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

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    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. 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    After SVB Collapse, Fed and Lawmakers Eye Bank Rules

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    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

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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