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    Push to Insure Big Deposits Percolates on Capitol Hill

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

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

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    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

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

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

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    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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    No, Diversity Did Not Cause Silicon Valley Bank’s Collapse

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    Blaming workplace diversity or environmentally and socially conscious investments for the firm’s downfall signals a “complete lack of understanding of how banks work,” one expert said.WASHINGTON — A growing chorus of conservative pundits and politicians have said the failure of Silicon Valley Bank was the result of the bank’s “woke” policies, blaming the California lender’s commitments to workplace diversity and environmentally and socially conscious investments.These claims are without merit. The bank’s collapse was due to financial missteps and a bank run.Moreover, the firm’s policy on diversity, equity and inclusion — also known as D.E.I. — is similar to ones that have been broadly adopted in the banking sector. So is its approach to taking environmental and social considerations into account when investing — referred to as E.S.G. — although that has become a target of conservatives.In fact, Silicon Valley Bank is considered about average in the industry when it comes to these issues.Here’s a fact check.What Was Said“They were one of the most woke banks in their quest for the E.S.G.-type policy in investing.”— Representative James R. Comer, Republican of Kentucky, in an appearance on Fox News on Sunday“This bank, they’re so concerned with D.E.I. and politics and all kinds of stuff. I think that really diverted from them focusing on their core mission.” — Gov. Ron DeSantis of Florida on Fox News on SundayThis lacks evidence. First, experts have broadly agreed that the bank’s demise had little to do with “wokeness.” As The New York Times and others have explained, the collapse was due to a bank run precipitated by a decline in start-up funding, rising interest rates and the firm’s sale of government bonds at a huge loss to raise capital.The bank’s loans to environmental and community projects “were not an important factor behind the collapse of SVB,” said Itay Goldstein, a finance professor at the University of Pennsylvania’s Wharton School. “There is no immediate indication that these loans precipitated the run by investors.”Silicon Valley Bank also was not an outlier in its diversity goals or its E.S.G. investments. U.S. investments in those assets are expected to rise to $33.9 trillion by 2026. A 2022 report by the Consumer Financial Protection Bureau found that 59 percent of banks had lending programs specifically for women- and minority-owned businesses, financing that would fit under the “social” umbrella of E.S.G.George Serafeim, a professor at Harvard Business School, said that blaming the collapse on such initiatives reflected either “a complete lack of understanding of how banks work or the intentional misattribution of causality for the bank’s failure.”Maretno Harjoto, a professor of finance at Pepperdine University and expert in E.S.G. investing, agreed that “there is no truth” to the claims. He added that banks will often set E.S.G. and diversity goals due to pressure from investors and stakeholders.Silicon Valley Bank said in a recent report that it would invest about $16.2 billion over the next few years to finance small businesses and community development projects, affordable housing and renewable energy. That level of investment was equivalent to about 8 percent of its $209 billion in assets.But Silicon Valley Bank was hardly alone in pursuing these types of investments. Of the 30 largest banks in the United States — Silicon Valley Bank ranked No. 16 — all but one (First Citizens Bank) have made E.S.G. investments and released reports on them. And the three largest U.S. banks — JPMorgan Chase & Company, Bank of America and Citigroup — all dedicated 8 percent to 14 percent of their overall assets toward social and environmental investments in 2021. All three have committed to at least $1 trillion in sustainable investments by 2030.Among all banking institutions, Silicon Valley Bank actually ranked about average on E.S.G. issues, according to three metrics developed separately by the financial research firms MSCI, Morningstar and Refinitiv. Among the 30 top banks, its middling A rating from MSCI put it on par with 11 banks, while 11 others received the higher AA rating, characterizing them as leaders. The California lender’s score from Morningstar was among the worst of all 30 banks. And its Refinitiv score was worse than all but one financial institution and on par with Signature Bank, which failed this week.Silicon Valley Bank’s commitment to improving diversity among its leadership was fairly typical as well. The largest 30 banks in the United States all have a stated commitment to more inclusive career advancement.The bank’s latest inclusion report noted that 38 percent of senior leadership and 42 percent of its board members were women, and that 30 percent of leadership and 8 percent of its board were nonwhite.By these demographics, Silicon Valley Bank was one of the more racially diverse financial institutions, but not extraordinarily so. Analyses have found that about 19 percent of senior leadership in financial services were nonwhite and 30 percent were women.While The Times was unable to find data on the demographics of boards of directors in the finance sector overall, the boards of the eight banks in the United States considered systemically important were more racially diverse on average than Silicon Valley Bank. Of the 104 board members who govern these banks, 23 percent were members of a racial or ethnic minority and 39 percent were women. More

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    How Washington Decided to Rescue Silicon Valley Bank

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    Officials were initially unsure about the need for the measures they eventually announced to shore up the financial system, but changed their minds quickly.WASHINGTON — On Friday afternoon, the deputy Treasury secretary, Wally Adeyemo, met with Jamie Dimon, the chief executive of JPMorgan Chase & Company, at Mr. Dimon’s office in New York.The Biden administration and the Federal Reserve were considering what would be the most aggressive emergency intervention in the banking system since the 2008 financial crisis, and the question the two men debated was at the heart of that decision.Could the failure of Silicon Valley Bank, the mega start-up lender that had just collapsed, spread to other banks and create a systemic risk to the financial system?“There’s potential,” Mr. Dimon said, according to people familiar with the conversation.Mr. Adeyemo was one of many administration officials who entered last weekend unsure of whether the federal government needed to explicitly rescue Silicon Valley Bank’s depositors before markets opened on Monday morning.In the White House and the Treasury, some officials initially saw the bank’s swift plunge to insolvency as unlikely to spark an economic crisis — particularly if the government could facilitate a sale of the bank to another financial institution.They quickly changed their minds after signs of nascent bank runs across the country — and direct appeals from small businesses and lawmakers from both parties — convinced them the bank’s problems could imperil the entire financial system, not just rich investors in Silicon Valley.On Friday morning, aides met with President Biden in the Oval Office, where they warned that the panic engulfing Silicon Valley Bank could spread to other financial institutions, according to a White House official. Mr. Biden told them to keep him updated on developments.By Friday afternoon, before financial markets had even closed, the Federal Deposit Insurance Corporation had stepped in and shut down the bank.Still, the kind of rescue that the United States ultimately engineered would not materialize publicly until Sunday, after intense deliberations across the government.This account is based on interviews with current and former officials in the White House, Treasury and the Fed; financial services executives; members of Congress; and others. All were involved or close to the discussions that dominated Washington over a frenzied process that began Thursday evening and ended 72 hours later with an extraordinary announcement timed to beat the opening of financial markets in Asia.The episode was a test for the president — who risked criticism from the left and the right by greenlighting what critics called a bailout for banks. It also confronted Treasury Secretary Janet L. Yellen with the prospect of a banking crisis at a moment when she had become more optimistic that a recession could be avoided. And it was the starkest demonstration to date of the impact that the Fed’s aggressive interest rate increases were having on the economy.Wally Adeyemo, deputy Treasury secretary, was initially unsure whether the government would need to intervene to rescue Silicon Valley Bank’s depositors. Andrew Harnik/Associated PressSilicon Valley Bank failed because it had put a large share of customer deposits into long-dated Treasury bonds and mortgage bonds that promised modest, steady returns when interest rates were low. As inflation jumped and the Fed lifted interest rates from near zero to above 4.5 percent to fight it over the last year, the value of those assets eroded. The bank essentially ran out of money to make good on what it owed to its depositors.By Thursday, concern was growing at the Federal Reserve. The bank had turned to the Fed to borrow money through the central bank’s “discount window” that day, but it soon became clear that was not going to be enough to forestall a collapse.Officials including Jerome H. Powell, chairman of the Fed, and Michael S. Barr, its vice chair for supervision, worked through Thursday night and into Friday morning to try to find a solution to the bank’s unraveling. By Friday, Fed officials feared the bank’s failure could pose sweeping risks to the financial system.Compounding the worry: The prospects of arranging a quick sale to another bank in order to keep depositors whole dimmed through the weekend. A range of firms nibbled around the idea of purchasing it — including some of the largest and most systemically important.One large regional bank, PNC, tiptoed toward making an acceptable offer. But that deal fell through as the bank scrambled to scrub Silicon Valley Bank’s books and failed to get enough assurances from the government that it would be protected from risks, according to a person briefed on the matter.A dramatic government intervention seemed unlikely on Thursday evening, when Peter Orszag, former President Barack Obama’s first budget director and now chief executive of financial advisory at the bank Lazard, hosted a previously scheduled dinner at the bank’s offices in New York City’s Rockefeller Center..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.Among those in attendance were Mr. Adeyemo and a pair of influential senators: Michael D. Crapo, Republican of Idaho, and Mark Warner, Democrat of Virginia. Both were sponsors of a 2018 law that rolled back regulation on smaller banks that critics now say left Silicon Valley Bank vulnerable.Blair Effron, a large Democratic donor who had just been hired by Silicon Valley Bank to advise it on its liquidity crunch, was also there. Earlier that day, the bank had attempted to raise money to stave off collapse with the help of Goldman Sachs — an effort that, by Thursday evening, had clearly failed.The Federal Reserve ultimately opened a lending program to help keep money flowing through the banking system.Al Drago for The New York TimesMr. Effron and Mr. Adeyemo spoke as it became evident that Silicon Valley Bank was running out of options and that a sale — or some bigger intervention — might be necessary. Jeffrey Zients, Mr. Biden’s new chief of staff, and Lael Brainard, the new director of his National Economic Council, were also being pelted by warnings about the bank’s threat to the economy. As Silicon Valley Bank’s depositors raced to withdraw their money on Thursday, sending its stock into free fall, both Ms. Brainard and Mr. Zients began receiving a flurry of calls and texts from worried leaders in the start-up community that the bank heavily served.Ms. Brainard, who had experienced financial crises in other countries while serving in Mr. Obama’s Treasury Department and as a Federal Reserve Board member, had begun to worry about a new crisis emanating from SVB’s failure. She and Mr. Zients raised that possibility with Mr. Biden when they briefed him in the Oval Office on Friday morning.Other officials across the administration were more skeptical, worrying that the lobbying blitz Ms. Brainard and others were receiving was purely a sign of wealthy investors trying to force the government to backstop their losses. And there were concerns that any kind of government action could be seen as bailing out a bank that had mismanaged its risk, potentially encouraging risky behavior by other banks in the future.Ms. Brainard started fielding anxious calls again on Saturday morning and did not stop until late in the evening. She and Mr. Zients briefed Mr. Biden that afternoon — virtually this time, because the president was spending the weekend in his home state of Delaware.Mr. Biden also spoke Saturday with Gov. Gavin Newsom of California, who was pushing aggressively for government intervention in fear that a wide range of companies in his state would otherwise not be able to pay employees or other operational costs on Monday morning.Concerns mounted that day as regulators reviewed data that showed deposit outflows increasing at regional banks nationwide — a likely sign of systemic risk. They began pursuing two possible sets of policy actions, ideally a buyer for the bank. Without that option, they would need to seek a “systemic risk exception” to allow the F.D.I.C. to insure all of the bank’s deposits. To calm jittery investors, they surmised that a Fed lending facility would also be needed to buttress regional banks more broadly.“Because of the actions that our regulators have already taken, every American should feel confident that their deposits will be there if and when they need them,” President Biden said on Monday.Doug Mills/The New York TimesMs. Yellen on Saturday convened top officials — Mr. Powell, Mr. Barr and Martin J. Gruenberg, the chairman of the F.D.I.C.’s board of directors — to figure out what to do. The Treasury secretary was fielding back-to-back calls on Zoom from officials and executives and at one point described what she was hearing about the banking sector as hair-raising.F.D.I.C. officials initially conveyed reservations about their authority to back deposits that were not insured, raising concerns among those who were briefed by the F.D.I.C. that a rescue could come too late.By Saturday night, anxiety that the Biden administration was dragging its feet was bubbling over among California lawmakers.At the glitzy Gridiron Club Dinner in Washington, Representative Ro Khanna, a California Democrat, cornered Steve Ricchetti, a top White House aide and close adviser to the president, and urged Mr. Biden and his team to be decisive. He warned that many of Mr. Biden’s major achievements would be washed away if the banking system melted down.“I said, Steve, this is a massive issue not just for Silicon Valley, but for regional banks around America,” Mr. Khanna said, adding that Mr. Ricchetti replied: “I get it.”Privately, it was becoming clear to Mr. Biden’s economic team that banking customers were getting spooked. On Saturday evening, officials from the Treasury, the White House and the Fed tentatively agreed to two bold moves they finalized and announced late on Sunday afternoon: The government would ensure that all depositors would be repaid in full, and the Fed would offer a program providing attractive loans to other financial institutions in hopes of avoid a cascading series of bank failures.But administration officials wanted to ensure the rescue had limits. The focus, according to a person familiar with the conversation, was ensuring that businesses around the country would be able to pay their employees on Monday and that no taxpayer money would be used by tapping the F.D.I.C.’s Deposit Insurance Fund.It was a priority that the rescue not be viewed as a bailout, which had become a toxic word in the wake of the 2008 financial crisis. The depositors would be protected, but the bank’s management and its investors would not.By Sunday morning, regulators were putting the finishing touches on the rescue package and preparing to brief Congress. Ms. Yellen, in consultation with the president, approved the “systemic risk exception” that would protect all of the bank’s deposits. The bipartisan members of the Federal Reserve and the F.D.I.C. voted unanimously to approve the decision.That evening, they announced a plan to make sure all depositors at Silicon Valley Bank and another large failed financial institution, Signature Bank, were repaid in full. The Fed also said it would offer banks loans against their Treasury and many other asset holdings, whose values had eroded.“Because of the actions that our regulators have already taken, every American should feel confident that their deposits will be there if and when they need them,” Mr. Biden said during brief remarks at the White House.By Tuesday afternoon the intervention was showing signs of working. Regional bank stocks, which had fallen on Monday, had partially rebounded. The outflow of deposits from regional banks had slowed. And banks were pledging collateral at the Fed’s new loan program, which would put them in a position to use it if they decided that doing so was necessary.The financial system appeared to have stabilized, at least for the moment. 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