Regulation and Deregulation of Industry

More stories

  • 113 Shares99 Views

    in Economy

    Push to Insure Big Deposits Percolates on Capitol Hill

    by

    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

  • 150 Shares149 Views

    in Economy

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

    by

    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

  • 138 Shares149 Views

    in Economy

    U.S. Is Ready to Protect Smaller Banks if Necessary, Yellen Says

    by

    The Treasury secretary pledged that the Biden administration would take additional steps as needed to support the banking system.Treasury Secretary Janet L. Yellen said pressures on the nation’s banking system were “stabilizing” in remarks to the American Bankers Association.Pete Marovich for The New York TimesWASHINGTON — Treasury Secretary Janet L. Yellen expressed confidence in the nation’s banks on Tuesday but said she was prepared to take additional action to safeguard smaller financial institutions as the Biden administration and federal regulators worked to contain fallout from fears over the stability of the banking system.Ms. Yellen, seeking to calm nerves as the U.S. financial system faces its worst turmoil in more than a decade, said the steps the administration and federal regulators had taken so far had helped restore confidence. But policymakers were focused on making sure that the broader banking system remained secure, she said.“Our intervention was necessary to protect the broader U.S. banking system,” Ms. Yellen said in remarks before the American Bankers Association, the industry’s leading lobbying group. “And similar actions could be warranted if smaller institutions suffer deposit runs that pose the risk of contagion.”She added: “The situation is stabilizing. And the U.S. banking system remains sound.”However, Ms. Yellen also underscored the gravity of the current situation. She said the stresses to the banking system, while not as dire as the 2008 financial meltdown, still constituted a “crisis” and pointed to the risk of bank runs spreading.“This is different than 2008; 2008 was a solvency crisis,” Ms. Yellen said. “Rather what we’re seeing are contagious bank runs.”In response to a question from Rob Nichols, the chief executive of the American Bankers Association, Ms. Yellen said she did not want to “speculate” about what regulatory changes might be necessary to prevent a similar situation from recurring.“There’s time to evaluate whether some adjustments are necessary in supervision and regulation to address the root causes of the crisis,” she said. “What I’m focused on is stabilizing our system and restoring the confidence of depositors.”She spoke as government officials contemplated additional options to stem the flow of deposits out of small and medium-size banks, and as concerns grew that more would need to be done.Ms. Yellen said recent federal actions after the failure of Silicon Valley Bank and Signature Bank this month were intended to show that the Biden administration was dedicated to protecting the integrity of the system and ensuring that deposits were secure.In the past 10 days, federal regulators have used an emergency measure to guarantee the deposits of Silicon Valley Bank and Signature Bank, initiated a new Federal Reserve program to make sure other banks can secure funds to meet the needs of their depositors and coordinated with 11 big banks that deposited $30 billion into First Republic, a wobbly regional bank..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;}How Times reporters cover politics. We rely on our journalists to be independent observers. So while Times staff members may vote, they are not allowed to endorse or campaign for candidates or political causes. This includes participating in marches or rallies in support of a movement or giving money to, or raising money for, any political candidate or election cause.Learn more about our process.“The situation demanded a swift response,” Ms. Yellen said. “In the days that followed, the federal government delivered just that: decisive and forceful actions to strengthen public confidence in the U.S. banking system and protect the American economy.”Despite those efforts, the Fed’s campaign to raise interest rates to tame inflation has exposed weaknesses in the balance sheets of regional banks, rattling investors and raising fears that deposits are not safe.Ms. Yellen said the financial system was far stronger than it was 15 years ago but also called for an examination of how the recent bank failures occurred.“In the coming weeks, it will be vital for us to get a full accounting of exactly what happened in these bank failures,” she said. “We will need to re-examine our current regulatory and supervisory regimes and consider whether they are appropriate for the risks that banks face today.”The Federal Reserve, which is the primary regulator for banks, is undertaking a review of what happened with Silicon Valley Bank as well as looking more broadly at supervision and regulation.The uncertainty about regional banks has also led to concerns that the industry will further consolidate among big banks.Ms. Yellen made clear on Tuesday that banks of all sizes are important, highlighting how smaller banks have close ties to communities and bring competition to the system.“Large banks play an important role in our economy, but so do small and midsized banks,” she said. “These banks are heavily engaged in traditional banking services that provide vital credit and financial support to families and small businesses.”The Treasury secretary added that the fortunes of the U.S. banking system and its economy were inextricably tied.“You should rest assured that we will remain vigilant,” she said. More

  • 138 Shares199 Views

    in Economy

    Before Collapse of Silicon Valley Bank, the Fed Spotted Big Problems

    by

    The bank was using an incorrect model as it assessed its own risks amid rising interest rates, and spent much of 2022 under a supervisory review.WASHINGTON — Silicon Valley Bank’s risky practices were on the Federal Reserve’s radar for more than a year — an awareness that proved insufficient to stop the bank’s demise.The Fed repeatedly warned the bank that it had problems, according to a person familiar with the matter.In 2021, a Fed review of the growing bank found serious weaknesses in how it was handling key risks. Supervisors at the Federal Reserve Bank of San Francisco, which oversaw Silicon Valley Bank, issued six citations. Those warnings, known as “matters requiring attention” and “matters requiring immediate attention,” flagged that the firm was doing a bad job of ensuring that it would have enough easy-to-tap cash on hand in the event of trouble.But the bank did not fix its vulnerabilities. By July 2022, Silicon Valley Bank was in a full supervisory review — getting a more careful look — and was ultimately rated deficient for governance and controls. It was placed under a set of restrictions that prevented it from growing through acquisitions. Last autumn, staff members from the San Francisco Fed met with senior leaders at the firm to talk about their ability to gain access to enough cash in a crisis and possible exposure to losses as interest rates rose.It became clear to the Fed that the firm was using bad models to determine how its business would fare as the central bank raised rates: Its leaders were assuming that higher interest revenue would substantially help their financial situation as rates went up, but that was out of step with reality.By early 2023, Silicon Valley Bank was in what the Fed calls a “horizontal review,” an assessment meant to gauge the strength of risk management. That checkup identified additional deficiencies — but at that point, the bank’s days were numbered. In early March, it faced a run and failed, sending shock-waves across the broader American banking system that ultimately led to a sweeping government intervention meant to prevent panic from spreading. On Sunday, Credit Suisse, which was caught up in the panic that followed Silicon Valley Bank’s demise, was taken over by UBS in a hastily arranged deal put together by the Swiss government.Major questions have been raised about why regulators failed to spot problems and take action early enough to prevent Silicon Valley Bank’s March 10 downfall. Many of the issues that contributed to its collapse seem obvious in hindsight: Measuring by value, about 97 percent of its deposits were uninsured by the federal government, which made customers more likely to run at the first sign of trouble. Many of the bank’s depositors were in the technology sector, which has recently hit tough times as higher interest rates have weighed on business.And Silicon Valley Bank also held a lot of long-term debt that had declined in market value as the Fed raised interest rates to fight inflation. As a result, it faced huge losses when it had to sell those securities to raise cash to meet a wave of withdrawals from customers.The Fed has initiated an investigation into what went wrong with the bank’s oversight, headed by Michael S. Barr, the Fed’s vice chair for supervision. The inquiry’s results are expected to be publicly released by May 1. Lawmakers are also digging into what went awry. The House Financial Services Committee has scheduled a hearing on recent bank collapses for March 29.Michael S. Barr’s review of the Silicon Valley Bank problems will focus on a few key questions.Manuel Balce Ceneta/Associated PressThe picture that is emerging is one of a bank whose leaders failed to plan for a realistic future and neglected looming financial and operational problems, even as they were raised by Fed supervisors. For instance, according to a person familiar with the matter, executives at the firm were told of cybersecurity problems both by internal employees and by the Fed — but ignored the concerns.The Federal Deposit Insurance Corporation, which has taken control of the firm, did not comment on its behalf.Still, the extent of known issues at the bank raises questions about whether Fed bank examiners or the Fed’s Board of Governors in Washington could have done more to force the institution to address weaknesses. Whatever intervention was staged was too little to save the bank, but why remains to be seen.“It’s a failure of supervision,” said Peter Conti-Brown, an expert in financial regulation and a Fed historian at the University of Pennsylvania. “The thing we don’t know is if it was a failure of supervisors.”Mr. Barr’s review of the Silicon Valley Bank collapse will focus on a few key questions, including why the problems identified by the Fed did not stop after the central bank issued its first set of matters requiring attention. The existence of those initial warnings was reported earlier by Bloomberg. It will also look at whether supervisors believed they had authority to escalate the issue, and if they raised the problems to the level of the Federal Reserve Board.The Fed’s report is expected to disclose information about Silicon Valley Bank that is usually kept private as part of the confidential bank oversight process. It will also include any recommendations for regulatory and supervisory fixes.The bank’s downfall and the chain reaction it set off is also likely to result in a broader push for stricter bank oversight. Mr. Barr was already performing a “holistic review” of Fed regulation, and the fact that a bank that was large but not enormous could create so many problems in the financial system is likely to inform the results.Typically, banks with fewer than $250 billion in assets are excluded from the most onerous parts of bank oversight — and that has been even more true since a “tailoring” law that passed in 2018 during the Trump administration and was put in place by the Fed in 2019. Those changes left smaller banks with less stringent rules.Silicon Valley Bank was still below that threshold, and its collapse underlined that even banks that are not large enough to be deemed globally systemic can cause sweeping problems in the American banking system.As a result, Fed officials could consider tighter rules for those big, but not huge, banks. Among them: Officials could ask whether banks with $100 billion to $250 billion in assets should have to hold more capital when the market price of their bond holdings drops — an “unrealized loss.” Such a tweak would most likely require a phase-in period, since it would be a substantial change.But as the Fed works to complete its review of what went wrong at Silicon Valley Bank and come up with next steps, it is facing intense political blowback for failing to arrest the problems.Supervisors at the Federal Reserve Bank of San Francisco, which oversaw Silicon Valley Bank, issued six citations in 2021.Aaron Wojack for The New York TimesSome of the concerns center on the fact that the bank’s chief executive, Greg Becker, sat on the Federal Reserve Bank of San Francisco’s board of directors until March 10. While board members do not play a role in bank supervision, the optics of the situation are bad.“One of the most absurd aspects of the Silicon Valley bank failure is that its CEO was a director of the same body in charge of regulating it,” Senator Bernie Sanders, a Vermont independent, wrote on Twitter on Saturday, announcing that he would be “introducing a bill to end this conflict of interest by banning big bank CEOs from serving on Fed boards.”Other worries center on whether Jerome H. Powell, the Fed chair, allowed too much deregulation during the Trump administration. Randal K. Quarles, who was the Fed’s vice chair for supervision from 2017 to 2021, carried out a 2018 regulatory rollback law in an expansive way that some onlookers at the time warned would weaken the banking system.Mr. Powell typically defers to the Fed’s supervisory vice chair on regulatory matters, and he did not vote against those changes. Lael Brainard, then a Fed governor and now a top White House economic adviser, did vote against some of the tweaks — and flagged them as potentially dangerous in dissenting statements.“The crisis demonstrated clearly that the distress of even noncomplex large banking organizations generally manifests first in liquidity stress and quickly transmits contagion through the financial system,” she warned.Senator Elizabeth Warren, Democrat of Massachusetts, has asked for an independent review of what happened at Silicon Valley Bank and has urged that Mr. Powell not be involved in that effort.  He “bears direct responsibility for — and has a long record of failure involving” bank regulation, she wrote in a letter on Sunday.Maureen Farrell More

  • 150 Shares99 Views

    in Economy

    Biden Asks Congress for New Tools to Target Executives of Failed Banks

    by

    The request is a response to the federal rescue of Silicon Valley Bank and Signature Bank, and it seeks to impose new fines and other penalties.WASHINGTON — President Biden asked Congress on Friday to pass legislation to give financial regulators broad new powers to claw back ill-gotten gains from the executives of failed banks and impose fines for failures.The proposal, a response to the federal rescue of depositors at Silicon Valley Bank and Signature Bank last week, would also seek to bar executives at failed banks from taking other jobs in the financial industry.The measures contained in Mr. Biden’s plan would build on existing regulatory powers held by the Federal Deposit Insurance Corporation. Administration officials were still weighing on Friday whether to ask Congress for further changes to financial regulation in the days to come.“Strengthening accountability is an important deterrent to prevent mismanagement in the future,” Mr. Biden said in a statement released by the White House.“When banks fail due to mismanagement and excessive risk taking, it should be easier for regulators to claw back compensation from executives, to impose civil penalties, and to ban executives from working in the banking industry again,” he said, adding that Congress would have to pass legislation to make that possible.“The law limits the administration’s authority to hold executives responsible,” he said.One plank of the proposal would broaden the F.D.I.C.’s ability to seek the return of compensation from executives of failed banks, in response to reports that the chief executive of Silicon Valley Bank sold $3 million in shares of the bank shortly before federal regulators took it over a week ago. Regulators’ current clawback powers are limited to the largest banks; Mr. Biden would expand them to cover banks the size of Signature and Silicon Valley Bank.In a contrast with top Silicon Valley Bank officials, a senior Signature Bank executive and one of its board members bought shares in the firm’s stock last Friday while it was experiencing a run, regulatory filings show. Signature’s chairman, Scott Shay, bought 5,000 shares of Signature stock while one of its directors, Michael Pappagallo, bought 1,500 shares.The president is also asking Congress to lower a legal bar that the F.D.I.C. must clear in order to bar an executive from a failed bank from working elsewhere in the financial industry. That ability currently applies only to executives who engage in “willful or continuing disregard for the safety and soundness” of their institutions. He is similarly seeking to broaden the agency’s ability to impose fines on executives whose actions contribute to the failure of their banks.The proposals face an uncertain future in Congress. Republicans control the House and have opposed other pushes by Mr. Biden to strengthen federal regulations. A 2018 law to roll back some of the regulations on banking that were approved after the 2008 financial crisis passed the House and Senate with bipartisan support.Senator Steve Daines, Republican of Montana, faulted Mr. Biden’s focus on regulation and indicated that he would not support any move to impose new rules on the banking sector.“What we don’t need is more onerous regulations on well-managed and sound Montana banks that didn’t fail,” Mr. Daines said in a statement on Friday evening.Democrats were far more vocal in supporting the call for new rules. The chair of the Senate Banking Committee, Sherrod Brown of Ohio, said in a statement emailed to reporters that regulators needed “stronger rules to rein in risky behavior and catch incompetence.”He added that in addition to executives who had failed at their duties, there should be a way to hold accountable the “regulators tasked with overseeing them.”In a letter to the chairs of the Securities and Exchange Commission, the F.D.I.C. and the Fed, Representative Maxine Waters, a Democrat from California, asked the regulators to use the “maximum extent” of their current powers to hold both banks’ senior executives and board directors accountable.She added that the Dodd-Frank law enacted after the 2008 financial crisis had given agencies more powers than they had yet used to tie executive compensation in the financial industry to successful risk management strategies.“While I am moving quickly to develop legislation on clawbacks and other matters arising from the collapse, it is critical that your agencies act now to investigate these bank failures and use the available enforcement tools you have to hold executives fully accountable for any wrongful activity,” she wrote. More

  • 113 Shares129 Views

    in Economy

    After SVB Collapse, Fed and Lawmakers Eye Bank Rules

    by

    The stunning demise of Silicon Valley Bank has spurred soul-searching about how large and regional banks are overseen.The Federal Reserve is facing criticism over Silicon Valley Bank’s collapse, with lawmakers and financial regulation experts asking why the regulator failed to catch and stop seemingly obvious risks. That concern is galvanizing a review of how the central bank oversees financial institutions — one that could end in stricter rules for a range of banks.In particular, the episode could result in meaningful regulatory and supervisory changes for institutions — like Silicon Valley Bank — that are large but not large enough to be considered globally systemic and thus subject to tougher oversight and rules. Smaller banks face lighter regulations than the largest ones, which go through regular and extensive tests of their financial health and have to more closely police how much easy-to-tap cash they have to serve as a buffer in times of crisis.Regulators and lawmakers are focused both on whether a deregulatory push in 2018, during the Trump administration, went too far, and on whether existing rules are sufficient in a changing world.While it is too early to predict the outcome, the shock waves that Silicon Valley Bank’s demise sent through the financial system, and the sweeping response the government staged to prevent it from inciting a nationwide bank run, are clearly intensifying the pressure for stronger oversight.“There are a lot of signs of a supervisory failure,” said Kathryn Judge, a financial regulation expert at Columbia Law School, who also noted that it was too early to draw firm conclusions. “We do need more rigorous regulations for large regional banks that more accurately reflect the risks these banks can pose to the financial system,” she said.The call for tougher bank rules echoes the aftermath of 2008, when risky bets by big financial firms helped to plunge the United States into a deep recession and exposed blind spots in bank oversight. The crisis ultimately led to the Dodd-Frank law in 2010, a reform that ushered in a series of more stringent requirements, including wide-ranging “stress tests” that probe a bank’s ability to weather severe economic situations.But some of those rules were lightened — or “tailored” — under Republicans. Randal K. Quarles, who was the Fed’s vice chair for supervision from 2017 to 2021, put a bipartisan law into effect that relaxed some regulations for small and medium-size banks and pushed to make day-to-day Fed supervision simpler and more predictable.Critics have said such changes could have helped pave the way for the problems now plaguing the banking system.“Clearly, there’s a problem with supervision,” said Daniel Tarullo, a former Fed governor who helped shape and enact many post-2008 bank regulations and who is now a professor at Harvard. “The lighter touch on supervision is something that has been a concern for several years now.”Jerome H. Powell, right, the chair of the Federal Reserve, and Randal K. Quarles, then the vice chair for supervision, at the Fed, in 2018. “The events surrounding Silicon Valley Bank demand a thorough, transparent and swift review,” Mr. Powell said in a statement this week.Aaron P. Bernstein/ReutersThe Federal Reserve Bank of San Francisco was in charge of overseeing Silicon Valley Bank, and experts across the ideological spectrum are questioning why growing risks at the bank were not halted. The firm grew rapidly and took on a large number of depositors from one vulnerable industry: technology. A large share of the bank’s deposits were uninsured, making customers more likely to run for the exit in a moment of trouble, and the bank had not taken care to protect itself against the financial risks posed by rising interest rates.Worsening the optics of the situation, Greg Becker, the chief executive of Silicon Valley Bank, was until Friday on the board of directors at the Federal Reserve Bank of San Francisco. The Fed has said reserve bank directors are not involved in matters related to banking supervision.Questions about bank oversight ultimately come back to roost at the Fed’s board in Washington — which, since the 2008 crisis, has played a heavier role in guiding how banks are overseen day to day.The board has indicated that it will take the concerns seriously, putting its new vice chair of supervision, Michael Barr, in charge of the inquiry into what happened at Silicon Valley Bank, the Fed announced this week.“The events surrounding Silicon Valley Bank demand a thorough, transparent and swift review by the Federal Reserve,” Jerome H. Powell, the Fed chair, said in a statement.It is unclear how much any one of the 2018 rollbacks would have mattered in the case of Silicon Valley Bank. Under the original postcrisis rules, the bank, which had less than $250 billion in assets, most likely would have faced a full Fed stress test earlier, probably by this year. But the rules for stress tests are complex enough that even that is difficult to pinpoint with certainty.“Nobody can say that without the 2018 rollbacks none of this would have happened,” Ms. Judge said. But “those rules suggested that banks in this size range did not pose a threat to financial stability.”But the government’s dramatic response to Silicon Valley Bank’s collapse, which included saving uninsured depositors and rolling out a Fed rescue program, underlined that even the 16th-largest bank in the country could require major public action.Given that, the Fed will be paying renewed attention to how those banks are treated when it comes to both capital (their financial cushion against losses) and liquidity (their ability to quickly convert assets into cash to pay back depositors).There could be a push, for instance, to lower the threshold at which the more onerous regulations begin to apply. As a result of the 2018 law, some of the stricter rules now kick in when banks have $250 billion in assets.Another major focal point will be the content of stress tests. While banks used to be run through an “adverse” scenario that included creative and unexpected shocks to the system — including, occasionally, a jump in interest rates like the one that bedeviled Silicon Valley Bank — that scenario ended with the deregulatory push.An interest rate shock will be included in this year’s stress test scenarios, but the larger question of what risks are reflected in those exercises and whether they are sufficient is likely to get another look. Many economists had assumed that inflation and interest rates would stay low for a long time — but the pandemic upended that. It now seems clear that bank oversight made the same flawed assumption.The collapse of Silicon Valley Bank could precipitate changes for financial institutions that are not large enough to be considered globally systemic and thus subject to tougher oversight and rules.Jason Henry for The New York TimesMany people were wrong about the staying power of low rates, and “that includes regulators and supervisors, who are supposed to think about: What are the possibilities, and what are the scenarios?” said Jonathan Parker, the head of the finance department at the Massachusetts Institute of Technology’s Sloan School of Management.And there is a bigger challenge laid bare by the current episode: Several financial experts said the run on Silicon Valley Bank was so severe that more capital would not have saved the institution. Its problem, in part, was its huge share of uninsured deposits. Those depositors ran rapidly amid signs of weakness.That could spur greater attention in Congress and among regulators regarding whether deposit insurance needs to be extended more broadly, or whether banks need to be limited in how many uninsured deposits they can hold. And it could prompt a closer look at how uninsured deposits are treated in bank oversight — those deposits have long been looked at as unlikely to run quickly.In an interview, Mr. Quarles pushed back on the idea that the changes made under his watch helped to precipitate Silicon Valley Bank’s collapse. But he acknowledged that they had created new regulatory questions — including how to deal with a world in which technology enables very rapid bank runs.“Certainly, none of this resulted from anything that we changed,” Mr. Quarles said. “You had this perfect flow of imperfect information that really increased the speed and intensity of this run.”In the days after the collapse, some Republicans focused on supervisory failures at the Fed, while many Democrats focused on the aftershocks of deregulation and possible wrongdoing by the bank’s executives.“All the regulators had to do was read the reports that Silicon Valley Bank was submitting, and they would have seen the problem,” Senator John Kennedy, Republican of Louisiana and a member of the Banking Committee, said on the Senate floor.By contrast, two Senate Democrats — Elizabeth Warren of Massachusetts and Richard Blumenthal of Connecticut — sent a letter to the Department of Justice and the Securities and Exchange Commission on Wednesday urging the agencies to investigate whether senior executives involved in the collapse of Silicon Valley Bank had fallen short of their regulatory responsibilities or violated laws.Ms. Warren also unveiled legislation this week, co-sponsored by roughly 50 Democrats in the House and Senate, that would reimpose some of the Dodd-Frank requirements that were rolled back in 2018, including regular stress testing.Senator Sherrod Brown, Democrat of Ohio and chairman of the Banking Committee, told reporters that he intended to hold a hearing examining what happened “as soon as we can.”Mr. Barr, who started at the Fed last summer, was already reviewing a number of the Fed’s regulations to try to determine whether they were appropriately stern — a reality that had spurred intense lobbying as financial institutions resisted tougher oversight.But the episode could make those counterefforts more challenging.Late on Monday, the Bank Policy Institute, which represents 40 large banks and financial services companies, emailed journalists a list of its positions, including claims that the failures of Silicon Valley Bank and Signature Bank were caused by “primarily a failure of management and supervision rather than regulation” and that the panic surrounding the collapses proved how resilient big banks were to stress, since they were largely unaffected by it.The trade group also emailed those talking points to congressional Democrats, but other trade groups, including the American Bankers Association, have stayed silent, according to a person familiar with the matter.“We share President Biden’s confidence in the nation’s banking system,” a spokesman with the American Bankers Association said. “Every American should know that their accounts are safe and their deposits are protected. Our industry will work with the administration, regulators and Congress to further bolster that trust.”The fallout could also kill big banks’ attempts to roll back regulations that they say are inefficient. The largest banks had wanted the Fed to stop forcing them to hold cash equivalents to what they say are safe securities like U.S. government debt. But Silicon Valley Bank’s failure was caused in part by its decision to keep a large portion of depositors’ cash in longer-dated U.S. Treasury bonds, which lost value as interest rates rose.“This definitely underscores why it is important that there be some capital requirement against government-backed securities,” said Sheila Bair, a former chair of the Federal Deposit Insurance Corporation.Catie Edmondson More

  • 163 Shares169 Views

    in Economy

    Don’t Call It a Bailout: Washington Is Haunted by the 2008 Financial Crisis

    by

    The colossal bailouts after the 2008 collapse arguably saved the global economy, but they also provoked a ferocious popular backlash.WASHINGTON — On that summer day in 2010 when he signed new legislation regulating the banks after the worst financial crash in generations, President Barack Obama declared, “There will be no more tax-funded bailouts. Period.” Standing over his right shoulder just inches away and clapping was his vice president, Joseph R. Biden Jr.Nearly 13 years later, Mr. Biden, now himself a president facing a banking crisis, appeared before television cameras on Monday to make clear that he remembered that moment even as he guaranteed depositors at failing institutions. “This is an important point: No losses will be borne by the taxpayers,” he vowed. “Let me repeat that: No losses will be borne by the taxpayers.”He could not even bring himself to utter the word “bailout.”Washington remains haunted by the specter of government intervention after the banking sector collapse that triggered the Great Recession, leaving leaders of both parties determined to avoid any repeat of that painful period. The colossal bailouts initiated under President George W. Bush and continued under Mr. Obama arguably saved the global economy but also provoked such a ferocious popular backlash that they transformed American politics to this day.The notion that “fat-cat bankers,” as Mr. Obama once called them, should be rescued by the government even as everyday Americans lost their jobs, their homes and their life savings so rankled the public that it gave birth to the Tea Party and Occupy Wall Street movements and undermined the establishment across the political spectrum. In some ways, that popular revolt empowered populists like Donald J. Trump and Bernie Sanders, ultimately helping Mr. Trump to win the presidency.“Today’s populism is firmly rooted in 2008,” said Brendan Buck, a top adviser to two Republican House speakers, John A. Boehner and Paul D. Ryan, who were both eventually targeted by Tea Party rebels within their own party. “The bailouts not only fostered distrust of corporations, but cemented the notion that elites always do well while regular people pay the price. Bailouts were also followed by a large expansion of government, and while it all may have prevented much worse calamity, the recovery was slow.”Mr. Biden, of course, knows all that intimately. He saw it up close, watching the public uprising from his office in the West Wing while counseling Mr. Obama on how to respond. Even the separate economic stimulus package that Mr. Obama assigned Mr. Biden to manage came to be tainted because many Americans confused it with the bank bailouts.And so now, as he endeavors to head off a crisis of confidence after the failure of three financial institutions in recent days, Mr. Biden wants to avoid not just a run on the banks but a run on his credibility.“The term and the idea of bailouts are still highly toxic,” said Robert Gibbs, Mr. Obama’s first White House press secretary. He said Mr. Biden rightly focused on accountability for those responsible and sparing taxpayers the cost. “Those are two important lessons learned from 15 years ago. Emphasizing that the ones being helped are instead innocent bystanders who just had money in the bank is why a backlash on this action is less likely.”But Republicans were quick to pin both the crisis and potential resolution on Mr. Biden, accusing him of fostering economic troubles by stoking inflation with big spending and labeling government efforts to head off escalation of the crisis the Biden bailout.“Politically, if you ask me what’s the impact of bailing out rich techies in California — which is exactly how this will be played — then the answer is Donald Trump’s likelihood of re-election just went up three to four points,” said Mick Mulvaney, who came to Congress as a Tea Party champion and later served as Mr. Trump’s acting White House chief of staff.In repeating that taxpayers will not bear the cost of bailing out depositors at the failed banks, Mr. Biden noted that the cost will be financed by fees paid by other banks into the Federal Deposit Insurance Corporation, or F.D.I.C. What he did not mention was that a separate loan program that the Federal Reserve has opened to help keep money flowing through the banking system will be backed by taxpayer money. In a statement on Sunday, the Fed said it “does not anticipate that it will be necessary to draw on these backstop funds.”.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;}How Times reporters cover politics. We rely on our journalists to be independent observers. So while Times staff members may vote, they are not allowed to endorse or campaign for candidates or political causes. This includes participating in marches or rallies in support of a movement or giving money to, or raising money for, any political candidate or election cause.Learn more about our process.The nuances did not matter to Mr. Biden’s critics. “Joe Biden is pretending this isn’t a bailout. It is,” Nikki Haley, the former ambassador to the United Nations now running for the Republican presidential nomination, said in a statement. “Now depositors at healthy banks are forced to subsidize Silicon Valley Bank’s mismanagement. When the Deposit Insurance Fund runs dry, all bank customers are on the hook. That’s a public bailout.”Other conservatives argued that a government rescue, however it is formulated, warps private markets and eliminates disincentives for financial institutions taking reckless risks because they can assume they too will eventually be saved, a concept called “moral hazard.”“Organizations that can’t manage risk should be allowed to fail, and taxpayers should not be forced to bailout the well-connected and wealthy because a bank prioritized woke causes above smart investing,” David M. McIntosh, a former Republican congressman from Indiana and president of the Club for Growth, a conservative advocacy organization, wrote on Twitter.But the White House adamantly rejected the comparison to the bailouts of the past, noting that the government is protecting depositors, not investors, while firing bank managers responsible for the trouble. “This is very different than what we saw in 2008,” Karine Jean-Pierre, the White House press secretary, told reporters.Michael Kikukawa, another White House spokesman, later said in a statement: “The president’s direction from the outset has been to respond in a way that protects hardworking Americans and small businesses, keeps our banking system strong and resilient, and ensures those responsible are held accountable. That’s exactly what his administration’s actions have done.”Mr. Biden, for his part, blamed Mr. Trump for the current crisis, saying “the last administration rolled back some of these requirements” in the Dodd-Frank law that Mr. Obama signed in 2010. Mr. Trump signed legislation passed by lawmakers in both parties in 2018 freeing thousands of small and medium-sized banks from some of the strict rules in the earlier law.The bailouts back then came in response to a banking crisis that seemed far more dangerous than what is currently evident. Some of the country’s most storied investment houses were collapsing in 2008 under the weight of risky mortgage-based securities, starting with Bear Stearns and later Lehman Brothers.Mr. Bush was warned that a cascade of failures could propel the country into another Great Depression. “If we’re really looking at another Great Depression,” he told aides, “you can be damn sure I’m going to be Roosevelt, not Hoover.”Casting aside his longstanding free-market philosophy, Mr. Bush asked Congress to authorize $700 billion for the Troubled Asset Relief Program, or TARP, to prop up the banks. Aghast at the request just weeks before an election, the House rejected the plan, led by Mr. Bush’s fellow Republicans, sending the Dow Jones industrial average down 777 points, the largest single-day point drop in history to that point. Alarmed by the reaction, the House soon reversed course and approved a barely revised version of the plan.Mr. Obama and his running mate, Mr. Biden, both voted for the program and went on to win the election. Taking office in January 2009, they then inherited the bailout. In the end, about $443 billion of the $700 billion authorized was actually used to bolster banks, automakers and a giant insurance firm. As unpopular as it was, the injection of funds helped stabilize the economy.The ultimate cost of the bailouts of that period remains in dispute. Mr. Obama and others who were involved often say that they were all ultimately paid back by the companies that benefited from the funds. ProPublica, the nonprofit investigative news organization, calculated in 2019 that after repayments the federal government actually made a profit of $109 billion.But it depends on how you count the costs. Deborah J. Lucas, a professor at the Massachusetts Institute of Technology, calculated that same year that the TARP program cost $90 billion in the end, a far cry from the original $700 billion. But other bailouts, most notably to Fannie Mae and Freddie Mac, the federally backed home mortgage companies, brought the total cost of various bailouts to $498 billion in her estimation.Either way, critics on the left and right felt aggrieved. As recently as 2020, Mr. Sanders cited the issue in running against Mr. Biden for the Democratic nomination. “Joe bailed out the crooks on Wall Street that nearly destroyed our economy 12 years ago,” he said at a town hall.Mr. Biden stood by the decisions, maintaining they worked. “Had those banks all gone under, all those people Bernie says he cares about would be in deep trouble,” he said during a debate, adding, “This was about saving an economy, and it did save the economy.”The issue was not enough to cost Mr. Biden the nomination, but that did not mean voters remember the bailouts of the past fondly. “To many, it didn’t feel like it ‘worked,’ and that made it very easy to demagogue,” said Mr. Buck. “A long period of economic malaise also leads to people looking for something or someone to blame, which is the basis for populism. I firmly believe we don’t get Trump without the devastation of 2008.” More

  • 138 Shares189 Views

    in Economy

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

    by

    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