoke out or had different opinions, according to one person.Several supervision officials departed in the following years, retiring or leaving for other reasons. As a result, relatively new managers were at the wheel as Silicon Valley Bank’s risks grew and became clearer.It’s hard to assess whether supervisors in San Francisco — and staff members at the Fed board, who would have been involved in rating Silicon Valley Bank — were unusually slow to respond to the bank’s problems given the secrecy surrounding bank oversight, Ms. Judge said.“We don’t have a baseline,” she said.Even as the Fed tries to understand why problems were not addressed more promptly, the fact that Silicon Valley Bank remained under less rigorous oversight that may not have tested for its specific weaknesses until relatively late in the game is increasingly in focus.“The Federal Reserve system of supervision and regulation is based on a tailored approach,” Mr. Barr said this week. “That framework, which really focuses on asset size, is not sensitive to the kinds of problems we saw here with respect to rapid growth and a concentrated business model.”Plus, the 2018 law and the Fed’s implementation of it probably affected Silicon Valley Bank’s oversight in other ways. The Fed would probably have begun administering full stress tests on the bank earlier without the changes, and the bank might have had to shore up its ability to raise money in a pinch to comply with the “liquidity coverage ratio,” some research has suggested.The White House called on Thursday for regulators to consider reinstating stronger rules for banks with assets of $100 billion to $250 billion. And the Fed is both re-examining the size cutoffs for stricter bank oversight and working on ways to test for “novel” risks that may not tie back cleanly to size, Mr. Barr said this week.But Mr. Quarles, who carried out the tailoring of the 2018 bank rule, has insisted that the bank’s collapse was not the result of changes that the law required or that he chose to make. Even the simplest rung of supervision should have caught the obvious problems that killed Silicon Valley Bank, he said, including a lack of protection against rising interest rates.“It was the simplest risk imaginable,” he said in interview. More

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    Will Bank Turmoil Tank the Economy?

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    As government officials testify before congressional committees on the fallout from recent banking collapses, a major question looms: What will this mean for the economy?Federal Reserve officials have been clear that they expect a slowdown in bank lending tied to the tumult to weigh on economic growth this year, but the magnitude is uncertain. And much of the potential fallout depends on what comes next.If the banking turmoil blows over in the coming weeks, lending and financing standards could return to something like normal — and the economic fallout might not be substantial.But if the upheaval continues, or if it creates knock-on effects in other parts of financial markets and the economy, the hit could be meaningful. If the banking trouble makes it harder to take out loans or issue debt, it means fewer businesses can expand and hire staff, among other troubles. Those problems could even be enough to push America toward a recession.“It definitely brings us closer” to a downturn, Neel Kashkari, the president of the Minneapolis Fed, said on CBS News’s “Face the Nation” this weekend. “Right now what’s unclear for us is how much of these banking stresses are leading to a widespread credit crunch.”Mr. Kashkari noted that some capital markets have been largely closed for weeks, and that if “capital markets remain closed because borrowers and lenders remain nervous, then that would tell me, OK, this is probably going to have a bigger imprint on the economy.”The riskiest companies have been mostly frozen out of debt markets since early this month. At the same time, some of the healthiest corporate borrowers have managed to issue bonds again this week — a hopeful sign — though their borrowing costs were unusually elevated.Investors and economists are watching for other risks, like the effect of banking turmoil on commercial real estate, which was already confronting pandemic-spurred office vacancies and which has traditionally relied on small and midsize banks for loans.With the scope of the fallout so unpredictable, Fed officials have been hesitant to react too decisively. Central bankers raised interest rates by a quarter-point last week as they continued their fight against inflation, while also suggesting that they did not know what would come next.“Events in the banking system over the past two weeks are likely to result in tighter credit conditions for households and businesses, which would in turn affect economic outcomes,” Jerome H. Powell, the Fed chair, said at a news conference after the rate increase. “It is too soon to determine the extent of these effects and therefore too soon to tell how monetary policy should respond.” More

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    How Far Can Regulators Go to Protect Uninsured Deposits?

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    A decision by federal regulators to ensure that depositors at Silicon Valley Bank and Signature Bank did not lose money regardless of how much they had in their accounts, has aroused populist anger as well as questions of what government agencies can and cannot do to protect uninsured accounts.Under current law, the government insures bank deposits only up to $250,000. Any increase in that limit would require congressional authorization. But regulators can protect deposits over that amount, like they did at Silicon Valley Bank and Signature Bank, if they determine that the banks’ failures pose a systemic risk.They can also request approval from Congress to temporarily raise the cap or eliminate it altogether, though some lawmakers have already expressed unwillingness to do so.Janet L. Yellen, the Treasury secretary, suggested last week that regulators were ready to make uninsured depositors at other banks whole if necessary and “if smaller institutions suffer deposit runs that pose the risk of contagion.”Amid widespread bank failures in the Great Depression, Congress created the Federal Deposit Insurance Corporation in 1933 to insure deposits under $2,500. It has increased that limit over the years, recently lifting it to $250,000 from $100,000 for IRAs in 2006 and for checking accounts in 2008. The Dodd-Frank Act of 2010 made the increase permanent.In the wake of the 2008 financial crisis, the F.D.I.C. evoked the systemic risk exception to create a program that guaranteed new debt issued by banks for three years and insured all deposits if they did not bear interest (typically, accounts used by businesses for payroll).The decision to grant the exception was reached “after three days of intense negotiation,” according to an account of the episode by the F.D.I.C.’s historian, and had to be approved by the Treasury secretary in consultation with the president and two-thirds of the boards of both the F.D.I.C. and the Federal Reserve.But regulators no longer have the ability to create such a program unilaterally, as the Dodd-Frank Act eliminated the F.D.I.C.’s authority to temporarily insure accounts with more assets than the statutory limit. Under that law, the agency can only do so if it is the receiver of a failed bank or if it has approval from Congress.“Congress was so concerned with moral hazard and ‘bailouts’ that it seemed to limit the receipt of F.D.I.C. assistance to the imposition of an F.D.I.C. receivership, unless Congress specifically approved a subsequent F.D.I.C. alternative,” said Jeffrey N. Gordon, a law professor at Columbia University and expert on financial regulation.During the coronavirus pandemic, Congress in 2020 temporarily lifted the deposit limit on noninterest bearing accounts. But in congressional testimony last week, Ms. Yellen said her agency was not seeking to lift the cap altogether and insure all deposits over $250,000. Rather, she said, regulators would seek the systemic risk exception for failed banks through a “case-by-case determination.”Others, though, have pushed for more sweeping coverage. Some lawmakers are considering temporarily increasing the deposit cap while others have proposed eliminating it altogether.The Dodd-Frank Act provides a fast-track process for such requests, allowing the Congress to expedite approval by adopting a joint resolution. Sheila Blair, the former president of the F.D.I.C. during the financial crisis, recently urged Congress to initiate the procedure.“We want people to make payroll. We want people to be able to pay their businesses and others to pay their bills. So I think that is one area where unlimited coverage, at least on a temporary basis, makes a lot of sense,” she said in a Washington Post event last week.News reports have also suggested that regulators are looking at other mechanisms of acting without Congress, specifically by tapping into the Exchange Stabilization Fund. The Treasury secretary has broad authority to use the emergency reserve, which was created in 1934 to stabilize the value of the dollar but has been used over the years for a host of other purposes.Mr. Gordon noted that using the exchange fund alone would not work to protect uninsured deposits, given that it is “paltry compared to the Deposit Insurance Fund and unlike the D.I.F. has no mechanism for replenishment.” But he said it would be possible to use the fund as a backstop in a program operated by the Federal Reserve that lends against bank assets.“What this means is that banks would have an easy way to raise cash to pay off all deposits,” he said. More

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    Silicon Valley Bank’s Risks Went Deep. Congress Wants to Know Why.

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    Lapses at the bank will be a focus as a top Federal Reserve official testifies to House and Senate committees this week.WASHINGTON — The nation’s top financial regulators will face a grilling from lawmakers on Tuesday over the collapse of Silicon Valley Bank as they push to understand why the firm was allowed to grow so rapidly and build up so much risk that it failed, requiring a government rescue for depositors and sending shock waves across global markets.Michael S. Barr, the Federal Reserve’s vice chair for supervision, will testify before the Senate Banking Committee on Tuesday alongside Martin Gruenberg, chair of the Federal Deposit Insurance Corporation, and Nellie Liang, the Treasury’s under secretary for domestic finance. The same officials are set to testify before the House Financial Services Committee on Wednesday.Lawmakers are expected to focus on what went wrong. The picture that has emerged so far is of a bank that grew ravenously and ran itself more like a start-up than a 40-year-old lender. The bank took in a large share of big — and uninsured — depositors even as it used its assets to double down on a bet that interest rates would stay low.Instead, the Fed raised rates sharply to slow rapid inflation, reducing the market value of Silicon Valley Bank’s large holdings of longer-term bonds and making them less attractive as new securities offered higher returns. When SVB sold some of its holdings to shore up its balance sheet, it incurred big losses.That spooked its customers, many of whom had deposits far above the $250,000 limit on what the government would guarantee in the event the bank failed. They raced to pull their money out, and the bank collapsed on March 10.The question is why supervisors at the Fed failed to stop the bank from making dangerous mistakes that seem obvious in hindsight. And the answer is important: If the Fed missed the problems because of widespread flaws in the ways banks are overseen and regulated, it could mean other weak spots in the industry are slipping through the cracks.Here is a rundown of what is already known, and where lawmakers could push for firmer answers this week.As Silicon Valley Bank grew, the Fed found problems.Silicon Valley Bank went to just above $115 billion in assets at the end of 2020 from $71 billion at the end of 2019. That growth catapulted it to a new level of oversight at the Fed by late 2021 — into the purview the Large and Foreign Banking Organization group.That group includes a mix of staff members from the Fed’s regional reserve banks and its Board of Governors in Washington. Banks that are large enough to fall under its remit get more scrutiny than smaller organizations.Silicon Valley Bank would most likely have moved to that more onerous oversight rung at least a couple of years earlier had it not been for a watering-down of rules that the Fed carried out under Randal K. Quarles, who was its supervisory vice chair during the Trump administration.By the time the bank had come under intense scrutiny, problems had already started: Fed officials found big issues in their first sweeping review.Supervisors promptly issued six citations — called matters requiring attention or matters requiring immediate attention — that amounted to a warning that SVB was doing a faulty job of managing its ability to raise cash in a pinch if needed.It is not clear precisely what those citations said, because the Fed has not released them. By the time the bank went through a full supervisory review in 2022, supervisors were seeing glimmers of progress on the issues, a person familiar with the matter said.Michael S. Barr, the Federal Reserve’s vice chair for supervision, is scheduled to testify at the hearings.Alex Wong/Getty ImagesSilicon Valley Bank was given a ‘satisfactory’ rating despite its issues.Perhaps in part because of that progress, SVB’s liquidity — its ability to come up with money quickly in the face of trouble — was rated satisfactory last year.Around that time, bank management was intensifying its bet that rates would stop climbing. SVB had been maintaining protection against rising rates on a sliver of its bond portfolio — but began to drop even those in early 2022, booking millions in profits by selling off the protection. According to a company presentation, SVB was newly focused on a scenario in which borrowing costs fell.That was a bad call. The Fed raised interest rates at the fastest pace since the 1980s last year as it tried to control rapid inflation — and Silicon Valley Bank was suddenly staring down huge losses.The bank’s demise set off cascading concerns.By mid-2022, Fed supervisors had focused a skeptical eye on SVB’s management, and it was barred from growing by buying other institutions. But by the time Fed officials had reviewed the bank’s liquidity fully again in 2023, its problems had turned crippling.SVB had been borrowing heavily from the Federal Home Loan Bank of San Francisco for months to raise cash. On March 8, the bank announced that it would need to raise capital after selling its bond portfolio at a loss.On March 9, customers tried to pull $42 billion from SVB in one day — the fastest bank run in history — and it had to scramble to tap the Fed’s backup funding source, the discount window. What loans it could get in exchange for its assets were not enough. On March 10, it failed.That only started the problems for the broader banking system. Uninsured depositors at other banks began to nervously eye their own institutions. On March 12 — a Sunday evening — regulators announced that they were closing another firm, Signature Bank.To forestall a nationwide bank run, regulators said they would make sure even the failed banks’ big depositors were paid back in full, and the Fed opened a new program to help banks get cash in a pinch.But that did not immediately stem the bleeding: Fed data showed that bank deposits fell by $98 billion to $17.5 trillion in the week that ended March 15, the biggest decline in nearly a year. But even those numbers hid a trend playing out under the surface: People moved their money away from smaller banks to banking giants that they thought were less likely to fail.Deposits at small banks dropped by $120 billion, while those at the 25 largest banks shot up by about $67 billion. Government officials have said those flows have abated.As customers and investors began to probe for weak spots in the financial system, other banks found themselves in tumult — including Credit Suisse in Switzerland, which was taken over, and First Republic, which took a capital injection from other banks.Lawmakers from both parties want answers.“It is concerning that Federal Reserve staff did not intervene in a timely manner and use the powerful supervisory and enforcement tools available to prevent the firm’s failure and subsequent market uncertainty,” Republicans on the House Financial Services Committee wrote in a letter released Friday.Senator Rick Scott, Republican of Florida, and Senator Elizabeth Warren, Democrat of Massachusetts, have introduced legislation to require a presidentially appointed and Senate-confirmed inspector general at the Fed and the Consumer Financial Protection Bureau. The Fed already has an internal watchdog, but this one would be appointed by the president.Recent bank failures “serve as a clear reminder that banks cannot be left to supervise themselves,” Ms. Warren warned. She has also pushed for an inspector general review of what went wrong with Silicon Valley Bank.Congress wants to know whom to blame.Much of the focus in recent weeks has been on who at the Fed is to blame. Mr. Barr started in his role midway through 2022, so he has mostly been left out of the finger-pointing.Some have pointed to Mary C. Daly, president of the Federal Reserve Bank of San Francisco. Presidents of regional Fed banks typically do not play a leading role in bank oversight, though they can flag gaping problems to the Federal Reserve Board in extreme cases.Others have pointed to Mr. Barr’s predecessor, Mr. Quarles, who left his supervisory vice chair post in October 2021. Mr. Quarles helped to roll back regulations, and people familiar with his time at the Fed have said his tone when it came to supervision — which he thought should be more transparent and predictable — led many bank overseers to take a less strict approach.And some critics have suggested that Jerome H. Powell, the Fed chair, helped to enable the problems by voting for Mr. Quarles’s deregulatory changes in 2018 and 2019.An internal Fed review of what went awry is set for release on May 1. And the central bank has expressed an openness to an outside inquiry.“It’s 100 percent certainty that there will be independent investigations and outside investigations and all that,” Mr. Powell said at news conference last week. “Of course we welcome that.” More

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    Fed Vice Chair Calls Silicon Valley Bank a ‘Textbook Case of Mismanagement’

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    The Federal Reserve’s top bank cop blamed Silicon Valley Bank’s leaders, while previewing the cental bank’s review of its faulty oversight.WASHINGTON — The Federal Reserve’s vice chair for supervision blamed Silicon Valley Bank’s demise on poor internal management and excessive risk-taking and detailed the steps that Fed supervisors took to address the snowballing problems that ultimately killed the company, according to prepared remarks ahead of a congressional hearing on Tuesday.The vice chair, Michael Barr, who will appear at a Senate Banking Committee hearing along with other regulators, also acknowledged in his written testimony that bank supervision and regulation might need to change in the wake of the collapse.Silicon Valley Bank’s collapse this month sent shock-waves across the global banking system, prompting many depositors to pull their cash out of regional and smaller banks over concerns they could lose their money. The tumult prompted a sweeping response from the government, which pledged to make sure that even big and uninsured depositors at Silicon Valley Bank and another failed bank — Signature — were paid back. The Fed itself set up an emergency lending program to help banks who needed to raise cash in a pinch.But as the upheaval shows tentative signs of calming, lawmakers are demanding to know what went wrong.Mr. Barr will testify alongside Martin Gruenberg, chairman of the Federal Deposit Insurance Corporation, and Nellie Liang, the Treasury’s under secretary for domestic finance.Mr. Gruenberg suggested in his prepared remarks, which were also released on Monday afternoon, that the F.D.I.C. would review both its oversight of Signature bank and the suitability of America’s deposit insurance system — including coverage levels, which now cap at $250,000 — in the wake of the debacle. The F.D.I.C. will release the results of its review by May 1.Silicon Valley Bank’s collapse sent shock-waves across the global banking system, prompting many depositors to pull their cash out of regional and smaller banks.Ian C. Bates for The New York TimesThe Fed was Silicon Valley Bank’s primary regulator, and it too was reviewing why it had failed to stop risks that were in plain sight. Silicon Valley Bank had grown rapidly. Its depositors were heavily concentrated in the volatile technology industry. Many of them had more than $250,000 in their accounts, meaning that their deposits were past the federal insurance limit and that they were more prone to run at the first sign of trouble. The bank’s leaders had made a bad bet that interest rates would stabilize or fall, and the bank faced big losses when rates instead rose in 2022.Mr. Barr was expected to face questions about why those glaring issues had not been stopped — and he laid out an early defense in his speech text.“SVB’s failure is a textbook case of mismanagement,” he said, while adding that the “failure demands a thorough review of what happened, including the Federal Reserve’s oversight of the bank.”He noted that Fed supervisors spotted a range of problems in late 2021 and throughout 2022, even rating the bank’s management as deficient, which barred it from growing by acquiring other companies. And he said that supervisors told board officials in mid-February that they were actively engaged with SVB on its interest rate risk.“As it turned out, the full extent of the bank’s vulnerability was not apparent until the unexpected bank run on March 9,” Mr. Barr added. “In our review, we are focusing on whether the Federal Reserve’s supervision was appropriate for the rapid growth and vulnerabilities of the bank.”Yet Mr. Barr was also likely to face questions — especially from Democrats — about whether changes to Fed regulation and supervision in recent years could have paved the way for the implosion. Congress passed a law that made midsize bank oversight less onerous in 2018, and Mr. Barr’s predecessor, Randal K. Quarles, an appointee of President Donald J. Trump, had carried out and in some cases built upon those changes in 2019.Mr. Barr, a Biden appointee, started in his role in mid-2022. He has been carrying out what the Fed calls a “holistic review” of bank capital standards, but that has yet to be completed.And questions could arise about issues that Mr. Barr did not address in his remarks. For instance, while he pointed out that supervisors were aware of risks at Silicon Valley Bank, he did not note that the group of Fed Board staff members and supervisors overseeing the bank gave it a satisfactory rating when it came to liquidity in 2022 — even after a range of problems, including some with liquidity risk management, had already been flagged.Mr. Barr did suggest that the Fed’s internal review, which he is leading and is set to conclude by May 1, was assessing whether supervisors could “distinguish risks that pose a material threat to a bank’s safety and soundness” and whether “supervisors have the tools to mitigate threats.”But that may be too little to satisfy lawmakers, many of whom are calling for an independent review of what went wrong. Several had sent letters to the Fed requesting a thorough release of materials related to how Silicon Valley Bank was overseen.Ms. Liang said in prepared remarks that the Biden administration was closely monitoring the banking sector and the broader financial system for signs of weakness and defended the handling of the bank failures.“These actions have helped to stabilize deposits throughout the country and provided depositors with confidence that their funds are safe,” she said.Echoing remarks made by Treasury Secretary Janet L. Yellen last week, Ms. Liang indicated that the Biden administration was prepared to take additional actions.“They are tools we would use again if warranted to ensure that Americans’ deposits are safe,” she said.Mr. Gruenberg suggested that the widespread problems caused by the failure of two banks that were not considered systemic under existing regulatory rules indicated that regulators needed to pay more attention to banks of their size.“Given the financial stability risks caused by the two failed banks, the methods for planning and carrying out a resolution of banks with assets of $100 billion or more also merit special attention,” he said.He said the F.D.I.C. had already begun investigating how senior leaders at both banks contributed to losses through bad management, adding, in what seemed like a roundabout reference to President Biden’s call for new legislation on clawbacks from failed bank executives’ stock sales, that the regulator had the power to hold individual executives accountable.Mr. Gruenberg also seemed to nod to community bank lobbyists’ recent protesting of having to pay for making uninsured depositors at Signature and Silicon Valley Bank whole by participating in a special assessment by the F.D.I.C. to replenish the deposit insurance fund.“The law provides the F.D.I.C. authority, in implementing the assessment, to consider ‘the types of entities that benefit from any action taken or assistance provided,’” Mr. Gruenberg said. 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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