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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

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    Banking Crisis Hangs Over Economy, Rekindling Recession Fear

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    Borrowing could become tougher, a particular blow to small businesses — and a threat to the recovery’s staying power.The U.S. economic recovery has repeatedly defied predictions of an impending recession, withstanding supply-chain backlogs, labor shortages, global conflicts and the fastest increase in interest rates in decades.That resilience now faces a new test: a banking crisis that, at times over the past week, seemed poised to turn into a full-blown financial meltdown as oil prices plunged and investors poured money into U.S. government debt and other assets perceived as safe.Markets remained volatile on Friday — stocks had their worst day of the week — as leaders in Washington and on Wall Street sought to keep the crisis contained.Even if those efforts succeed — and veterans of previous crises cautioned that was a big “if” — economists said the episode would inevitably take a toll on hiring and investments as banks pulled back on lending, and businesses struggled to borrow money as a result. Some forecasters said the turmoil had already made a recession more likely.“There will be real and lasting economic repercussions from this, even if all the dust settles well,” said Jay Bryson, chief economist at Wells Fargo. “I would raise the probability of a recession given what’s happened in the last week.”At a minimum, the crisis has complicated the already delicate task facing officials at the Federal Reserve, who have been trying to slow the economy gradually in order to bring inflation to heel. That task is as urgent as ever: Government data on Tuesday showed that prices continued to rise at a rapid clip in February. But now policymakers must grapple with the risk that the Fed’s efforts to fight inflation could be destabilizing the financial system.They don’t have long to weigh their options: Fed officials will hold their next regularly scheduled meeting on Tuesday and Wednesday amid unusual uncertainty about what they will do. As recently as 10 days ago, investors expected the central bank to reaccelerate its campaign of interest rate increases in response to stronger-than-expected economic data. Now, Fed watchers are debating whether the meeting will end with rates unchanged.The failure of Silicon Valley Bank, the midsize California institution, set the latest turmoil in motion.Ian C. Bates for The New York TimesThe notion that the rapid increase in interest rates could threaten financial stability is hardly new. In recent months, economists have remarked often that it is surprising that the Fed has been able to raise rates so much, so fast without severe disruptions to a marketplace that has grown used to rock-bottom borrowing costs.What was less expected is where the first crack showed: small and midsize U.S. banks, in theory among the most closely monitored and tightly regulated pieces of the global financial system.“I was surprised where the problem came, but I wasn’t surprised there was a problem,” Kenneth Rogoff, a Harvard professor and leading scholar of financial crises, said in an interview. In an essay in early January, he warned of the risk of a “looming financial contagion” as governments and businesses struggled to adjust to an era of higher interest rates.He said he did not expect a repeat of 2008, when the collapse of the U.S. mortgage market quickly engulfed virtually the entire global financial system. Banks around the world are better capitalized and better regulated than they were back then, and the economy itself is stronger.“Usually to have a more systemic financial crisis, you need more than one shoe to drop,” Professor Rogoff said. “Think of higher real interest rates as one shoe, but you need another.”Still, he and other experts said it was alarming that such severe problems could go undetected so long at Silicon Valley Bank, the midsize California institution whose failure set in motion the latest turmoil. That raises questions about what other threats could be lurking, perhaps in less regulated corners of finance such as real estate or private equity.“If we’re not on top of that, then what about some of these other, more shadowy parts of the financial system?” said Anil Kashyap, a University of Chicago economist who studies financial crises. Already, there are hints that the crisis may not be limited to the United States. Credit Suisse said on Thursday that it would borrow up to $54 billion from the Swiss National Bank after investors dumped its stock as fears arose about its financial health. The 166-year-old lender has faced a long series of scandals and missteps, and its problems aren’t directly related to those of Silicon Valley Bank and other U.S. institutions. But economists said the violent market reaction was a sign that investors were growing concerned about the stability of the broader system.Tougher lending standards could be a blow to small businesses and affect overall supply in the economy.Casey Steffens for The New York TimesThe turmoil in the financial world comes just as the economic recovery, at least in the United States, seemed to be gaining momentum. Consumer spending, which fell in late 2022, rebounded early this year. The housing market, which slumped in 2022 as mortgage rates rose, had shown signs of stabilizing. And despite high-profile layoffs at large tech companies, job growth has stayed strong or even accelerated in recent months. By early March, forecasters were raising their estimates of economic growth and marking down the risks of a recession, at least this year.‌Now, many of them are reversing course. Mr. Bryson, of Wells Fargo, said he now put the probability of a recession this year at about 65 percent, up from about 55 percent before the recent bank failures. Even Goldman Sachs, among the most optimistic forecasters on Wall Street in recent months, said Thursday that the chances of a recession had risen ‌10 percentage points, to 35 percent, as a result of the crisis and the resulting uncertainty.The most immediate impact is likely to be on lending. Small and midsize banks could tighten their lending standards and issue fewer loans, either in a voluntary effort to shore up their finances or in response to heightened scrutiny from regulators. That could be a blow to residential and commercial developers, manufacturers and other businesses that rely on debt to finance their day-to-day operations.Janet L. Yellen, the Treasury secretary, said Thursday that the federal government was “monitoring very carefully” the health of the banking system and of credit conditions more broadly.“A more general problem that concerns us is the possibility that if banks are under stress, they might be reluctant to lend,” she told members of the Senate Finance Committee. That, she added, “could turn this into a source of significant downside economic risk.”Tighter credit is likely to be a particular challenge for small businesses, which typically don’t have ready access to other sources of financing, such as the corporate debt market, and which often rely on relationships with bankers who know their specific industry or local community. Some may be able to get loans from big banks, which have so far seemed largely immune from the problems facing smaller institutions. But they will almost certainly pay more to do so, and many businesses may not be able to obtain credit at all, forcing them to cut back on hiring, investing and spending.The housing market, which slumped in 2022 as mortgage rates rose, had shown signs of stabilizing before the banking crisis arose.Jennifer Pottheiser for The New York Times“It may be hard to replace those small and medium-size banks with other sources of capital,” said Michael Feroli, chief U.S. economist at J.P. Morgan. “That, in turn, could hinder growth.”Slower growth, of course, is exactly what the Fed has been trying to achieve by raising interest rates — and tighter credit is one of the main channels through which monetary policy is believed to work. If businesses and consumers pull back activity, either because borrowing becomes more expensive or because they are nervous about the economy, that could, in theory, help the Fed bring inflation under control.But Philipp Schnabl, a New York University economist who has studied the recent banking problems, said policymakers had been trying to rein in the economy by crimping demand for goods and services. A financial upheaval, by contrast, could result in a sudden loss of access to credit. That tighter bank lending could also affect overall supply in the economy, which is hard to address through Fed policy.“We have been raising rates to affect aggregate demand,” he said. “Now, you get this credit crunch, but that’s coming from financial stability concerns.”Still, the U.S. economy retains sources of strength that could help cushion the latest blows. Households, in the aggregate, have ample savings and rising incomes. Businesses, after years of strong profits, have relatively little debt. And despite the struggles of their smaller peers, the biggest U.S. banks are on much firmer financial footing than they were in 2008.“I still believe — not just hope — that the damage to the real economy from this is going to be pretty limited,” said Adam Posen, president of the Peterson Institute for International Economics. “I can tell a very compelling story of why this is scary, but it should be OK.”Alan Rappeport More

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    Low Rates Were Meant to Last. Without Them, Finance Is In for a Rough Ride.

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    Economists expected inflation and rates to stay low for years. With Silicon Valley Bank’s implosion, Wall Street is starting to reckon with how wrong that prediction has proved.WASHINGTON — If a number defined the 2010s, it was 2 percent. Inflation, annual economic growth, and interest rates at their highest all hovered around that level — so persistently that economists, the Federal Reserve and Wall Street began to bet that the era of low-everything would last.That bet has gone bad. And with the implosion of Silicon Valley Bank, America is beginning to reckon with the consequences.Inflation surprised economists and policymakers by spiking after the onset of the coronavirus pandemic, and at 6 percent in February, it is proving difficult to stamp out. The Fed has lifted interest rates by 4.5 percentage points in just the past 12 months as it tries to slow the economy and wrestle price increases under control. The central bank’s decision next Wednesday could nudge rates even higher. And that jump in borrowing costs is catching some businesses, investors and households by surprise.Silicon Valley Bank is the most extreme example of an institution’s being caught off guard so far. The bank had amassed a big portfolio of long-term bonds, which pay more interest than shorter-term ones. But it wasn’t paying to sufficiently protect its assets against the possibility of an interest rate spike — and when rates jumped, it found the market value of its holdings seriously dented. The reason: Why would investors want those old bonds when they could buy new ones at more attractive rates?Those impending financial losses helped to spook investors, fueling a bank run that collapsed the institution and shot tremors across the American banking system.The bank’s mistake was a bad — and ultimately lethal — one. But it wasn’t wholly unique.Many banks are holding big portfolios of long-term bonds that are worth a lot less than their original value. U.S. banks were sitting on $620 billion in unrealized losses from securities that had dropped in price at the end of 2022, based on Federal Deposit Insurance Corporation data, with many regional banks facing big hits.Adding in other potential losses, including on mortgages that were extended when rates were low, economists at New York University have estimated that the total may be more like $1.75 trillion. Banks can offset that with higher earnings on deposits — but that doesn’t work if depositors pull their money out, as in Silicon Valley Bank’s case.“How worried should we be comes down to: How likely is it that the deposit franchise leaves?” said Alexi Savov, who wrote the analysis with his colleague Philipp Schnabl.Regulators are conscious of that potentially broad interest rate risk. The Fed unveiled an emergency loan program on Sunday night that will offer banks cash in exchange for their bonds, treating them as though they were still worth their original value in the process. The setup will allow banks to temporarily escape the squeeze they are feeling as interest rates rise.But even if the Fed succeeds at neutralizing the threat of bank runs tied to rising rates, it is likely that other vulnerabilities grew during decades of relatively low interest rates. That could trigger more problems at a time when borrowing costs are substantially higher.Impending financial losses helped to spook investors, fueling a bank run that collapsed Silicon Valley Bank and shot tremors across the U.S. banking system.Jason Henry for The New York Times“There’s an old saying: Whenever the Fed hits the brakes, someone goes through the windshield,” said Michael Feroli, chief economist at J.P. Morgan. “You just never know who it’s going to be.”America has gone through regular bouts of financial pain brought about by rising interest rates. A jump in rates has been blamed for helping to burst the bubble in technology stocks in the early 2000s, and for contributing to the decline in house prices that helped to set off the crash in 2008.Even more closely related to the current moment, a sharp rise in interest rates in the 1970s and 1980s caused acute problems in the savings and loan industry that ended only when the government intervened.There’s a simple logic behind the financial problems that arise from rising interest rates. When borrowing costs are very low, people and businesses need to take on more risk to earn money on their cash — and that typically means that they tie up their money for longer or they throw their cash behind risky ventures.When the Fed raises interest rates to cool the economy and control inflation, though, money moves toward the comparative safety of government bonds and other steady investments. They suddenly pay more, and they seem like a surer bet in a world where the central bank is trying to slow the economy.That helps to explain what is happening in the technology sector in 2023, for example. Investors have pulled back from tech company stocks, which tend to have values that are predicated on expectations for growth. Betting on prospective profits is suddenly less attractive in a higher-rate environment.A more challenging business and financial backdrop has quickly translated into a souring job market in technology. Companies have been making high-profile layoffs, with Meta announcing a fresh round just this week.That is more or less the way Fed rate moves are supposed to work: They diminish growth prospects and make access to financing tougher, curb business expansions, cost jobs and end up slowing demand throughout the economy. Slower demand makes for weaker inflation.But sometimes the pain does not play out in such an orderly and predictable way, as the trouble in the banking system makes clear.“This just teaches you that we really have these blind spots,” said Jeremy Stein, a former Fed governor who is now at Harvard. “You put more pressure on the pipes, and something is going to crack — but you never know where it is going to be.”The Fed was conscious that some banks could face trouble as rates rose meaningfully for the first time in years.“The industry’s lack of recent experience with rising and more volatile interest rates, coupled with material levels of market uncertainty, presents challenges for all banks,” Carl White, the senior vice president of the supervision, credit and learning division at the Federal Reserve Bank of St. Louis, wrote in a research note in November. That was true “regardless of size or complexity.”But it has been years since the central bank formally tested for a scenario of rising rates in big banks’ formal stress tests, which examine their expected health in the event of trouble. While smaller regional banks aren’t subject to those tests, the decision not to test for rate risk is evidence of a broader reality: Everyone, policymakers included, spent years assuming that rates would not go back up.When borrowing costs are very low, people and businesses need to take on more risk to earn money on their cash.John Taggart for The New York TimesIn their economic forecasts a year ago, even after months of accelerating inflation, Fed officials projected that interest rates would peak at 2.8 percent before falling back to 2.4 percent in the longer run.That owed to both recent experience and to the economy’s fundamentals: Inequality is high and the population is aging, two forces that mean there are lots of savings sloshing around the economy and looking for a safe place to park. Such forces tend to reduce interest rates.The pandemic’s downswing upended those forecasts, and it is not clear when rates will get back on the lower-for-longer track. While central bankers still anticipate that borrowing costs will hover around 2.5 percent in the long run, for now they have pledged to keep them high for a long time — until inflation is well on its way back down to 2 percent.Yet the fact that unexpectedly high interest rates are putting a squeeze on the financial system could complicate those plans. The Fed will release fresh economic forecasts alongside its rates decision next week, providing a snapshot of how its policymakers view the changing landscape.Central bankers had previously hinted that they might raise interest rates even higher than the roughly 5 percent that they had previously forecast this year as inflation shows staying power and the job market remains strong. Whether they will be able to stick with that plan in a world colored by financial upheaval is unclear. Officials may want to tread lightly at a time of uncertainty and the threat of financial chaos.“There’s sometimes this sense that the world works like engineering,” Skanda Amarnath, executive director of Employ America, said of the way central bankers think about monetary policy. “How the machine actually works is such a complex and fickle thing that you have to be paying attention.”And policymakers are likely to be attuned to other pockets of risk in the financial system as rates climb: Mr. Stein, for instance, had expected rate-related weakness to show up in bond funds and was surprised to see the pain surface in the banking system instead.“Whether it is stabler than we thought, or we just haven’t hit the air pocket yet, I don’t know,” he said.Joe Rennison More

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    Biden’s World Bank Pick Looks to Link Climate and Development Goals

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    Ajay Banga will begin a monthlong “global listening tour” to drum up support for his nomination to be the bank’s next president.The Biden administration’s nominee to be the next president of the World Bank, the international development and climate institution, is embarking on a monthlong sprint around the globe to solidify support for his candidacy.It will be the first opportunity for the nominee, Ajay Banga, to share his vision for the bank, which has been aiming to take on a more ambitious role in combating climate change while maintaining its core commitment to alleviating poverty.Mr. Banga, who has had a long career in finance, faces the challenge of convincing nations that his decades of private-sector experience will help him transform the World Bank.He will begin his “global listening tour” on Monday with stops in Ivory Coast and Kenya, the Treasury Department said on Friday. In Ivory Coast, he will meet with senior government officials, leaders of the African Development Bank and civil society organizations. In Kenya, he will visit the Kenya Climate Innovation Center and a World Bank-backed project that helps local entrepreneurs find ways to address climate change.Mr. Banga will focus on how finding development solutions can be intertwined with climate goals and emphasize his experience working on financial inclusion in Africa, where he helped expand access to electronic payments systems while chief executive of Mastercard, a Treasury official said.The whirlwind campaign will also take Mr. Banga to Asia, Latin America and Europe.The White House nominated him last week after the unexpected announcement last month that David Malpass will step down as World Bank president by the end of June, nearly a year before the end of his five-year term. Mr. Malpass, who was nominated by President Donald J. Trump, ignited a controversy last year when he appeared to express skepticism about whether fossil fuels contribute to global warming.During a briefing at the Treasury Department this week, Mr. Banga made clear that he had no doubts about the causes of climate change. “Yes, there is scientific evidence, and it matters,” he said.Careful to strike a balance between the bank’s growing climate ambitions and its poverty-reduction goals, Mr. Banga emphasized that both issues were interconnected and equally important.“My belief is that poverty alleviation, or shared prosperity, or all those words that essentially imply the idea of tackling inequality, cannot be divorced from the challenges of managing nature in a constructive way,” Mr. Banga added.The World Bank’s nomination process runs through March 29, and other countries may offer candidates. But by tradition, the United States, the bank’s largest shareholder, selects an American to be its president. The executive board hopes to choose a new president by early May.A climate protest in Munich on Friday. Mr. Banga will focus on how finding development solutions can be intertwined with climate goals.Anna Szilagyi/EPA, via ShutterstockIf approved by the board, Mr. Banga will face an array of challenges. The world economy is slowly emerging from three years of pandemic and war that have slowed global growth and worsened poverty. Emerging economies face the prospect of a cascade of defaults in the coming years, and the World Bank has been vocal in calling for debt reduction.The Biden administration has pointed to China, one of the world’s largest creditors, as a primary obstacle in debt-restructuring efforts. Mr. Banga was careful not to be critical of China and said he expected to travel there in the coming weeks.“Today I’m the nominee of the United States, but if I’m lucky enough to be elected, then I represent all the countries who are part of the bank,” Mr. Banga said on Thursday. “Having their points of view known, understood and openly discussed — maybe not agreed to, but openly discussed — is an important part of leading a multilateral institution.”His nomination has won both praise and skepticism from climate activists and development experts.Some climate groups have lamented Mr. Banga’s lack of direct public-sector experience and expressed concern about his affiliation with companies that invest in the oil and gas industries.“Many question whether his history at global multinationals such as Citibank, Nestlé, KFC and Mastercard will prepare him for the huge challenges of poverty and inequality,” Recourse, a nonprofit environmental organization, said in a statement this week. Recourse has been critical of the World Bank’s policies on gas transition, its exposure to coal and its pace of action on climate change.Other prominent activists have praised Mr. Banga, including Vice President Al Gore, who predicted that he would bring “renewed leadership on the climate crisis to the World Bank.”And others viewed Mr. Banga as a natural choice to bridge the gap between the bank’s broad mandates.“Throughout discussions of the World Bank’s evolution, borrowing countries have consistently communicated that financing for climate should not come at the expense of other development priorities,” Stephanie Segal, a senior fellow with the Economics Program at the Center for Strategic and International Studies, wrote in an essay this week. “In nominating Banga, whose candidacy does not lead with climate, the United States has signaled agreement that the bank’s development mandate cannot be abandoned in favor of a ‘climate only’ agenda.”The Biden administration has also faced questions about why it did not choose a woman to lead the bank, which has had only men serve as its full-time president.Mr. Banga asserted that as someone who was born and educated in India, he would bring diversity and a unique perspective to the World Bank. He also emphasized that at Mastercard, he had demonstrated a commitment to empowering women and elevating them to senior roles.“I think that you should credit the administration with taking a huge leap forward into finding somebody who wasn’t born here, wasn’t educated here,” Mr. Banga said. “I believe that giving people a level playing field is our job.”He added: “And that means whether you’re a woman, your color, your sexual orientation, growing up on the wrong side of the tracks, it doesn’t matter.” More

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    Bed Bath & Beyond’s Stock Offering Is Backed by Hudson Bay Capital

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    Hudson Bay Capital has essentially agreed to make sure the troubled retailer will sell roughly $1 billion in shares as it tries to avoid bankruptcy.Bed Bath & Beyond’s plan to use a public stock offering as a way to raise more than $1 billion and avoid bankruptcy will be backed by the investment firm Hudson Bay Capital Management, two people familiar with the situation said, speaking on the condition of anonymity because the terms of the deal have not been made public.Bed Bath & Beyond disclosed the deal on Monday without naming Hudson Bay. It hopes that raising enough cash will restore the confidence of suppliers, preserve jobs and allow the company to pursue a turnaround plan it announced in August.The retailer said on Tuesday that it had already underwritten the initial $225 million worth of shares it was selling. It plans to sell an additional $800 million over time, assuming “certain conditions are met.” The company did not disclose what those conditions were.Hudson Bay, though, has essentially agreed to buy the stock, assuming Bed Bath & Beyond sells the additional shares.Hudson Bay is a multibillion-dollar fund based in Greenwich, Conn. It often acts as a mergers specialist, either betting passively on whether company deals go through or fall apart or, at other times, pushing for such moves.The firm is likely looking to take advantage of Bed Bath & Beyond’s rising share price, with hopes of selling when it goes even higher. Retail investors helped drive the price up nearly 100 percent on Monday, before Bed Bath & Beyond announced its plan to offer stock. Shares fell nearly 50 percent in trading on Tuesday, to around $3.“This transformative transaction will provide runway to execute our turnaround plan,” Sue Gove, Bed Bath & Beyond’s chief executive, said in a statement. “As we make important strategic and operational changes, we will continue to take disciplined steps to enhance our cost base and improve our financial position.”The Downfall of Bed Bath & BeyondThe home goods retailer, which was founded in New Jersey in 1971, faces an uncertain future amid worsening financial woes.Few Options: After a disappointing holiday season, Bed Bath & Beyond is said to be in discussions to sell pieces of its business and has warned investors of a potential bankruptcy.A Warning Sign: The disclosure that the retailer had defaulted on certain debt payments was the most salient sign of financial strain yet for the company.Turnaround Plan: The company laid out an aggressive plan in August to turn itself around that included store closings, cost cuts and layoffs. But it needs cash to execute its strategy.Selling Stock: Bed Bath & Beyond announced plans for a public offering, saying that it hoped the move would help it raise more than $1 billion and pay off its debts.A spokesperson for Hudson Bay did not respond to request for comment. Bed Bath & Beyond did not respond to a request for additional comment on the transaction. The deal between the hedge fund and the retailer was reported earlier by Bloomberg.Some analysts doubt whether the deal will be enough to help the struggling home goods retailer.“The fundamental story for Bed Bath & Beyond is so broken at this point,” David Silverman, retail analyst at Fitch Ratings, said. “I don’t know that a short-term cash infusion that could buy them a few months, a couple of quarters, is going to change their fate.”The deal with Hudson Bay came together within the past several weeks, the two people familiar with the matter said. Late last month, JPMorgan Chase, which helped give Bed Bath & Beyond a lifeline this summer by expanding its credit line, froze the retailer’s credit accounts after notifying it that it was in breach of the terms of its debt. As Bed Bath & Beyond raced to find cash to pay its debts, tensions built over the amount information it was sharing with its banks and other creditors and how quickly it was relaying it to them, the people said..css-1v2n82w{max-width:600px;width:calc(100% – 40px);margin-top:20px;margin-bottom:25px;height:auto;margin-left:auto;margin-right:auto;font-family:nyt-franklin;color:var(–color-content-secondary,#363636);}@media only screen and (max-width:480px){.css-1v2n82w{margin-left:20px;margin-right:20px;}}@media only screen and (min-width:1024px){.css-1v2n82w{width:600px;}}.css-161d8zr{width:40px;margin-bottom:18px;text-align:left;margin-left:0;color:var(–color-content-primary,#121212);border:1px solid var(–color-content-primary,#121212);}@media only screen and (max-width:480px){.css-161d8zr{width:30px;margin-bottom:15px;}}.css-tjtq43{line-height:25px;}@media only screen and (max-width:480px){.css-tjtq43{line-height:24px;}}.css-x1k33h{font-family:nyt-cheltenham;font-size:19px;font-weight:700;line-height:25px;}.css-1hvpcve{font-size:17px;font-weight:300;line-height:25px;}.css-1hvpcve em{font-style:italic;}.css-1hvpcve strong{font-weight:bold;}.css-1hvpcve a{font-weight:500;color:var(–color-content-secondary,#363636);}.css-1c013uz{margin-top:18px;margin-bottom:22px;}@media only screen and (max-width:480px){.css-1c013uz{font-size:14px;margin-top:15px;margin-bottom:20px;}}.css-1c013uz a{color:var(–color-signal-editorial,#326891);-webkit-text-decoration:underline;text-decoration:underline;font-weight:500;font-size:16px;}@media only screen and (max-width:480px){.css-1c013uz a{font-size:13px;}}.css-1c013uz a:hover{-webkit-text-decoration:none;text-decoration:none;}What we consider before using anonymous sources. Do the sources know the information? What’s their motivation for telling us? Have they proved reliable in the past? Can we corroborate the information? Even with these questions satisfied, The Times uses anonymous sources as a last resort. The reporter and at least one editor know the identity of the source.Learn more about our process.The retailer’s lenders had dealt with a great deal of turbulence over the past few months. In early September, weeks after Bed Bath & Beyond secured rescue financing from JPMorgan and the investment firm Sixth Street, the company’s chief financial officer died in what was ruled a suicide. Industry executives have questioned whether the retailer had the right management in place to weather its challenges.On Monday, Bed Bath & Beyond said Holly Etlin had been hired as the interim chief financial officer. Ms. Etlin has experience with restructurings and company turnarounds.Rising interest rates have also made lenders warier of plowing more money into distressed companies like Bed Bath & Beyond. But equity may prove to be a new alternative.Bed Bath & Beyond’s move echoes what appears to be a new playbook for distressed retailers. Another indebted company favored by meme traders, AMC Entertainment, sold investors preferred shares in August after common shareholders balked at its efforts to issue more stock, which dilutes the value of shares that are already held. Both sets of AMC shares have remained volatile. In 2020, Hertz tried to sell shares after filing for bankruptcy, but the Securities and Exchange Commission squashed those efforts.“For those who are in this situation, for those who are desperate, this will be one instrument that they can use,” said Douglas Chia, the head of Soundboard Governance, a corporate governance consultancy. “Every couple years there’s a new instrument that investment bankers come up with, and it’s creative and it becomes the flavor of the month and everyone starts to use that. This could be the same thing.”The question for Bed Bath & Beyond and the roughly 30,000 people it employed as of last February is whether it will be enough. Even if this financing goes through, the company faces the same challenges that have plagued it the past couple of months. The retailer is contending with low inventory in its stores as vendors hold back on shipping items because of worries about its finances. It also has a less sophisticated e-commerce operation than many of its competitors and a dwindling customer base.The stock offering “by itself doesn’t change the business model or any of those tough decisions that they need to make,” said Patrick Collins, a partner who works on bankruptcies and restructurings at the law firm Farrell Fritz.The deal could give Bed Bath & Beyond only a few more quarters of financial runway, said Seth Basham, a retail analyst at the investment firm Wedbush Capital.The company is ramping up the number of stores it’s closing to more than 400, including Harmon stores. That’s a significant chunk of the 950 stores that it had when the closings began in August.Sales keep sliding as well. Bed Bath & Beyond has said it expects comparable sales in the first quarter to decline 30 to 40 percent from a year earlier, but expects to see quarterly sales improving afterward.It projects that its ability to have goods in stock will return to normal levels by the important back-to-college shopping season.Not everyone is convinced.“It is very difficult to see where they could be able to reverse those trends quickly, particularly given we’re in a somewhat challenging environment for retail goods,” Fitch’s Mr. Silverman said. “You’ve got competitors like Target, Amazon, Walmart and low- and mid-tier department stores that aren’t relinquishing market share.” More

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    After a Burst of New Businesses, a Cooling Economy Intrudes

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    The pandemic has brought a boom in entrepreneurship, but higher interest rates, a chill in venture capital and fears of recession now pose obstacles.An unexpected result of the pandemic era has been a surge in entrepreneurial activity. Since 2020, applications to start new businesses have skyrocketed, reversing a decades-long slump.The reasons for the boom are manifold. Millions of people were suddenly laid off, giving them the time, and inclination, to start new businesses. Personal savings jumped, buoyed partly by a frothy stock market and government stimulus payments, providing would-be entrepreneurs with the means to fulfill their visions. Rock-bottom interest rates made money cheap and widely available.But the ebullient economic environment that helped foster this entrepreneurial spirit has given way to high inflation, rising interest rates and dwindling savings. That has left these nascent businesses to navigate challenging financial crosscurrents — and a possible recession — at a moment when they are at their most fragile. Even under normal conditions, roughly half of new businesses fail within five years.“Young businesses are inherently vulnerable,” said John Haltiwanger, an economist at the University of Maryland who studies entrepreneurship. “They’re likely to fail, and they are especially likely to fail in a recession.”In 2021, Americans filed applications to start 5.4 million new businesses, according to data from the Census Bureau. That was on top of the 4.4 million applications filed in 2020, which had been the highest by far in the more than 15 years the government had been keeping track. (Filings last year through November were running ahead of 2020 but behind 2021; figures for December will be released this week.)Data on actual business formation will not become available for several years, so it is not possible yet to measure the effects of the cooling economy on new ventures. Whether these new businesses pull through could have broad implications for the health and dynamism of the overall economy.“Innovation drives gains in productivity,” said John Dearie, president of the Center for American Entrepreneurship, an advocacy organization. “And innovation comes disproportionately from new businesses.”Jennifer Sutton started a juice and wellness bar in Park City, Utah. She is worried about the prospect of a recession and how it would affect the tourism that supports her business.Kim Raff for The New York TimesBut he cautioned that the Federal Reserve’s monetary policy — intended to tamp down the fastest price increases in decades — is “ramping up the headwinds facing entrepreneurs to gale force by crushing demand and by increasing the price of money.”In interviews, entrepreneurs expressed a mix of resolve and resignation about the months ahead. Some said they had learned lessons from the pandemic’s upheaval about how to endure financial adversity that they believed had recession-proofed their business models. Others were cleareyed about needing outside funding that they feared would no longer arrive.Inflation F.A.Q.Card 1 of 5What is inflation? More

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    A Holiday Season Divided by Inflation and Economic Struggles

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    Even if policymakers achieve a gentle economic slowdown, it won’t be smooth for everyone.Langham Hotel in Boston has plush suites and conference rooms. Across town, in Dorchester, people line up for Thanksgiving turkeys at Catholic Charities.November has been busier than expected at the Langham Hotel in Boston as luxury travelers book rooms in plush suites and hold meetings in gilded conference rooms. The $135-per-adult Thanksgiving brunch at its in-house restaurant sold out weeks ago.Across town, in Dorchester, demand has been booming for a different kind of food service. Catholic Charities is seeing so many families at its free pantry that Beth Chambers, vice president of basic needs at Catholic Charities Boston, has had to close early some days and tell patrons to come back first thing in the morning. On the frigid Saturday morning before Thanksgiving, patrons waiting for free turkeys began to line the street at 4:30 a.m. — more than four hours before the pantry opened.The contrast illustrates a divide that is rippling through America’s topsy-turvy economy nearly three years into the pandemic. Many well-off consumers are still flush with savings and faring well financially, bolstering luxury brands and keeping some high-end retailers and travel companies optimistic about the holiday season. At the same time, America’s poor are running low on cash buffers, struggling to keep up with rising prices and facing climbing borrowing costs if they use credit cards or loans to make ends meet.The situation underlines a grim reality of the pandemic era. The Federal Reserve is raising interest rates to make borrowing more expensive and temper demand, hoping to cool the economy and bring the fastest inflation in decades back under control. Central bankers are trying to manage that without a recession that leaves families out of work. But the adjustment period is already a painful one for many Americans — evidence that even if the central bank can pull off a so-called “soft landing,” it won’t feel benign to everyone.“A lot of these households are moving toward the greater fragility that was the norm before the pandemic,” said Matthew Luzzetti, chief U.S. economist at Deutsche Bank.Many working-class households fared well in 2020 and 2021. Though they lost jobs rapidly at the outset of the pandemic, hiring rebounded swiftly, wage growth has been strong, and repeated government relief checks helped families amass savings.But after 18 months of rapid price inflation — some of which was driven by stimulus-fueled demand — the poor are depleting those cushions. American families were still sitting on about $1.7 trillion in excess savings — extra savings accumulated during the pandemic — by the middle of this year, based on Fed estimates, but about $1.35 trillion of it was held by the top half of earners and just $350 billion in the bottom half.At the same time, prices climbed 7.7 percent in the year through October, far faster than the roughly 2 percent pace that was normal before the pandemic. As savings have run down and necessities like car repair, food and housing become sharply more expensive, many people in lower-income neighborhoods have begun turning to credit cards to sustain their spending. Balances for that group are now above 2019 levels, New York Fed research shows. Some are struggling to keep up at all.“With the cost of food, the explosive cost of eggs, people are having to come to us more,” said Ms. Chambers of Catholic Charities, explaining that other rising prices, including rent, are intensifying the struggle. The location planned to give out 1,000 turkeys and 600 gift cards for turkeys, at its holiday distribution, along with bags of canned creamed corn, cranberry sauce and other Thanksgiving fare.Tina Obadiaru, 42, was among those who lined up to get a turkey on Saturday. A mother of seven, she works full time caring for residents at a group home, but it isn’t enough to make ends meet for her and her family, especially after her Dorchester rent jumped last month to $2,500 from $2,000.“It is going to be really difficult,” she said.The disproportionate burden inflation places on the poor is one reason Fed officials are scrambling to quickly bring price increases back under control. Central bankers have lifted interest rates from near zero earlier this year to nearly 4 percent, and have signaled that there are more to come.But the process of lowering inflation is also likely to hurt for lower-income people. Fed policies work partly by making it expensive to borrow to sustain consumption, which causes demand to decline and eventually forces sellers to charge less. Rate increases also slow down the labor market, cooling wage growth and possibly even costing jobs.Catholic Charities has seen a surge in demand for food.November has been busier than expected at the Langham Hotel.That means that the solid labor market that has buoyed the working class through this challenging time — one that has particularly pushed up wages in lower-paying jobs, including leisure and hospitality, and transportation — could soon crack. In fact, Fed officials are watching for a slowdown in spending and pay gains as a sign that their policies are working.“While higher interest rates, slower growth and softer labor market conditions will bring down inflation, they will also bring some pain to households and businesses,” Jerome H. Powell, the Fed chair, said at a key Fed conference in August. “These are the unfortunate costs of reducing inflation.”Central bankers believe that a measure of pain today is better than what would happen if inflation were allowed to continue unchecked. If people and businesses begin to expect rapid price increases and act accordingly — asking for big raises, instituting frequent and large price increases — inflation could become entrenched in the economy. It would then take a more punishing policy response to bring it to heel, one that could push unemployment even higher.But evidence accumulating across the economy underscores that the slowdown the Fed has been engineering, however necessary, is likely to feel different across different income groups.Consumer spending overall has so far been resilient to the Fed’s rate moves. Retail sales data moderated notably early in the year, but have recently picked back up. Personal consumption expenditures aren’t expanding at a breakneck pace, but they continue to grow.Yet underneath those aggregate numbers, a nascent shift appears to be underway — one that highlights the growing divide in economic comfort between the rich and the poor. Credit card data from Bank of America suggest that high- and middle-income households have replaced lower-income households in driving consumption growth in recent months. Poorer shoppers contributed one-fifth of the growth in discretionary spending in October, compared with around two-fifths a year earlier.“This is likely due to lower-income groups being the most negatively impacted by surging prices — they have also seen the biggest drawdown of bank savings,” economists at the Bank of America Institute wrote in a Nov. 10 note.Even if the poor feel the squeeze of elevated prices and higher interest rates and pull back, the economists noted that continued economic health among richer consumers could keep demand strong in areas where wealthier people tend to spend their money, including services like travel and hotels.At the Langham, a newly renovated hotel in a century-old building that originally served as the Federal Reserve Bank of Boston, there is little to suggest an impending slowdown in spending. In “The Fed,” the hotel bar named in a nod to the building’s heritage, bartenders are busy every weeknight slinging cocktails with names like “Trust Fund Baby” and “Apple Butter Me Up” (both $16). When guests come back from shopping on nearby Newbury Street, the hotel’s managing director, Michele Grosso, said, their arms are full of bags. He sees the fact that the Thanksgiving brunch sold out so fast as emblematic of continued demand.“If people were pulling back, we’d still be promoting,” he said of the three-course, family-style meal. “Instead, we’ve got a waiting list.”The consumption divide playing out in Boston is also clear at a national level, echoing through corporate earnings calls. American Express added customers for platinum and gold cards at a record clip in the United States last quarter, for instance, as it reported “great demand” for premium, fee-based products.The $135-per-adult Thanksgiving Brunch at the Langham Hotel sold out weeks ago.Food to be distributed at Catholic Charities, which has been giving out Turkeys, cranberry sauce and other Thanksgiving fare.“As we sit here today, we see no changes in the spending behaviors of our customers,” Stephen J. Squeri, the company’s chief executive, told investors during an earnings call last month.Companies that serve more low-income consumers, however, are reporting a marked pullback.“Many consumers this year have relied on borrowing or dipping into their savings to manage their weekly budgets,” Brian Cornell, the chief executive of Target, said in an earnings call on Nov. 16. “But for many consumers, those options are starting to run out. As a result, our guests are exhibiting increasing price sensitivity, becoming more focused on and responsive to promotions and more hesitant to purchase at full price.”The split makes it hard to guess what will happen next with spending and inflation. Some economists think the return of price sensitivity among lower-income consumers will be enough to help overall costs moderate, paving the way for a notable slowdown in 2023.“You get more promotional activity, and companies starting to compete for market share,” said Julia Coronado, founder of MacroPolicy Perspectives.But others warn that, even if the very poor are struggling, it may not be sufficient to bring spending and prices down meaningfully.Many families paid off their credit card balances during the pandemic, and that is now reversing, despite high credit card rates. The borrowing could help some households sustain their consumption for a while, especially paired with strong employment gains and recently fallen gas prices, said Neil Dutta, head of U.S. economics at Renaissance Macro.As the world waits to see whether the Fed can slow down the economy enough to control inflation without forcing the country into an outright recession, those coming to Catholic Charities in Boston illustrate why the stakes are so high. Though many have jobs, they have been buffeted by months of rapid price increases and now face an uncertain future.“Before the pandemic, we thought in cases,” Ms. Chambers said, referencing how much food is needed to meet local need. “Now we think only in pallets.” More