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

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

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    How Silicon Valley Bank’s Failure Could Have Spread Far and Wide

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    New research suggests large parts of the country remain vulnerable to widespread bank failure in the event of a run on deposits.WASHINGTON — The federal government’s rescue of two failed banks last month has drawn criticism from some lawmakers and investors, who accuse the Biden administration and the Federal Reserve of bailing out wealthy customers in California and New York and sticking bank customers in Middle America with the bill.But new data help explain why government officials declared the failures of Silicon Valley Bank and Signature Bank to be a risk to not just their customers, but also the entire financial system. The numbers suggest that a run on deposits at those two banks could have set off a cascading series of bank failures, crippling small businesses and economic activity across wide parts of the country.The analysis of geographic risks from a banking crisis, prepared at the request of The New York Times, was done by economists at Stanford University, the University of Southern California, Columbia University and Northwestern University.The results show the continuing potential for widespread damage to the entire banking system, which has seen many banks’ financial positions deteriorate as the Fed has raised interest rates to tame inflation. Those rate increases have reduced the value of some government bonds that many banks hold in their portfolios.Although the damage has so far been contained, the research shows that larger runs on banks vulnerable to rate increases could result in a significant drop in credit available to store owners, home borrowers and more. Because so many counties rely on a relatively small number of financial institutions for deposits and loans, and because so many small businesses keep their money close to home, even a modest run on vulnerable banks could effectively stifle access to credit for entire communities.That sort of credit paralysis, the researchers estimate, could afflict nearly half the counties in Missouri, Tennessee and Mississippi — and every county in Vermont, Maine and Hawaii.The analysis helps buttress the case that government officials were making based on anecdotes and preliminary data they had when they orchestrated the bank rescues during that weekend in March. As fears of a wider financial crisis mounted, the Fed, the Treasury Department and the Federal Deposit Insurance Corporation acted together to ensure depositors could have access to all their money after the banks collapsed — even if their accounts exceeded the $250,000 limit on federally insured deposits. Fed officials also announced they would offer attractive loans to banks that needed help covering depositors’ demands.The moves allowed big companies — like Roku — that kept all their money with Silicon Valley Bank to be fully protected despite the bank’s collapse. That has prompted criticism from lawmakers and analysts who said the government was effectively encouraging risky behavior by bank managers and depositors alike.Even with those moves, the analysts warn, regulators have not permanently addressed the vulnerabilities in the banking system. Those risks leave some of the most economically disadvantaged areas of the country susceptible to banking shocks ranging from a pullback in small-business lending, which may already be underway, to a new depositor run that could effectively cut off easy access to credit for people and companies in counties across the nation.Federal Reserve staff hinted at the risks of a broader banking-related hit to the American economy in minutes from the Fed’s March meeting, which was released on Wednesday. “If banking and financial conditions and their effects on macroeconomic conditions were to deteriorate more than assumed in the baseline,” staff members were reported as saying, “then the risks around the baseline would be skewed to the downside for both economic activity and inflation.”Administration and Fed officials say the actions they took to rescue depositors have stabilized the financial system — including banks that could have been threatened by a depositor run.Lael Brainard, director of President Biden’s National Economic Council, said on Wednesday that banks could learn from the “stresses that the failed banks were under” and were “shoring up their balance sheets.”Drew Angerer/Getty Images“The banking system is very sound — it’s stable,” Lael Brainard, director of President Biden’s National Economic Council, said on Wednesday at an event in Washington hosted by the media outlet Semafor. “The core of the banking system has a great deal of capital.”“What is important is that banks have now seen, bank executives have now seen, some of the stresses that the failed banks were under, and they’re shoring up their balance sheets,” she said.But the researchers behind the new study caution that it is historically difficult for banks to quickly make large changes to their financial holdings. Their data does not account for efforts smaller banks have taken in recent weeks to reduce their exposure to higher interest rates. But the researchers note smaller and regional banks face new risks in the current economic climate, including a downturn in the commercial real estate market, that could set off another run on deposits.“We have to be very careful,” said Amit Seru, an economist at Stanford Graduate School of Business and an author of the study. “These communities are still pretty vulnerable.”Biden administration officials were monitoring a long list of regional banks in the hours after Silicon Valley Bank failed on March 10. They became alarmed when data and anecdotes suggested depositors were lining up to pull money out of many of them.The costs of the rescue they engineered will ultimately be paid by other banks, through a special fee levied by the government.The moves drew criticism, particularly from conservatives. “These losses are borne by the deposit insurance fund,” Senator Bill Hagerty, Republican of Tennessee, said in a recent Banking Committee hearing on the rescues. “That fund is going to be replenished by banks across the nation that had nothing to do with the mismanagement of Silicon Valley Bank or the failure of supervision here.”Senator Josh Hawley, Republican of Missouri, wrote on Twitter that he would try to block banks from passing on the special fee to consumers. “No way MO customers are paying for a woke bailout,” he said.The researchers found Silicon Valley Bank was more exposed than most banks to the risks of a rapid increase in interest rates, which reduced the value of securities like Treasury bills that it held in its portfolios and set the stage for insolvency when depositors rushed to pull their money from the bank.But using federal regulator data from 2022, the team also found hundreds of U.S. banks had dangerous amounts of deterioration in their balance sheets over the past year as the Fed rapidly raised rates.To map the vulnerabilities of smaller banks across the country, the researchers calculated how much the Fed’s interest rate increases have reduced the value of the asset holdings for individual banks, compared with the value of its deposits. They used that data to effectively estimate the risk of a bank failing in the event of a run on its deposits, which would force bank officials to sell undervalued assets to raise money. Then they calculated the share of banks at risk of failure for every county in the country.Those banks are disproportionately located in low-income communities, areas with high shares of Black and Hispanic populations and places where few residents hold a college degree.They are also the economic backbone of some of the nation’s most conservative states: Two-thirds of the counties in Texas and four-fifths of the counties in West Virginia could have a paralyzing number of their banks go under in the event of even a medium-sized run on deposits, the researchers calculate.In counties across the country, smaller banks are crucial engines of economic activity. In 95 percent of counties, Goldman Sachs researchers recently estimated, at least 70 percent of small business lending comes from smaller and regional banks. Those banks, the Goldman researchers warned, are pulling back on lending “disproportionately” in the wake of the Silicon Valley Bank collapse.Analysts will get new indications of the degree to which banks are moving quickly to pull back on lending and building up capital when three large financial institutions report quarterly earnings on Friday: Citigroup, JPMorgan Chase and Wells Fargo.Mr. Seru of Stanford said the communities that were particularly vulnerable to both a lending slowdown and a potential regional bank run were also the ones that suffered most in the pandemic recession. He said larger financial institutions were unlikely to quickly fill any lending vacuum in those communities if smaller banks failed.Mr. Seru and his colleagues have urged the government to help address those communities’ vulnerabilities by requiring banks to raise more capital to shore up their balance sheets.“The recovery in these neighborhoods is still not there yet,” he said. “And the last thing we want is disruption there.” 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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    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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    Powell and Yellen Suggest Need to Review Regulations After Bank Failures

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    Proposals for more scrutiny of the financial sector are meeting resistance from industry and Congress.WASHINGTON — Two of the nation’s top economic policymakers on Wednesday said they were focused on determining how the failure of Silicon Valley Bank had happened and suggested changes to federal regulation and oversight might be needed to prevent future runs on American banks.The discussion of stricter oversight by Jerome H. Powell, the Federal Reserve chair, and Treasury Secretary Janet L. Yellen came as lawmakers, the financial industry and investors are working to figure out why Silicon Valley Bank and Signature Bank failed and as policymakers try to ensure other firms don’t suffer the same fate.At a news conference following the Fed’s announcement that it would raise interest rates by a quarter percentage point, Mr. Powell said he was focused on the question of what had gone wrong at Silicon Valley Bank, which was overseen by the Federal Reserve Bank of San Francisco.The Fed has initiated an internal review into the supervision and regulation of Silicon Valley Bank, with the central bank’s vice chair for supervision, Michael S. Barr, leading the probe. Asked at the news conference whether he would support an independent examination — one not conducted by the Fed — Mr. Powell said he would welcome more scrutiny.“There’s 100 percent certainty that there will be outside investigations,” he said.Mr. Powell criticized bank executives, who he said had “failed badly,” but also conceded that Fed supervisors had not been effective at preventing the bank from sliding into insolvency. He said he expected the central bank’s own report to outline concrete steps to avoid a repeat of the crisis.“Clearly we do need to strengthen supervision and regulation,” Mr. Powell said. “And I assume that there’ll be recommendations coming out of the report, and I plan on supporting them and supporting their implementation.”Ms. Yellen echoed his comments at a Senate hearing on Wednesday afternoon, saying policymakers needed to take a hard look at the troubles plaguing the banking industry, including what led to the downfalls of Silicon Valley Bank, on March 10, and Signature Bank, which was seized by regulators on March 12.“I absolutely think that it’s appropriate to conduct a very thorough review of what factors were responsible for the failure of these banks,” she said. “Certainly we should be reconsidering what we need to shore up regulation to prevent this.”Ms. Yellen said she supports legislation that would penalize executives whose actions lead to bank failures and restore rules that were rolled back during the Trump administration that gave the Financial Stability Oversight Council more power to scrutinize nonbank financial institutions.Economic policymakers are trying to figure out why Silicon Valley Bank failed and to ensure other firms don’t suffer the same fate.Ulysses Ortega for The New York TimesMs. Yellen also said that because bank runs “may more readily happen now,” it might make sense to update stress test models and bank liquidity requirements with new assumptions about how quickly deposits could flee. Mr. Powell also addressed the speed of the outflows of funds from Silicon Valley Bank, which was hastened by social media and the ease of moving money with smartphones, suggesting that new rules are needed to keep up with advances in technology.For the time being, Ms. Yellen said she was focused on using existing tools to restore confidence in the banking system.The Biden administration likely has little choice because of mounting resistance to new financial regulations within Congress and the banking industry. That opposition was clear on Wednesday as lawmakers and executives gathered at an American Bankers Association conference in Washington.Although there was widespread support for uncovering the roots of the current turmoil, influential lawmakers expressed a desire for caution in considering new curbs on the financial sector.“I think it’s too early to know whether or not new legislation will be necessary,” said Representative Patrick T. McHenry of North Carolina, the Republican chairman of the House Financial Services committee.Mr. McHenry warned that proposed increases to the Federal Deposit Insurance Corporation deposit insurance limit could lead to unintended consequences and “moral hazard,” and said that “firms need to be able to fail.”“If you have a hammer, the world looks like a nail,” Mr. McHenry said of the desire to impose more onerous regulations on banks.The banking industry, which has welcomed the government’s support of the sector this month, also urged lawmakers not to respond with more scrutiny.“We should not rush to make changes when we still do not fully know what happened and why,” Rob Nichols, chief executive of the American Bankers Association, said on Wednesday.But Senator Sherrod Brown of Ohio, the Democratic chairman of the Senate Banking Committee, said the failures of Silicon Valley Bank and Signature Bank this month had shaken the nation’s trust in the banking system. He vowed to hold the executives of those banks accountable and press regulators to review what went wrong.Mr. Brown also called for legislation to “strengthen guardrails” and urged the bank lobbyists not to stand in the way.Representative Patrick T. McHenry warned that proposed increases to the Federal Deposit Insurance Corporation $250,000 deposit insurance limit could have unintended consequences.Sarah Silbiger for The New York TimesPresident Biden has decried rollbacks in financial regulation passed by Republicans and Democrats under his predecessor, President Donald J. Trump. But he has thus far offered only a small set of concrete proposals for new legislation or executive action to stabilize the financial system in its current turmoil.Last week, Mr. Biden called for Congress to strengthen regulators’ ability to penalize executives of failed banks. His proposals would allow regulators to claw back compensation that executives of medium-sized banks received before their institutions went under, broadening a penalty that currently applies only to executives of large banks. They also would lower the legal threshold that regulators need to clear in order to ban those executives from working in other parts of the financial system.Administration officials are privately debating what else, if anything, Mr. Biden might ask Congress to do — or announce his administration will do unilaterally — to shore up the banking system.Karine Jean-Pierre, the White House press secretary, repeatedly dodged questions from reporters this week about any new proposals Mr. Biden was considering. “We don’t want to let Congress off the hook,” she said on Tuesday. “We want Congress to continue to — to certainly — to take action. And so, we’re going to call on them to do just that.”Mr. Biden has given just one speech on bank regulation since his administration joined the Fed in announcing a rescue plan for Silicon Valley Bank depositors earlier this month. He last addressed the issue on March 17, in a brief exchange with reporters before boarding Marine One at the White House.In that exchange, Mr. Biden was asked: “Are you confident the bank crisis has calmed down?”He replied: “Yes.”Lawmakers pressed Ms. Yellen on whether the administration supported proposals that some members of Congress have offered to make bank customers, whose deposits are only federally guaranteed up to $250,000, feel more confident that their money is safe.Ms. Yellen demurred when asked about proposals to raise the Federal Deposit Insurance Corporation’s cap on deposit insurance. Referring to recent moves to protect bank depositors, Ms. Yellen said during a speech at the A.B.A. gathering on Tuesday that “similar actions could be warranted if smaller institutions suffer deposit runs that pose the risk of contagion.”The Biden administration appears to have limited legal authority to unilaterally lift the deposit insurance cap, but financial sector analysts have speculated that the Treasury Department is studying whether it could utilize its Exchange Stabilization Fund, a pot of more than $200 billion of emergency money, to back bank deposits.“All she needs is approval from the president to tap into that basket,” Henrietta Treyz, director of economic policy research at Veda Partners, said of Ms. Yellen. “There are no other alternatives; there’s no chance of a bill passing Congress.”Ms. Yellen said on Wednesday that she was not considering such a move but rather would make case-by-case determinations of whether any banks facing runs pose a “systemic risk” to the economy.“I have not considered or discussed anything to do with blanket insurance or guarantees of all deposits,” Ms. Yellen said, adding that any changes to the deposit insurance limit would require legislation from Congress.Invoking the systemic-risk exception again would require approval from both the Fed and the F.D.I.C. At least one policymaker at the F.D.I.C. is skeptical that the exception should be applied to smaller banks, a person familiar with the situation said, which suggests that achieving consensus on such a move may not be a foregone conclusion.Uncertainty over any government plans to help further backstop banks loom large for the number of regional banks that have seen massive outflows of deposits and are exploring various ways to shore up their balance sheets. Both buyers and sellers are wary of striking a deal without full clarity on concessions the government might offer, two people familiar with the negotiations said.These include First Republic and Pacific Western Bank, which earlier Wednesday said, after tapping billions from an investment firm and the Federal Reserve, it was holding off on raising new capital in part because of depressed shares. Pacific Western has seen deposits fall 20 percent since the start of the year, while First Republic has lost nearly half.It is also unclear what concessions the F.D.I.C will offer as part of its efforts to sell the former Silicon Valley Bank. At least one bank, North Carolina-based First Citizens, has put forward an offer to buy that business, a person briefed on the matter said. The agency is now in the process of soliciting offers for various parts of SVB’s business including Silicon Valley Private Bank, an asset management firm, to discern whether it is more lucrative to sell the bank in pieces or as a whole.“We’ll need to wait and see what the bids are and what the least cost is to the deposit insurance fund,” said Julianne Breitbeil, a spokeswoman for the F.D.I.C, regarding any potential concessions the government plans to offer.The agency expects to issue an update on the sale process this weekend, Ms. Breitbeil said. More

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    Push to Insure Big Deposits Percolates on Capitol Hill

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    The government insures only deposits of less than $250,000, but there is precedent for lifting that cap amid turmoil. It could happen again.WASHINGTON — Lawmakers are looking for ways to resolve a major concern that threatens to keep the banking industry in turmoil: The federal government insures bank deposits only up to $250,000.Some members of Congress are looking for ways to boost that cap, at least temporarily, in order to stop depositors from pulling their money out of smaller institutions that have been at center of recent bank runs.Representative Ro Khanna, Democrat of California, and other lawmakers are in talks about introducing bipartisan legislation as early as this week that would temporarily increase the deposit cap on transaction accounts, which are used for activities like payroll, with an eye on smaller banks. Such a move would potentially reprise a playbook used during the 2008 financial crisis and authorized at the onset of the coronavirus pandemic in 2020 to prevent depositors from pulling their money out.Others, including Senator Elizabeth Warren, Democrat of Massachusetts, have suggested lifting the deposit cap altogether.Any broad expansion to deposit insurance could require action from Congress because of legal changes made after the 2008 financial crisis, unless government agencies can find a workaround. The White House has not taken a public position, instead emphasizing the tools it has already rolled out to address banking troubles.Many lawmakers have yet to solidify their positions, and some have openly opposed lifting the cap, so it is not clear that legislation adjusting it even temporarily would pass. While such a move could calm nervous depositors, it could have drawbacks, including removing a big disincentive for banks to take on too much risk.Still, Senate staff members from both parties have been in early conversations about whether it would make sense to resurrect some version of the previous guarantees for uninsured deposits, according to a person familiar with the talks.Even after two weeks of aggressive government action to shore up the banking system, jitters remain about its safety after high-profile bank failures. Some worry that depositors whose accounts exceed the $250,000 limit may pull their money from smaller banks that seem more likely to crash without a government rescue. That could drive people toward bigger banks that are perceived as more likely to have a government guarantee — spurring more industry concentration.“I’m concerned about the danger to regional banking and community banking in this country,” Mr. Khanna said in an interview. He noted that if regional banks lose deposits as people turn to giant banking institutions that are deemed too big to fail, it could make it harder to get loans and other financing in the middle of the country, where community and regional banks play a major role.“This should be deeply concerning, that our regional banks are losing deposits, and losing the ability to lend, he said.Representative Ro Khanna said broad temporary expansions to deposit insurance would likely require action from Congress.T.J. Kirkpatrick for The New York TimesIf passed, a temporary guarantee on transaction deposits over the $250,000 federal insurance cap would be the latest step in a sweeping government response to an unfolding banking disaster.Silicon Valley Bank’s failure on March 10 has rattled the banking system. The bank was ill prepared to contend with the Federal Reserve’s interest rate increases: It held a lot of long-term bonds that had declined in value as well as an outsize share of uninsured deposits, which tend to be withdrawn at the first sign of trouble.Still, its demise focused attention on other weak spots in finance. Signature Bank has also failed, and First Republic Bank has been imperiled by outflows of deposits and a plunging stock price. In Europe, the Swiss government had to engineer the takeover of Credit Suisse by its competitor UBS.The U.S. government has responded to the turmoil with a volley of action. On March 12 it announced that it would guarantee the big depositors at Silicon Valley Bank and Signature. The Federal Reserve announced that it would set up an emergency lending program to make sure that banks had a workaround to avoid recognizing big losses if they — as Silicon Valley Bank did — needed to raise cash to cover withdrawals.And on Sunday, the Fed announced that it was making its regular operations to keep dollar financing flowing around the world more frequent, to try to prevent problems from extending to financial markets.For now, the administration has stressed that it will use the tools it is already deploying to protect depositors and ensure a healthy regional and community banking system.“We will use the tools we have to support community banks,” Michael Kikukawa, a White House spokesman, said Monday. “Since our administration and the regulators took decisive action last weekend, we have seen deposits stabilize at regional banks throughout the country, and, in some cases, outflows have modestly reversed.”The midsize Bank Coalition of America has urged federal regulators to extend Federal Deposit Insurance Corporation protection to all deposits for the next two years, saying in a letter late last week that it would halt an “exodus” of deposits from smaller banks.“It would be prudent to take further action,” Mr. Khanna said.Yet not even all banking groups agree that such a step is necessary, especially given that a higher insurance cap might incite more regulation or lead to higher fees.The midsize Bank Coalition of America has urged federal regulators to extend F.D.I.C. insurance to all deposits for the next two years.Al Drago for The New York TimesLifting the deposit cap temporarily could send a signal that the problem is worse than it is, said Anne Balcer, senior executive vice president of the Independent Community Bankers of America, a trade group for small U.S. banks. She said many of its member banks were seeing an increase in deposits.“Right now, we’re in a phase of let’s exercise restraint,” she said.There is precedent for temporarily expanding deposit insurance. In March 2020, Congress’s first major coronavirus relief package authorized the F.D.I.C. to temporarily lift the insurance cap on deposits.And in 2008, as panic coursed across Wall Street at the outset of the global financial crisis, the F.D.I.C. created a program that allowed for unlimited deposit insurance for transaction accounts that chose to join the program in exchange for an added fee.Peter Conti-Brown, a financial historian and a legal scholar at the University of Pennsylvania, said the 2010 Dodd-Frank law ended the option for the agencies to temporarily insure larger transaction accounts the way they did in 2008.Now, he said, the regulators would either need congressional approval, or lawmakers would have to pass legislation to enable such a broad-based backstop for deposits. While regulators were able to step in and promise to protect depositors at Silicon Valley Bank and Signature Bank, that is because the collapse at those banks was deemed to have the potential to cause broad problems across the financial system.For smaller banks, where failures would be much less likely to have systemwide implications, that means that uninsured depositors might not receive the same kind of protection in a pinch.In a nod to those worries, Janet L. Yellen, the Treasury secretary, suggested on Tuesday that even smaller banks could warrant a “systemic” classification in some cases, allowing the agencies to backstop their deposits.“The steps we took were not focused on aiding specific banks or classes of banks,” Ms. Yellen said in a speech. “And similar actions could be warranted if smaller institutions suffer deposit runs that pose the risk of contagion.”But the chances that such an approach — or another workaround that allows the government to take the action without passing legislation, such as tapping a pot of money at the Treasury called the Exchange Stabilization Fund — would be effective are not yet clear.Sheila Bair, who was chair of the F.D.I.C. from 2006 to 2011, said she thought that the Biden administration should propose legislation that would let the F.D.I.C. reconstitute a bigger deposit insurance program and use a “fast-track” legislative process to put it in place.While Dodd-Frank curbed the ability of the F.D.I.C. to restart the transaction account guarantee program on its own, it did provide for a streamlined process for future lawmakers to get it up and running again, she said.“I hope the president asks for it; I think it would settle things down pretty quickly,” Ms. Bair said in an interview. But some warned that enacting broad-based deposit insurance could set a dangerous precedent: signaling to bank managers that they can take risks unchecked, and leading to calls for more regulation to protect taxpayers from potential costs.Aaron Klein, a senior fellow in economic studies at the Brookings Institution, said he would oppose even a revamp of the 2008 deposit insurance because he thought it would be temporary in name only: It would reassert to big depositors that the government will come to the rescue.“If we think the market is going to believe that these things are temporary when they are constantly done in times of crisis,” he said, “then we’re deluding ourselves.”Alan Rappeport More

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    Was This a Bailout? Skeptics Descend on Silicon Valley Bank Response.

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    The government took drastic action to shore up the banking system and make depositors of two failed banks whole. It quickly drew blowback.WASHINGTON — A sweeping package aimed at containing damage to the financial system in the wake of high-profile failures has prompted questions about whether the federal government is again bailing out Wall Street.And while many economists and analysts agreed that the government’s response should not be considered a “bailout” in key ways — investors in the banks’ stock will lose their money, and the banks have been closed — many said it should lead to scrutiny of how the banking system is regulated and supervised.The reckoning came after the Federal Reserve, Treasury and Federal Deposit Insurance Corporation announced Sunday that they would make sure that all depositors in two large failed banks, Silicon Valley Bank and Signature Bank, were repaid in full. The Fed also announced that it would offer banks loans against their Treasuries and many other asset holdings, treating the securities as though they were worth their original value — even though higher interest rates have eroded the market price of such bonds.The actions were meant to send a message to America: There is no reason to pull your money out of the banking system, because your deposits are safe and funding is plentiful. The point was to avert a bank run that could tank the financial system and broader economy.It was unclear on Monday whether the plan would succeed. Regional bank stocks tumbled, and nervous investors snapped up safe assets. But even before the verdict was in, lawmakers, policy researchers and academics had begun debating whether the government had made the correct move, whether it would encourage future risk-taking in the financial system and why it was necessary in the first place.“The Fed has basically just written insurance on interest-rate risk for the whole banking system,” said Steven Kelly, senior research associate at Yale’s program on financial stability. And that, he said, could stoke future risk-taking by implying that the Fed will step in if things go awry.“I’ll call it a bailout of the system,” Mr. Kelly said. “It lowers the threshold for the expectation of where emergency steps kick in.”While the definition of “bailout” is ill defined, it is typically applied when an institution or investor is saved by government intervention from the consequences of reckless risk-taking. The term became a swear word in the wake of the 2008 financial crisis, after the government engineered a rescue of big banks and other financial firms using taxpayer money, with little to no consequences for the executives who made bad bets that brought the financial system close to the abyss.President Biden, speaking from the White House on Monday, tried to make clear that he did not consider what the government was doing to be a bailout in the traditional sense, given that investors would lose their money and taxpayers would not be on the hook for any losses.“Investors in the banks will not be protected,” Mr. Biden said. “They knowingly took a risk, and when the risk didn’t pay off, investors lose their money. That’s how capitalism works.”The Downfall of Silicon Valley BankOne of the most prominent lenders in the world of technology start-ups collapsed on March 10, forcing the U.S. government to step in.A Rapid Fall: The collapse of Silicon Valley Bank, the biggest U.S. bank failure since the 2008 financial crisis, was caused by a run on the bank. But will the turmoil prove to be fleeting — or turn into a true crisis?The Fallout: The bank’s implosion rattled a start-up industry already on edge, and some of the worst casualties of the collapse were companies developing solutions for the climate crisis.Signature Bank: The New York financial institution closed its doors abruptly after regulators said it could threaten the entire financial system. To some extent, it is a victim of the panic around Silicon Valley Bank.The Fed’s Next Move: The Federal Reserve has been rapidly raising interest rates to fight inflation, but making big moves could be trickier after Silicon Valley Bank’s blowup.He added, “No losses will be borne by the taxpayers. Let me repeat that: No losses will be borne by the taxpayers.”But some Republican lawmakers were unconvinced.Senator Josh Hawley of Missouri said on Monday that he was introducing legislation to protect customers and community banks from new “special assessment fees” that the Fed said would be imposed to cover any losses to the Federal Deposit Insurance Corporation’s Deposit Insurance Fund, which is being used to protect depositors from losses.“What’s basically happened with these ‘special assessments’ to cover SVB is the Biden administration has found a way to make taxpayers pay for a bailout without taking a vote,” Mr. Hawley said in a statement.President Biden said Monday that he would ask Congress and banking regulators to consider rule changes “to make it less likely that this kind of bank failure would happen again.”Doug Mills/The New York TimesMonday’s action by the government was a clear rescue of a range of financial players. Banks that took on interest-rate risk, and potentially their big depositors, were being protected against losses — which some observers said constituted a bailout.“It’s hard to say that isn’t a bailout,” said Dennis Kelleher, a co-founder of Better Markets, a prominent financial reform advocacy group. “Merely because taxpayers aren’t on the hook so far doesn’t mean something isn’t a bailout.”But many academics agreed that the plan was more about preventing a broad and destabilizing bank run than saving any one business or group of depositors.“Big picture, this was the right thing to do,” said Christina Parajon Skinner, an expert on central banking and financial regulation at the University of Pennsylvania. But she added that it could still encourage financial betting by reinforcing the idea that the government would step in to clean up the mess if the financial system faced trouble.“There are questions about moral hazard,” she said.One of the signals the rescue sent was to depositors: If you hold a large bank account, the moves suggested that the government would step in to protect you in a crisis. That might be desirable — several experts on Monday said it might be smart to revise deposit insurance to cover accounts bigger than $250,000.But it could give big depositors less incentive to pull their money out if their banks take big risks, which could in turn give the financial institutions a green light to be less careful.That could merit new safeguards to guard against future danger, said William English, a former director of the monetary affairs division at the Fed who is now at Yale. He thinks that bank runs in 2008 and recent days have illustrated that a system of partial deposit insurance doesn’t really work, he said.An official with the F.D.I.C., center, explained to clients of Silicon Valley Bank in Santa Clara, Calif., the procedure for entering the bank and making transactions.Jim Wilson/The New York Times“Market discipline doesn’t really happen until it’s too late, and then it’s too sharp,” he said. “But if you don’t have that, what is limiting the risk-tanking of banks?”It wasn’t just the side effects of the rescue stoking concern on Monday: Many onlookers suggested that the failure of the banks, and particularly of Silicon Valley Bank, indicated that bank supervisors might not have been monitoring vulnerabilities closely enough. The bank had grown very quickly. It had a lot of clients in one volatile industry — technology — and did not appear to have managed its exposure to rising interest rates carefully.“The Silicon Valley Bank situation is a massive failure of regulation and supervision,” said Simon Johnson, an economist at the Massachusetts Institute of Technology.The Fed responded to that concern on Monday, announcing that it would conduct a review of Silicon Valley Bank’s oversight. The Federal Reserve Bank of San Francisco was responsible for supervising the failed bank. The results will be released publicly on May 1, the central bank said.“The events surrounding Silicon Valley Bank demand a thorough, transparent and swift review,” Jerome H. Powell, the Fed chair, said in a statement.Mr. Kelleher said the Department of Justice and the Securities and Exchange Commission should be looking into potential wrongdoing by Silicon Valley Bank’s executives.“Crises don’t just happen — they’re not like the Immaculate Conception,” Mr. Kelleher said. “People take actions that range from stupid to reckless to illegal to criminal that cause banks to fail and cause financial crises, and they should be held accountable whether they are bank executives, board directors, venture capitalists or anyone else.”One big looming question is whether the federal government will prevent bank executives from getting big compensation packages, often known as “golden parachutes,” which tend to be written into contracts.Treasury and the F.D.I.C. had no comment on whether those payouts would be restricted.Uninsured depositors at Silicon Valley Bank and Signature Bank, who had accounts exceeding $250,000, will be paid back.David Dee Delgado/ReutersMany experts said the reality that problems at Silicon Valley Bank could imperil the financial system — and require such a big response — suggested a need for more stringent regulation.While the regional banks that are now struggling are not large enough to face the most intense level of regulatory scrutiny, they were deemed important enough to the financial system to warrant an aggressive government intervention.“At the end of the day, what has been shown is that the explicit guarantee extended to the globally systemic banks is now extended to everyone,” said Renita Marcellin, legislative and advocacy director at Americans for Financial Reform. “We have this implicit guarantee for everyone, but not the rules and regulations that should be paired with these guarantees.”Daniel Tarullo, a former Fed governor who was instrumental in setting up and carrying out financial regulation after the 2008 crisis, said the situation meant that “concerns about moral hazard, and concerns about who the system is protecting, are front and center again.” More