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    IMF Lowers Growth Outlook Amid Financial System Tremors

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    The International Monetary Fund says a painful slowdown, which could include a recession, has become a bigger risk for the global economy.WASHINGTON — The world economy faces the increasing risk of a painful slowdown amid worries about the global banking system and concerns that rising interest rates could force banks to curtail lending, the International Monetary Fund said on Tuesday.The warning follows weeks of turmoil in the global banking sector, which included two bank failures in the United States and UBS’s takeover of Credit Suisse, brokered by the Swiss government. Fears that bank runs would ripple through the financial system have abated in recent weeks, but concerns that additional bank failures and tightening lending standards could slow economic output around the world remain.In its latest World Economic Outlook report, the I.M.F. made a slight reduction to its growth forecast for 2023, lowering it to 2.8 percent, from 2.9 percent in January. Growth for the year is expected to be much slower than the I.M.F. predicted a year ago, when it projected output of 3.4 percent.Growth projections for Japan, Germany and India were all lowered since the start of the year, when the I.M.F. said a global recession would most likely be avoided.The I.M.F. and the World Bank have both raised alarms in recent weeks that the global economy is facing a period of extended stagnation. The I.M.F. expects growth to hover around 3 percent for the next five years, which is its weakest medium-term growth forecast since 1990.On Tuesday, the I.M.F. expressed optimism that a financial crisis could be averted, but it lamented that inflation was still elevated and that the global economy remained fragile, facing a “rocky” road ahead. It suggested that a so-called hard landing, which could entail economies around the world tipping into recession, was increasingly plausible.“A hard landing — particularly for advanced economies — has become a much larger risk,” the I.M.F. report said, adding, “The fog around the world economic outlook has thickened.”Pierre-Olivier Gourinchas, the I.M.F.’s chief economist, said hopes for stronger growth hinged partly on China’s reopening after strict Covid-19 regulations.How Hwee Young/EPA, via ShutterstockThe dimmer forecast comes as top economic officials from around the world are convening in Washington this week for the spring meetings of the I.M.F. and World Bank. The gathering is taking place at a moment of high uncertainty, with Russia’s war in Ukraine grinding on, prices around the world remaining stubbornly high and debt burdens in developing countries raising unease about the possibility of defaults.Treasury Secretary Janet L. Yellen is expected to meet with other international regulators this week to assess the state of the global financial system. On Tuesday, she expressed confidence in the U.S. banking system and the health of the economy, explaining that she continues to believe that the outlook is brighter than what many economists predicted last fall.“Here at home, the U.S. banking system remains sound, with strong capital and liquidity positions,” Ms. Yellen said during a news conference. “The global financial system also remains resilient due to the significant reforms that nations took after the financial crisis.”Ms. Yellen said she remained “vigilant” to the risks facing the economy, pointing to recent pressures on banking systems in the United States and Europe and the potential for more fallout from Russia’s war in Ukraine. She is not currently seeing evidence that credit is contracting, she added, but acknowledged that it was a possibility.“I’m not anticipating a downturn in the economy, although, of course, that remains a risk,” Ms. Yellen said.Treasury Secretary Janet Yellen expressed confidence on Tuesday in the strength of the U.S. economy but acknowledged that a downturn remained possible.Yuri Gripas for The New York TimesThe I.M.F. made a small upgrade to its projection for U.S. output, which is now expected to be 1.6 percent for 2023.Economists are still working to assess what effects the bank failures might have on the broader U.S. economy. Analysts at Goldman Sachs wrote in a research note this week that bank stress could reduce lending by as much as six percentage points and that small businesses, which rely heavily on small and midsize banks, could bear the brunt of tighter lending.The I.M.F. attributed the strain on the financial sector to banks with business models that relied heavily on a continuation of low interest rates and failed to adjust to the rapid pace of increases in the last year. Although it appears that the turbulence in the banking sector might be contained, the I.M.F. noted that investors and depositors remained highly sensitive to developments in the banking sector.Unrealized losses at banks could lead to a “plausible scenario” of additional shocks that could have a “potentially significant impact on the global economy” if credit conditions tighten further and businesses and households have an even harder time borrowing.“The risks are again heavily weighted to the downside and in large part because of the financial turmoil of the last month and a half,” Pierre-Olivier Gourinchas, the I.M.F.’s chief economist, said at a briefing ahead of the report’s release.In the most severe scenario, in which global credit conditions tighten sharply, the I.M.F. projected that global growth could slow to 1 percent this year.Mr. Gourinchas noted that the financial system was not the only cloud hanging over the global economy. Hopes for stronger growth have been hinging on China’s reopening after strict pandemic regulations, and changes to that policy could slow output and disrupt international commerce, he said. At the same time, Russia’s war in Ukraine continues to threaten the reliability of food and energy supply chains.Last month, the I.M.F. approved a $15.6 billion loan package for Ukraine, the first such financing program for a country involved in a major war.Emile Ducke for The New York TimesThe I.M.F. has been playing a leading role in trying to stabilize the Ukrainian economy, and last month it approved a $15.6 billion loan package for Ukraine, the first such financing program for a country involved in a major war. But despite the efforts by Western nations to buttress Ukraine and weaken Russia, the I.M.F. raised its outlook for the Russian economy, projecting it will grow 0.7 percent this year and 1.3 percent in 2024.The I.M.F. noted that Russia’s energy exports continued to be robust, allowing it to support its economy through government spending. The impact of efforts by the United States and Europe to cap the price of Russian oil at $60 a barrel remains unclear because global oil prices have been falling amid recession fears. I.M.F. officials said that because of lower oil prices, Russian oil was no longer trading at as much of a discount and that Russia had been successful at finding ways to circumvent the price cap.Even as it underscored the risks facing the global economy, the I.M.F. urged central banks to maintain their efforts to contain prices while standing ready to stabilize the financial system, noting that inflation is still too elevated relative to their targets.Despite the I.M.F.’s warnings about a hard landing, Ms. Yellen sought to open this week’s meetings with a note of optimism. She pointed to signs that inflation is diminishing and the resilience of the financial system as reasons for hope.“I wouldn’t overdo the negativism about the global economy,” Ms. Yellen said. “I think we should be more positive.”She added: “I think the outlook is reasonably bright.” More

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    I.R.S. Unveils $80 Billion Plan to Overhaul Tax Collection

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    The 10-year strategy document outlines a focus on improving customer service and cracking down on tax evasion by corporations and the wealthy.WASHINGTON — The Internal Revenue Service on Thursday unveiled an $80 billion plan to transform itself into a “digital first” tax collector focused on customer service and cracking down on wealthy tax evaders. The move lays the groundwork for an ambitious 10-year overhaul of one of the most scrutinized arms of the federal government.The effort is a key part of President Biden’s economic agenda, which aims to reduce the nation’s $7 trillion of uncollected tax revenue and use the funds to combat climate change, curb prescription drug prices and pay for other initiatives prized by Democrats.The plan is also at the heart of the White House’s goal of making tax administration fairer. The report indicates that more than half the new money will be dedicated to ensuring that rich investors and large corporations cannot avoid paying the taxes that they owe.The $80 billion is the largest single infusion of funds in the agency’s history and was included in the Inflation Reduction Act, the sweeping climate and energy legislation that Democrats pushed through last year.According to the Biden administration, the investment will yield hundreds of billions of dollars in deficit reduction. But efforts to bolster the I.R.S. have drawn strong opposition from Republicans, who have long accused the agency of improperly targeting them.The report released Thursday was requested by Treasury Secretary Janet L. Yellen, whose department oversees the tax agency.In a memorandum to Ms. Yellen that accompanied the report, Daniel I. Werfel, the new I.R.S. commissioner, said he would focus new enforcement resources on “hiring the accountants, attorneys and data scientists needed to pursue high-income and high-wealth individuals, complex partnerships and large corporations that are not paying the taxes they owe.”Daniel I. Werfel, the new I.R.S. commissioner, said the agency’s staff expansion would aim to improve its ability to collect unpaid taxes from the wealthy and big corporations.Shuran Huang for The New York TimesThe I.R.S. has about 80,000 full-time employees, about 20 percent fewer than it had in 2010 even though the U.S. population is now larger and the tax system more complex. The agency’s resources have also declined over the years, as Republicans have sought to cut its funding and, in some cases, called for its abolition. The financial strain has led to backlogs of tax filings, delayed refunds, long waits for taxpayers who call the agency with questions and plunging audit rates.In recent months, the I.R.S. has ramped up hiring to improve its customer service capacity and has been racing to complete the processing of old tax returns, most of which were filed on paper rather than electronically.The plan released on Thursday details how the I.R.S. intends to become a “digital first” organization that provides “world class” service to taxpayers. That includes the replacement of antiquated technology and the introduction of systems that will allow taxpayers greater access to their financial information, easier communication with the I.R.S. and new ways to correct errors as returns are being filed.The most sweeping and politically sensitive changes involve enforcement. The I.R.S. plans to introduce more data analytics and machine-learning technology to better detect cheating, and it aims to bolster its teams of revenue agents and tax attorneys so that the agency is not overwhelmed when auditing complicated business partnerships or corporations.The I.R.S. plan repeatedly emphasizes that it will honor Ms. Yellen’s directive that the new money not be aimed at increasing audit rates for taxpayers who earn less than $400,000 a year — a pledge meant to align with Mr. Biden’s promise not to raise taxes on low- and middle-income Americans. The plan echoes Ms. Yellen’s assurance that those audit rates will not rise above “historical levels,” but does not specify the levels, suggesting that audit rates could rise above their existing levels.In a briefing for reporters on Thursday, however, Mr. Werfel said that in the near term, audit rates for those making less than $400,000 would not rise.“We have years of work ahead of us, where we will be 100 percent focused on building capacity for higher-income individuals and corporations,” he said.But Janet Holtzblatt, a senior fellow at the Urban-Brookings Tax Policy Center, said it would be a challenge for the I.R.S. to determine whether taxpayers reporting an income under $400,000 were doing so legitimately, without being able to audit some of them initially. Ultimately, she said, the agency will need to decide on an acceptable audit rate for people under that income level.Mr. Werfel acknowledged that the I.R.S. would have to be alert in instances when taxpayers earn, for example, $5 million in a given year and $399,000 a year later.“We might take a second look at that,” he said.The plan lays out benchmarks for many of its goals, but it leaves unanswered questions.The I.R.S. is in the midst of a $15 million study to determine if it can create its own system enabling more taxpayers to file their federal returns online at no cost. This idea has met resistance from lobbying groups representing the tax preparation industry.The agency has faced criticism this year after the publication of a study that showed Black taxpayers are at least three times as likely as other taxpayers to face I.R.S. audits, even after the study accounted for the differences in the types of returns that each group is most likely to file. The plan includes using data to support “equity analyses” and says a key project will be developing procedures to evaluate the fairness of I.R.S. systems.The Treasury Department said earlier that the investment in the I.R.S. would lead to the hiring of 87,000 employees over 10 years, and has suggested that with anticipated attrition its head count could top 110,000 by the end of the decade. But the operating plan does not give an estimate for the agency’s eventual head count, and Wally Adeyemo, the deputy Treasury secretary, said on Thursday that I.R.S. did not want to be “locked in” to long-term hiring requirements before learning how new technology would affect its staffing needs.Mr. Werfel batted down claims by Republican lawmakers that the I.R.S. would be hiring thousands of armed “agents” to scrutinize middle-class taxpayers and small businesses. He said that only 3 percent of the I.R.S. work force was in the criminal investigations division, which has access to weapons, and that there were no plans to increase that percentage. The plan projects that the I.R.S. will hire more than 7,000 new enforcement employees over the next two years.Despite efforts to focus on technology and taxpayers services, the plan is likely to stoke criticism.Erin M. Collins, the national taxpayer advocate, wrote in a blog post on Thursday that the plan had the potential to transform tax administration but that the money was disproportionately invested in enforcement.“I believe Congress should reallocate I.R.S. funding to achieve a better balance with taxpayer service needs and IT modernization,” Ms. Collins, who serves as a watchdog for the I.R.S., wrote.The report notes that if the agency’s annual funding is curtailed over the coming years, some of the $80 billion might be needed to maintain its basic operations. That would force the I.R.S. to scale back its overhaul.House Republicans in January voted to pare the allocation, and Republican reaction to the report on Thursday indicated that the political fight over the I.R.S. will only intensify.“The Democrats are further weaponizing the most-feared agency in all of the federal government: the IRS,” Representative Mike Kelly, Republican of Pennsylvania and a member of the House Ways and Means Committee, said on Twitter. “Make no mistake — we are using money from hardworking American taxpayers to go after hardworking American taxpayers.”Former Gov. Nikki Haley of South Carolina, a candidate for the Republican presidential nomination, said on Twitter, “Does anyone believe the IRS won’t go after middle America?” More

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    SVB Hearing Takeaways: Bank Failures Spur a Blame Game, But Few Solutions

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    Federal regulators faced more than two hours of intense questioning from lawmakers on Tuesday about what caused the failures of Silicon Valley Bank and Signature Bank, the red flags that went unheeded and the steps that must be taken to avoid future collapses that could rattle the United States financial system.There was bipartisan concern about the state of the nation’s banks that in many cases blurred the usual party lines, where Democrats want more strict oversight and Republicans call for looser regulations. But there was also a substantial amount of buck-passing and finger pointing as the officials from the Federal Reserve, the Federal Deposit Insurance Corporation and the Treasury Department sought to make sense of the second largest bank failure in American history.The hearing — featuring Michael S. Barr, the Federal Reserve’s vice chair for supervision, Martin Gruenberg, chair of the Federal Deposit Insurance Corporation and Nellie Liang, the Treasury’s under secretary for domestic finance — marked the beginning of what will be an extended inquiry by Congress and the regulators themselves into what went wrong.Regulators blamed the banks.From the outset, the regulators made clear what they believed to be the primary reason that Silicon Valley Bank failed: It was poorly managed and allowed risks to build up to the point that the bank collapsed.Mr. Barr said in his testimony that “SVB’s failure is a textbook case of mismanagement.” He added that Fed officials flagged problems to the bank as far back as November 2021, but the bank failed to deal with them.Punishment for executives is on the table.Lawmakers remained intent on ensuring that the executives of the banks are punished if they did anything improper leading up to the failures. They also expressed particular concern about last minute stock sales by Silicon Valley Bank officials.Regulators said that they were limited in their power to claw back compensation but that they can impose financial and other penalties if their continuing investigation finds wrongdoing.Regulators blamed Silicon Valley Bank’s collapse on poor management during more than two hours of questioning, Kenny Holston/The New York TimesThe Fed could have done more.The Federal Reserve is under particular scrutiny regarding when it knew that things were amiss at SVB.Even though Fed supervisors had flagged weaknesses at SVB as far back as 2021, Mr. Barr said he first learned of SVB’s problems last month — suggesting it took a long time for concerns to be escalated to the Fed board and its vice chair of supervision.Mr. Barr said that the Federal Reserve officials will be discussing any potential missed warning signs in their internal review and that “we expect to be held accountable.”Regulators say they need more authority.All three regulators said that they believed that financial regulations needed to be tightened following the recent stress in the banking sector.Mr. Barr pointed to Federal Reserve regulations, which were enacted during the Trump administration in 2019, that exempted Silicon Valley Bank from being stress tested and suggested that those need to be revisited.Some Democrats on the committee emphasized the notion that deregulation left agencies without the tools they needed to address issues at smaller banks.What’s next?The House Financial Services Committee will hold its own hearing on Wednesday, and question the same officials.Reviews by the F.D.I.C. and the Fed are expected to be completed by May 1 and members of the Senate committee from both parties suggested they’d be interested in hearing from regulators after those inquiries are concluded.There is also an ongoing debate about raising the bank deposit insurance cap from $250,000 and imposing stiffer penalties on executives at banks that fail.Lawmakers have also asked the Government Accountability Office to study the effectiveness of the bank supervisory regime and make recommendations for changes. But it’s not clear whether any suggested changes would have enough bipartisan support to overcome a divided Congress. More

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    How Far Can Regulators Go to Protect Uninsured Deposits?

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    A decision by federal regulators to ensure that depositors at Silicon Valley Bank and Signature Bank did not lose money regardless of how much they had in their accounts, has aroused populist anger as well as questions of what government agencies can and cannot do to protect uninsured accounts.Under current law, the government insures bank deposits only up to $250,000. Any increase in that limit would require congressional authorization. But regulators can protect deposits over that amount, like they did at Silicon Valley Bank and Signature Bank, if they determine that the banks’ failures pose a systemic risk.They can also request approval from Congress to temporarily raise the cap or eliminate it altogether, though some lawmakers have already expressed unwillingness to do so.Janet L. Yellen, the Treasury secretary, suggested last week that regulators were ready to make uninsured depositors at other banks whole if necessary and “if smaller institutions suffer deposit runs that pose the risk of contagion.”Amid widespread bank failures in the Great Depression, Congress created the Federal Deposit Insurance Corporation in 1933 to insure deposits under $2,500. It has increased that limit over the years, recently lifting it to $250,000 from $100,000 for IRAs in 2006 and for checking accounts in 2008. The Dodd-Frank Act of 2010 made the increase permanent.In the wake of the 2008 financial crisis, the F.D.I.C. evoked the systemic risk exception to create a program that guaranteed new debt issued by banks for three years and insured all deposits if they did not bear interest (typically, accounts used by businesses for payroll).The decision to grant the exception was reached “after three days of intense negotiation,” according to an account of the episode by the F.D.I.C.’s historian, and had to be approved by the Treasury secretary in consultation with the president and two-thirds of the boards of both the F.D.I.C. and the Federal Reserve.But regulators no longer have the ability to create such a program unilaterally, as the Dodd-Frank Act eliminated the F.D.I.C.’s authority to temporarily insure accounts with more assets than the statutory limit. Under that law, the agency can only do so if it is the receiver of a failed bank or if it has approval from Congress.“Congress was so concerned with moral hazard and ‘bailouts’ that it seemed to limit the receipt of F.D.I.C. assistance to the imposition of an F.D.I.C. receivership, unless Congress specifically approved a subsequent F.D.I.C. alternative,” said Jeffrey N. Gordon, a law professor at Columbia University and expert on financial regulation.During the coronavirus pandemic, Congress in 2020 temporarily lifted the deposit limit on noninterest bearing accounts. But in congressional testimony last week, Ms. Yellen said her agency was not seeking to lift the cap altogether and insure all deposits over $250,000. Rather, she said, regulators would seek the systemic risk exception for failed banks through a “case-by-case determination.”Others, though, have pushed for more sweeping coverage. Some lawmakers are considering temporarily increasing the deposit cap while others have proposed eliminating it altogether.The Dodd-Frank Act provides a fast-track process for such requests, allowing the Congress to expedite approval by adopting a joint resolution. Sheila Blair, the former president of the F.D.I.C. during the financial crisis, recently urged Congress to initiate the procedure.“We want people to make payroll. We want people to be able to pay their businesses and others to pay their bills. So I think that is one area where unlimited coverage, at least on a temporary basis, makes a lot of sense,” she said in a Washington Post event last week.News reports have also suggested that regulators are looking at other mechanisms of acting without Congress, specifically by tapping into the Exchange Stabilization Fund. The Treasury secretary has broad authority to use the emergency reserve, which was created in 1934 to stabilize the value of the dollar but has been used over the years for a host of other purposes.Mr. Gordon noted that using the exchange fund alone would not work to protect uninsured deposits, given that it is “paltry compared to the Deposit Insurance Fund and unlike the D.I.F. has no mechanism for replenishment.” But he said it would be possible to use the fund as a backstop in a program operated by the Federal Reserve that lends against bank assets.“What this means is that banks would have an easy way to raise cash to pay off all deposits,” he said. More

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    Banks Are Borrowing More From the Fed: What to Know

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    As turmoil sweeps the United States financial system, banks are turning to the Federal Reserve for loans to get them through the squeeze.Banks are turning to the Federal Reserve’s loan programs to access funding as turmoil sweeps the financial system in the wake several high-profile bank failures.The collapse of Silicon Valley Bank on March 10 followed by Signature Bank on March 12 prompted depositors to pull their money from some banks and sent the stock prices for financial firms on a roller-coaster ride. The tumult has left some institutions looking for a ready source of cash — either to pay back customers or to make sure they have enough money on hand to weather a rough patch.That is where the Fed comes in. The central bank was founded in 1913 partly to serve as a backstop to the banking system — it can loan financial institutions money against their assets in a pinch, which can help banks raise cash more quickly than they would be able to if they had to sell those securities on the open market.But the Fed is now going further than that: Central bankers on March 12 created a program that is lending to banks against their financial assets as if those securities were still worth their original value. Why? As the Fed has raised interest rates to contain inflation over the past year, bonds and mortgage debt that paid lower rate of interest became less valuable.By lending against the assets at their original price instead of their lower market value, the Fed can insulate banks from having to sell those securities at big losses. That could reassure depositors and stave off bank runs.Two key programs together lent $163.9 billion this week, according to Fed data released on Wednesday — roughly in line with $164.8 billion a week earlier. That is much higher than normal. The report usually shows banks borrowing less than $10 billion at the Fed’s so-called “discount window” program.The elevated lending underlines a troubling reality: Stress continues to course through the banking system. The question is whether the government’s response, including a new central bank lending program, will be enough to quell it.A Little HistoryBefore diving into what the fresh figures mean, it’s important to understand how the Fed’s lending programs work.The first, and more traditional, is the discount window, affectionately called “disco” by financial wonks. It is the Fed’s original tool: At its founding, the central bank didn’t buy and sell securities as it does today, but it could lend to banks against collateral.In the modern era, though, borrowing from the discount window has been stigmatized. There is a perception in the financial industry that if a big bank taps it, it must be a sign of distress. Borrower identities are released, though it’s on a two-year delay. Its most frequent users are community banks, though some big regional lenders like Bancorp used it in 2020 at the onset of the pandemic. Fed officials have tweaked the program’s terms over the years to try to make it more attractive during times of trouble, but with mixed results.Enter the Fed’s new facility, which is like the discount window on steroids. Officially called the Bank Term Funding Program, it leverages emergency lending powers that the Fed has had since the Great Depression — ones that the central bank can use in “extraordinary and exigent” circumstances with the sign-off of the Treasury secretary. Through it, the Fed is lending against Treasuries and mortgage-backed securities valued at their original price for up to a year.Policymakers seem to hope that the program will help reduce interest rate risk in the banking system — the problem of the day — while also getting around the stigma of borrowing from the discount window.Banks are Borrowing More Than UsualThe backstops seem to be working:  During the recent turmoil, banks are using both programs.Discount window borrowing climbed to $110.2 billion as of Wednesday, down slightly from $152.9 billion the previous week — when the turmoil started. Those figures are abnormally elevated: Discount window borrowing had stood at just $4.6 billion the week before the tumult began.The new program also had borrowers. As of Wednesday, banks were borrowing $53.7 billion, according to the Fed data. The previous week, it stood at $11.9 billion. The names of specific borrowers will not be released until 2025.The Borrowing Could Be a Sign of TroubleThe next issue is perhaps more critical: Analysts are trying to parse whether it is a good thing that banks are turning to these programs, or whether the stepped up borrowing is a sign that their problems remain serious.“You still have some banks that feel the need to tap these facilities,” said Subadra Rajappa, head of U.S. rates strategy at Société Générale. “There’s definitely cash moving from the banking sector and into other investments, or into the biggest banks.”While Silicon Valley Bank had some obvious weaknesses that regulation experts said were not widely shared across the banking system, its failure has prodded people to look more closely at banks — and depositors have been punishing those with similarities to the failed institutions by withdrawing their cash. PacWest Bancorp has been among the struggling banks. The company said this week that it had borrowed $10.5 billion from the Fed’s discount window.Or the Borrowing Could Be a Good SignThe fact that banks feel comfortable using these tools might reassure depositors and financial markets that cash will keep flowing, which might help avert further troubles.In the past, borrowing from the Fed carried a stigma because it signaled a bank might be in trouble. This time around, the securities the banks hold aren’t at risk of defaulting, they are just worth less in the bond market as a result of the rapid increase in interest rates.“For me, this is a very different situation to what I have seen in the past,” said Greg Peters, co-chief investment officer at PGIM Fixed Income. More

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    Powell and Yellen Suggest Need to Review Regulations After Bank Failures

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

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    Fed Meeting Holds High Stakes for Biden

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    The president is counting on the central bank to strike the right balance on jobs and inflation — and to prevent a spiraling financial crisis.WASHINGTON — The Federal Reserve’s decision on Wednesday on whether to raise rates at a precarious moment carries risks not just for the central bank, but also for President Biden.Mr. Biden was already relying on the Fed to maintain a delicate balance with its interest rate decisions, simultaneously taming rapid price growth while avoiding plunging the economy into recession. Now, he also needs the Fed chair, Jerome H. Powell, and his colleagues to avert a misstep that could hasten a full-blown financial crisis.Economists and investors are watching Wednesday’s decision closely, after the Fed and the administration intervened this month to shore up a suddenly shaky regional banking system following the failures of Silicon Valley Bank and Signature Bank. So are administration officials, who publicly express support for Mr. Powell but, in some cases, have privately clashed with Fed officials over bank regulation and supervision in the midst of their joint financial rescue efforts.Forecasters generally expect Fed officials to continue their monthslong march of rate increases, in an effort to cool an inflation rate that is still far too hot for the Fed’s liking. But they expect policymakers to raise rates by only a quarter of a percentage point, to just above 4.75 percent — a smaller move than markets were pricing in before the bank troubles began.Some economists and former Fed officials have urged Mr. Powell and his colleagues to continue raising rates unabated, in order to project confidence in the system. Others have called on the Fed to pause its efforts, at least temporarily, to avoid dealing further losses to financial institutions holding large amounts of government bonds and other assets that have lost value amid the rapid rate increases of the past year.“Under the currently unsettled circumstances, the stakes are high,” Hung Tran, a former deputy director of the International Monetary Fund who is now at the Atlantic Council’s GeoEconomics Center, wrote in a blog post this week.“Disappointing market expectations could usher in additional sell-offs in financial markets, especially of bank shares and bonds, possibly requiring more bailouts,” he wrote. “On the other hand, the Fed needs also to communicate its intention to bring inflation back to its target in the medium term — a difficult but not impossible thing to do.”Economists and investors are watching the Fed’s decision closely.Haiyun Jiang/The New York TimesMr. Biden has for nearly a year professed his belief that the Fed could engineer a so-called soft landing as it raises interest rates, slowing the pace of job creation and bringing down inflation but not pushing the economy into recession. That would complete what the president frequently calls a transition to “steady and more stable growth.”It would also help Mr. Biden as he gears up for a widely expected announcement that he will seek re-election: History suggests that the president would be buoyed by an economy with low unemployment and historically normal levels of inflation in 2024..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.Through the beginning of the year, data suggested a soft landing could be in the works. But in recent months, price growth has picked up again. The economy continues to create jobs at a much faster pace than Mr. Biden said last year would be consistent with more stable growth. Fed officials were eyeing a more aggressive inflation-fighting stance before the banking crisis hit.Mr. Powell suggested in congressional testimony this month that the Fed could raise rates by as much as half a percentage point in the two-day meeting that ends on Wednesday. Days later, Silicon Valley Bank failed, followed by Signature Bank. The Fed, the Treasury Department and the Federal Deposit Insurance Corporation announced emergency measures to ensure that the banks’ depositors would have access to all their money, and that other regional banks could borrow from the Fed to prevent the rapid flight of deposits that had doomed Silicon Valley Bank.Mr. Biden will need further cooperation from Fed officials if more bank failures, or other events, threaten a full-scale financial crisis. Republicans control the House and appear unwilling to sign on for a potentially large government rescue of the financial system, like the bipartisan bank bailouts during the 2008 financial crisis.“It’s especially important when you can’t count on Congress,” said Jason Furman, a Harvard economist who led the White House Council of Economic Advisers under President Barack Obama. “We’re going to see the only game in town when it comes to financial stability is the White House and the Fed.”Administration officials have publicly lauded Mr. Powell since the Silicon Valley Bank failure. Karine Jean-Pierre, the White House press secretary, told reporters this week that there was no risk to Mr. Powell’s position as Fed chair from his handling of financial regulation.“The president has confidence in Jerome Powell,” she said.Ms. Jean-Pierre also reiterated the administration’s longstanding refusal to comment on Fed interest rate decisions. “They are independent,” she said, adding: “And they are going to make their decision — their monetary policy decision, as it relates to the interest rate, as it relates to dealing with inflation, which are clearly both connected. But I’m just not going to — we’re not going to comment on that from here.”There is wide debate on what interest rate announcement Mr. Biden should be hoping to hear on Wednesday afternoon.Some economists and commentators have pushed the Fed to hold off on raising rates entirely, contending that another increase risks further rattling the banking system — and consumers’ confidence in it.Liberal senators like Elizabeth Warren, Democrat of Massachusetts, and progressive groups in Washington have urged the same for months but for a far different reason. They argue that continued rate increases could slam the brakes on economic growth and throw millions of Americans out of work, and they say the real drivers of inflation are corporate profiteering and snarled supply chains, which will not be tamed by higher borrowing costs.“I don’t think the Fed should be touching interest rate hikes with a 15-foot pole,” said Rakeen Mabud, the chief economist at the Groundwork Collaborative, a liberal policy group in Washington.“Tanking our labor market is not the way to a healthy economy, is not the way to stable prices,” Ms. Mabud said. “We have an additional imperative this month, which is that aggressive interest rate hikes are exactly what have created some of the instability that we’re seeing” in the financial system.Other economists, including some Democrats, have urged the Fed to raise rates even more swiftly to beat back inflation as soon as possible.“The whole reason we have independent central banks is so they think about things on a longer time horizon than the typical White House is able to,” Mr. Furman said. “So I think the Fed, insofar as it did anything to hurt Biden, it was that it raised rates too slowly.” More

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    Push to Insure Big Deposits Percolates on Capitol Hill

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