the about books podcast takes you behind the scenes of the nonfiction book publishing industry of insid interviews, industry updates bestsellers list. find all of our podcast by doubling the free c-span now app or where get your podcast and on our website c-span.org/podcast. unfiltered view of government funded by these television companies and more including comcast. >> are you thinking this is just a community? no it is way more than that. comcast is part of the 1000 community center's great wi-fi tudents from low-income families can get the tools they need to be ready for anything. comcast support c-span as a public service along these other television providers. giving you a front row seat to democracy. as republican congressman patrick mchenry chair of the house services committee spoke

about the collapse of silicon bank west church of the largest bank failures in u.s. history. congressman mchenry discussed the role the federal reserve and the deposit insurance corporation bank regulation of risk management. this event as hope and by the brookings institution. kground noises] [background noises] good morning everybody. i'm director on fiscal and monetary policy and be half the hutch and center center on me you to

this event both the people in the room and the people watching remotely. our subject today is what lessons we have learned from the really interesting efforts of march 2023. a year ago the glol financial system suffered the most significant banking stress since the global financial crisis of 2007 and eight. as you all probably know if event silicon valley bank failed prompt and the fdic to take it over the middle of the dayay could not even make d it to the weekend which is as a one off event. silicon valley was certainly for lack of a better term unusual. the deposits were uninsured is woefully unprepared for decrease in interest rate that eroded the values of its securities portfolio it was followed by with some of called the panic of 2023. the phillies of signature bank and itsoversees to arrest what u.s. authorities fear is a destabilizing bank

running u.s. authorities invoked emergency powers to cover all uninsured deposits and create an usually generous emergency lending facility. thesein actions stabilize the financial system and shielded the economy from harm. the recent troubles of new york community bank or court bancorp and unfortunately named first bank core are reminders that there still banks that are in trouble. particularly those who invested in commercial real estat so i think it is understood bank failures are inevitable despite all the changes to rule the liquidity regulation and risk managementriskmanagement since a global crisis. a but today we ask what lessons weou episode of policy policymakers and regulators not the biggest banks can threaten the stability of the entire financial system.

and up with tax payer writing to the rescue once again. somebody i'm not sure who was originally responsible for this phra first from the , economic historian who originally won the nobel prize you don't know where you're going and what you know where you've been. so today were p going to start the panel i am moderating that will look specifically what lessons we should learn about su regulation, bank risk management and what should be changed at the the very good panel agent isirector of capital markets department where he has been for seven years. beforese that he spent 13 years with the new york fed and his colleagues at the imf have today published report on what we learned about what happened march 2023 it's also going to report about supervision which has been a concern for a long time. susan mcglaughlin is at the program and financial stability a 30 year veteran of the new york fed who important for this

conversation oversaw the lender ofof last resort function at the new york fed. controllers allowed to land i'll be joined by billll who is chair and ceo bill joined in 2002. has been the ceo since 2013. our plan when to moderate a panel here i hope we have time this planet will be followed by a conversation with my colleague erin klein he's going to hold with patrick my henry i'm sorry the republican congressman from north carolina. who has chaired the house financial services committee but was made famous when he was the interim speakers about the bow tie who smiles broadly when he finally got relieved of that great job of being speaker of the house. going to moderate a panel

following that. on resolutions the dodd frank act told us we were not going to have to have any more rush rescues of bank because we set up a resolution system that was supposed to avoid this. it was not invoked for various reasons as to what we learned habout resolving failed banks? would be cochair of paul weiss former chairman of the white house national economic council and vice chair of ibm. senior policy analyst americans previously worked at deutsche bank. in it for 13 y examiner. she can tell us how it works and why they missed all these things. what we are going to and ask to be the first to talk about bank supervision and what we learned about bank supersion. and it's weaknesses during the year ago crisis.

>> thank you for hosting this event and thank you for booking's staff to organize. the one year anniversary for breaking terminal as b opposed to the bankinge crisis, the banking turmoil of 2023 happened about a week from now when year ago. let me start by noting was the management of the institutions that ended up in distress. when you look at the business model and some of the other regional banks that were distressed lastin year it was highly concentrated exposure on both the appetite and liability side of the balance sheet two.withni the large dependence uninsured deposits highly concentratedn valley firm.

it's ultimately with the institutioninstitution the policy question is could there have been more action enter to contain the broader fallt out? as you noted in the opening remarks from banks will fail. how corporate life goes. there was a spillover effect. in fact, thinking back of last year both the federal reserve together with the treasury and ultimately the white house had to take emergency measures they use the emergency powers in the case of the federal reserve for

lending powers the r extension. to contain the follow-up of the failure of these regional banks. very successful. the crisis management tools available making uninsured these are very, very aggressivedo actions. it worked very well but could done to prevent even going there? so what is interesting when you look at the history a number of reports by the fdic that really look in great detail as to what happened.

and the interesting thing there is supervision and i'm going to focus on supervision here. supervisors did like the for months instead of years in and other institutions flagging the liquidity problems of the interest rate risk exposures. the failures and risk management. they are clearly they they are, the letters were being sent but what they did not do is to use their powers to get the commitment by management to remedy those issues. the weight we describe it in the paper you held up as there is supervisory hesitation. the supervisors hesitated to act aggressively to get agreement from management to fix the shop.me the issues where they are and management basically ignore the

letters. but striking in the.s u.s. supervisors don't have the legal power to take aggressive action. the supervisors had all the legal basis but they were not it's the hesitation of the supervisors that need fixing. they did see many of the problems but they hesitated to act. when you think about about the regulation there are three pillarthere is a regulation and there were issues to regulation were happy to talk about that. there is supervision the issue supervision was the hesitancy and then there's the market discipline. i would argue all three had issues supervision was the hesitation as opposed to the legal power at the time the mayor other things which are often times the issue.

what's the solution to addressing supervisory hesitation? is that bad incentives is that what help them back and how do we change that? >> what isbi interesting when you look at the supervision federal banking institutions in the u.s. after the 2008 crisis there was a massive reervision focusing very much on the details. >> mobley systemic. this is an ae. >> i did not realize. their own language that we speak. really scaled up the seniority of supervisors engaging with ensenior management in a much more forward leaning using as a key

tool to get out forward-looking liquidity mismatches as a capitol issue is a quality at the regional banks were not being banned. in fact the u.s. introduced its regulatory scold regulatory tailoring but regulation and supervision that was tailored so the smaller regional banks between these regional banks were not subject to the same regulation. the regulation we do think needs fixing but the supervision is really about the culture of the supervisors how supervision is

managed.d. many of t there. >> thefor. >> the lender of last resort function at central banks is historically 130 years more back like walter badgett and the notion is banks have very quid assets and loans to mortgages and business loans very liquid liabilities. and just like in that mary poppins movie you can have a bank run where everybody wants to get their money out and the bank has assets that are still good but they don't have the cash to pay out. we learned during the great depression you can have a bank runs that can screw up the whole economy so we set up a system of deposit insurance to discourage runs. that's not a bailout of the banks on the central and the fed or thef bank of england says if you have good assets give us your assets as collateral we

will lend youou money so you can make your depositors whole and they've talked about the synergy between liquidity insolvency. if everyone believes your soul and they won't take the money out and in order to assure them they can get their money out the central bank. you have had a lot of experience lender of last resort function the window and its analogues. there's been some concern it d have. suut >> absolutely. your description is wonderful last resort is right. it is really designed to provide confidencece a solvent banks ability it has value from spreading to other banks as well. until it is mainly centered on supervisory reforms and that is understandable. there's been a pretty limited

discussion of lender of last resort as a discount window because you're out your matter eight asked the discussion of the discount window has things. encouraging banks to be ready to use the window in times of stress and requiring banks to pre-position collateral in some some proportion to the runnable liabilities. i think what is missing from the debate is the is issues of stigma that accompanies the discount window. back in the 1920s reasons we can talk about later if we have time but basically there's a lot of segment that accompanies the use of the discount window so banks are reluctant to use the window when they initially have liquidity needs that areematicic because banks are ready but they're not willing to use the tool the tool can do its job on contagion risk. >> i see a disconnect between current messaging from officials discount window when they needed on the way the

discount window borrowing capacity is treated and how we supervise things with risk management there's a lot of opportunities here which i will talk about in a minute to make the two tool supervision and the lenderd of great last resort work together and march of the same direction to enhance financial stability. why stigma problem? as i noted banks are ready but not willing to use the window. then the discount window cannot do its job. in mitigating systemic risk. and importantly stigma undermines the cause o readiness. i'm a bank i know my management does not want me too use this from going get criticized by my supervisor for using it, i do not use it and probably not going to be preparing too use it. and then when i needed it's going to be very challenging. in fact we saw this last year so would not test of the discount window their ability to borrow for the past year before their demise. most was parked at the federal homefederalhome loan bank. so when the time came to move

that to their federal reserve nkbank there weren't arrangements in place to do that. there is a lack of understanding but the operational cut off time they had to observed to be able to move collateral that sameim day. obviously by the time theyy wanted to hit the discount window is too late. signature perhapsvenore egregious case they did not even have discount window as part of their contingency funding plan. that not tested the discount window their ability to borrow from it for about five years before their demise. and when it came d time to try to borrow from the discount window they were not familiar with the collateral eligible to w guidelines of the fed they spent some time in their final days trying to pledge ineligible collateral which was not helpful to them. so, i think both discount window bar it would not have saved either were expensing solvency issue it's really clear tonc say it could have slowed down the run on those banks and it

could also have float or sto the contagion of the runs to other regional banks what they are more characteristic. the window can all be effective if banks are actually willing to use it when they need it. how to reduce stigma? this is a complicated problem stigma is a multifacetedte went public sector entity can solve it on their owni to think there things about the central bank and bank liquidity regulators can do to reduce stigma. several thing the fed can do develop and execute a clear gy long-term communication strategy to the publican. to make clear primary credit is a legitimate source of funding for solvent banks against good collateral when they need it. i think there's a lot of confusion on this point we have a long checkeredry again since the 1920s whether the discount window tool is something that should be used bwhen needed or is not okay to use. second it could explorepl a way to administer secondary credit which is really akin to reco resolution funding. it's kind ofthis kind of separately

from administration primary credit at the discountw. window. this could help to reduce the embodying the waters i've having solvent and weak banking programs lending programs. >> it's so secondary banks and in trouble? the official language is for banks not eligible for primary credit. [laughter] yes. essentially it's akin to recovering resolution funding and practice. y have drawn a much brighter line between lending and solvent banks and weaker bank for central banks have tended to more success having a stigmatized than a solvent institution. but there thing the fed could do is improve its operationalprocess to make collateral easier to access against banks. i am sure you have much to say about this but i'llborrowing from the window is a manual process obey calls as a period of time the staff are checking to make sure it's okay

to approve the loan. i think that pause for a solid month with good collateral decision collateral is unencumbered it almost seems to signal. it is kind of a legacy of ambiguity that started in the s20s. why not automate the check for collateral borrowers make it more restrictive process? that would be another way toss is a legitimate tool to use. finally the fed could read visit is for a good revisit to better balance thef trade-off creating stigma if it's efforts to hide the discount was it 100 basis points as it was before the gse? is zero basis points as we have today? that would be a really useful effort to look at that.

i think also think about how it's priced relative to credit extended by federal home loan banks. might be a useful exercise as well. trucks bank regulars have a role in reducing stigma. bank regulators can bes the requirements and guidance to align more with the idea the fed is pushing legitimate source of short-term funding. for example if requiring banks to pre-position why not consider counting some portion of the assets. >> high quality. >> that's a violation non- high-quality liquid assets pledge and liquidity coverage ratio. there's a lot of talk in a fed right nowow very good message of encouraging banks to use the discount window and t it in its contingency plan and to test regularly. why not require that?

though be a really important requirement rather than letting banks decide whether the going to be right let's just lessers require they be ready. and if we ever target discount window to part of the contingency funding agency plan dity and banks with liquidy stress test and resolution fundingan plans? the bottom line is we can reduce stigma at the discount window's been with us for long time is not going to be easy. it will require a concerted effort across central bank and bank liquidity regulators. but it is something we should do to ensure weto have an effective lender of last resort. >> think it might pick up on two points. one is it would not have saved silicon valley bank because they were a mess. but the reason it's important to have it is so that other banks that are threatened when people are panicking can pay off their sadepositors. >> it provides confidence to depositors and investors frankly the bank will have access to liquidity if needed. >> the second thing is we tell

the banks you have to have a certain amount of liquid we have all these rules. we tell them you should feel free to use the discount window it's almost like this is probably a violation of some corporate finance principles almost like a line of credit. but then we tell them you cannot count this access and we decide how liquid youwh are. >> i think we need in the u.s. to decide we are for with the discount is it a facility that's a banks to use or is it something that should not be used? this ambiguity doctrine that dates back to the 20s has caused a lot of confusion. i think the confusion is stemming from the federal reserve act itself. in section 10d disc that governs the lending notes note no reserve bank is obligated to provide loan to a i think that dates from the era when there is not robust supervision of banks on the time of depression. the fed was very worried

legitimately about lending tok weak banks. now we have much more robust provisions. yes there's opportunity for improvement but we have a very strong system. and wewe need to decide what are we doing? >> i'm glad the weather gods and air traffic control let you make it. that's right you miss the glowing introduction i made to you. we start out by y saying the banks failed in march 23 failed in large part because of management and went on to talk about supervision. i am interested in your responses to susan but iant to ask a broader question first. as a banker super regional bank, what lessons do you think we should learn for the march 2023 episode? >> my primary lesson learned was that regulation is uneven.

it astounded me the first republican silicon valley were able to do inside what i thought was, i know is inside the handbook. regulators did not do their job. now management was bad and there's lots of different things but bluntly a thousand occ bank that never would've happened. >> you sayhe regulation not the supervisors but the rules? >> regulation is there. supervisors didid not do their job. silicon valley bank was the day they put a fixed rate bond position long before the fed started raising rates they should have been red flags. they had an embedded leverage in their balance sheet that was unsustainable and cited in the interest rate risk management would have known t it.ve it should not have happened after the fed raised rates.

that'sat the long-term capitol position. i'm going to go by wonder billions of bonds and fund it with hot money. >> nobody in their right mindn would do that by the regulator should not allow that to happen. you do not need the rules to tell the regulator had not allow that to happen but. >> explained what you mean about the difference between federal deposit insurance corporation a regulation in the office of the comptroller? >> there's regulatory arbitrage is in this country. i think it is uneven for we purposefully have allowed and i'm sympathetic to this that smaller banks have lighter tax regulation but in the course of doing so we have allowed banks to charter. >> who are you regulated by? bi >> everybody. >> we are in a national bank bag so occ fdic insured fed member for it whichratewhich basically brings everybody into the house. >> in the case of new york

commercial bank what role did that play this difference in regulators that episode? >> so i do not have direct knowledge of that situation. i have moreed knowledge of the issues from last march. but it is not a coincidence they emerge, take the occ charter and a new regulators andte look at an old book ands saying oh my god i think is very telling. can you reflect a little bit on susan's point about the discount window? how does that look to you as a banker? on without getting dinged by the board of directors analysts and regulators are not?no. the stigma behind as the lender it is the lender of last resort. the day you hid it for anything other than a test you

effectively have told the world you failed. investors inspect to look at that number is discloses by district so nobody wants it. >> the fed does not disclose the name of the bank the bars for three years but you can two years? you can figure it out. you look at what's published by each regional bank and there's not that many banks. in a big thing comes up. >> even away from the we call it the lender of last resort. there is a need for liquidity in the banking system which today is served by the home loans bank particularly for smaller banks. that has increased with the money market funds in excess reserves being nailed needed to be held.yi the f role in my view. the fed is not.

all the. things susan said is mechanically incrediblydi difficult. even when you pre-position you have to audit what signature loans that's guarded. you call your regional fed somebody answers the phone maybe they will have a meeting to see if it's action okay for you to draw and then they'll talk to washington at a drop or if i draw from a home loan bank i hit a few keystrokes of dragon's treasury pre-position it's much easier its regular weight lending is necessary for the quiddity in the system. i think the discount window for the fed to play its role first of all any of its crazy for me too pre-position collateral and get penalized for having done so. whatever the monitoring is you can access it easily if you collateral and importantly capitol. the ought to be able to do it.

it should not be a lender of last resort it should be funding into the banking system that helps in a situation where for whatever reason deposits are leaving an institution but there's good collateral and capitol that makes at a momentary event as opposed to critical events per. >> is a cheaper forrrow from the federal homeland homeland bank than the fed? >> not right now because the discount window is at a zero spread on the home loan bank is probably about the t same. in today's moment but you never know they change the price. >> talk to me a little bit about what it's like to be the ceo of a bank like yours and deal with >> most of us don't work in a profession of the good fortune to work for the wall street journal because of the first amount we are unregulated we have no standards and is total freedom. can you run a business

effectively was a bunch of supervisors who may not be as smart as the people you employ looking over their shoulders? >> i disagree with the last statement. one of the things i would tell you about our supervisoryry relationshipsh which is almost every time true is when they smell smoke they are correct. they could not necessarily distinguish between a one alarm fire at a farm five alarm fire. when they say hey when using this? we are seeing that. they are almost every time correct in my experience. i'm so at the end of the day we are at the business of taking risk it is what a ban supply. anybody was to talk to me about risks i am taking so i can get smarterbout it is is okay by me. >> a lot of people call attention to interview you did recall an analyst where he

u.s. regulars will keep all banks safe. bank j.p. morgan bank of america five or 60 billion in assets really smart thing to do iso get bigger so you are essentially too big to fail. that did not seem to the spirit of dodd frank but it see the reality. >> benefit of scale forget about the incident last march benefit of scale we had that theory forever but it basically is take off and proven true the economy is a scale inside of marketing inside of ubiquitous cyber protection are finally playing out the banking space you see since the financial crisis the

two largest banks org panic they grow pnc every five years. i really the country i think this is correct except for silicon valley and first republic their deposits shrunk during the same period oft time unless you did an acquisition or merged. and so we already we have alreadyy seen big thanks one of them is public that one retail share within the next five years in the u.s. marczyk celebrated it because what happened in away from that retail reach you have forfor the positive corporations basicallyy saying i hrust that you my banker, i love you like a brother but i have no idea if your bank is safe because he is too high sue-great banks

just blew apart and i am not as treasurer of this company going to take a risk. i know if i go with j.p. morgan and by the way pnc the net benefited from this. i'm going to move my money upstream a happened. where he said he talks about bank culture and he said balance sheets are often scrutinized with the hocks it's often a culture is the first that findsha trouble. thanks her complex orgmanis driven by some human interactions and decision. it's therg banks culture that flavors the interactions and he basically made the cases supervisors focus only on the balance sheet they missed the red flags. i'm wondering if you agree thought of what we do about that?to

>> it's important to keep in mind there are issues in the bank and culture issues in the supervisor. it has alluded to earlier would look at the supervision of the federal banking agency in the u.s. there was a significant change in the culture of bank these are seven or eight institutions in the u.s. after the crisis. therefore focus areas of the supervisory approach. one of which is governance. the culture issue is broadly captured in the government so there's quite a bit of effort at a very senior level from supervisors to understand governance mechanisms and the institutions. for that regional banks there is not been the shift. in fact there was that regulatory tailoring that occurs

i think in 19hich tailored both regulation and supervision and the proportionate manner that essentially change the culture of the of those institutions. and as i alluded to earlier is the culture of the supervisors flags that they did not engage proactively with management to get the commitment of management to make change even though they have a legal basis to do so. the u.s. has a very strong basis. there is a cultural issue in the supervisor agency. >> you suggested interest rate risk as part of the job. but interest rates are zero you're pretty confident you know what direction they're going to go eventually. i think. we weren't. [laughter]

do you think the feds should have told it supervisors look, as we start to raise interest rates you've you got to bear down on the banks to make sure thatinterest rate risk management or is that another job? >> it is their job it's inside of a stress test environment whether a bank is subject to the official test arere not reviewed test against v variables against the outcomes. the issue of the risk positions we use pnc as an example. in fixed rate assets. our fixed rates assets went underwater when interest rates went up. we own them as a hed deposits so we basically went into this somewhat short so rates would go and on a calculator we made money. had we owned a massive amounts of war bonds that would've been

a negative outcome. regulators talk to us about that all the time but that's common sense risk. i have a certain set of funding and a shortit position i'm going to buy something alongng against it and do my very best to run a matchbook given up variables onr either side. that is our job parade that is what banks do. talk to regulars all the time about that. >> a few minutes for questions.

>> four years to the day that banks need to move away from got-you feeds correctly anticipating thehe biden administration regulators talk about junkk fees and today the consumer financial protection bureau announced caps on credit card late fees, is this a good thing, do you see your vision beingg fulfilled for a transparent market? >> over here? two questions but i will let you have -- >> community bank in dc and i'm just curious that no one mentioned deposit insurance before in the mix of possible solution i'm hoping the panel can address that? >> okay. let's start with those. let's start with last one.

deposit insurance reform. >> i honestly don't kno where it stands right now. interesting report, several options and certainly things need to be if you think about financial stability, deposit insurance deposit insurance keep use of that. >> it's the one thing i would add is we get -- we are afraid of uninsured deposits because they can run. >> if i have collateral, it doesn't matter. so i don't think we need deposit insurance. i think thatt leads to bad behaviors was i do think that you need too have access to a window with good collateral. >> i just want to emphasize it's so important that all these tools are walking in the same rection and we don't have that right now. >> yeah, so on the question of

supervision, you know, the financial assessments around the world, every five years we go into every single major a assessment of the -- you know, assessment of what could be and what is the regulator oversight and the objectiveness and the emergency measures the crisis management tool that we come to have. in the u.s. we did this for the last time in 2020 and you know, when you go bac documents and these are extensivee documents available publicly in the ims website on-site supervision and we criticize and go hand in hand with supervisory with regulation i

e mentioned earlier shift improving supervision and regulation as well as crisis management but the tearing was personality in a way you know, that lowered the standards so, you know, i think -- i think what we said back then is consistent with what has enunfolded and again i think that the legal base, the yknow on regulation things need to change but on supervision there's strong legal basis and it is theanagement of the supervisor -- we have big swings.

the fdic is different under biden than it was under trump. mpthe occ, the comptroller is different, the whole system now and this is true in other regulation agencies seems to swing from place to place with who is in the white house. is that a problem for you? >> yes. it's hard to, you know, plan and run a business o four-year cycle. 1 >> right. >> do you want to respond to carter's -- >> i'd love to. [laughter] >> low cash mode, take your word four years ago seems longer than that. but basically an overdraft product that we built because i felt at the time we were hitting customers withus fees almost by stint. we call them got-you fees. somebody didn't intend to pay late or overdraft and something didn't clear c and they had plenty

of liquidity some place else, so basically overdraft is left in the moment if somebody making a conscious choice that that is their best financial t'decision to do that versus be late on a car payment or not pay their school taxes or do whatever their other things are that they are going to do. that, you know, has med what at least one regulator calls junk fees which has become a popular term which is frankly wrong. banks have a right to make money. we need to disclose how we are making money and it should otherwise be fair. but the way if there isn't fair there's 5,000 banks we compete and somebody will lower price.e. i just want to distinguish we shouldn't charge a because you didn't understandd it. to me that's a got-you fee.

people don't understand, i call them aha. that's a bad thing. that's different than charging legitimate fees for legitimate services. i think that one of the issues that is playing out at least in this administration is an attack on any fees in banks which ultimately leads in my view to bad outcomes particularly for the smaller banks who don't have many fee streams to begin with. >> thank you. so congressman mchenry is her please join me in thanking the panel. >> the next act is about to begin.

>> good morning, i'm eric klein. center for regulation and it's my pleasure to in introducing patrick mchenry. [applause] >> if you don't know who the chairman is, you're probably in but for those of you who need an introduction and those of you watching at home or online chairman mchenry has served as aschairman of the house financial services committee. he serves as acting speaker. this is wrapping up his tenth n congress representing california -- north carolina's tenth district. >> ten r chairman of financial servicesse committee, acting speaker and

now this is your -- you will be not be standing for reelection. now we can tell it like it is. dhat for a while. >> everybody says well because you're not running for reelection. >> no no. it's true, so i mean, you have an amazing reputation for being a straight shooter in a town that's getting -- some would argue more crooked as time goes on. so let's -- let's start right with the real question. a year ago we had a bunch of banks failing and the governmentt, treasury, the fdic, the fed broke the glass, rang the alarm bell some risk authority some would say bail out on insurance depositors. did they do the wrongdi thing? >> there's two elements in the moment of crisis and the other is what comes thereafter. two elements. the n the first i calmed the

crisis and the second not so good so let me dive into this. so the fdic should have time been able to take quick and effective action number 1 number 2 the fed should have provisioned for the discount window much more quickly. so i agree with chairman powell when he says the fed response was clunky, right in the immediate piece of it but when secretary yellen stepped in, that calmed the waters significantl we got to a good place. i think in the immediate question there it was to calm the waters and stop -- stem the tied and i think that happened. it was way too much drama for what we are now a major banking crisis of two banks without any great contagion beyond this. they had an obvious hole in balance sheet and to me

transparency was the key there. the -- we have takeaways on the discount window, the operations of fdic and the fed where they obviously failed in that moment in those days they did not act in an appropriate passion commensurate with the rules that they had and because they didn't do that it had to then graduate up to really chairman powell and secretary yellen stepping in to calm things whend have been done at lower levels. now the second piece of it. in the immediate piece we all rally today say let's just be calm, we can get through this thing. the long-term question is -- is the regulatory response which was a failure of two banks with the hole in the balance sheet visible to all investorsigally one hole in the balance

sheet and silicon valley bank being the projectile taking out other banks, right total two other banks they took out. but the response to that is additional capital which was not the issue at stake not the issue of regulatory reform and not the proper learning from the crisis so that part i think -- we get a failing grade for the response and in response is to raise more capital for institutions that were not affected by this and actually the moment of trepidation and crisis in large of last year. on the prior panel pncc benchmark was pretty clear that in occ regulated bank which is not allowpen, immediately after the crisis the federal reserve promised an unflinching end quote review both at san francisco federal reserve bank which regulated spb and at the board which

regulatory delegate today san francisco. how would youo. grade a year later the inflinching review? >> reverential. it is my review of how i was on my third trip to the -- to then salad bar actually not the salad bar. this is why checks and balances in our government, this is why other people do afteraction review, not people that actually committed action. what steps hasn't done that it should in the years since the

failure to reform itself because the fed says it answers to congress and you being the committee congress -- >> okay. so let's -- let's separate. where he we gave them the ability -- gave up substantial amount of government control that was done poorly in america. so i think independent rate setting and monetary policy is a very good thing. number 2 policy is very stupid and not cob forming with law in any country on the globe. in this -- in this question of functionality andare a couple of things

we know and some of it not just regulation, some of it isy so silicon valley bank should not have failed on a random day of the week. we have not seen this in america and it's -- we have to go back many generations. the discount window closing at a time conformed to theeality. can you open up the discount window while then the report that is we get and we are trying to dive a little more here,d up the phone and we had assets over here because we've got the folks that hold mortgages that are home owning banks and we thought of base count window. that's not what they do. so you're using the systems in an inappropriate waycount window, we didn't actually have our capital positioned to i use the discount

window. excuse me you're on a phone so you're telling me that technology enabled so on the front side of this you have bank consumer tech. they are using the phone a little bit better now. you're still using the. we can take care of this. should be a push of a button rather than phone calls and should be done aten instant rather than days. and so that piece didn't fix. they had a weekend and they

delayed. in the first weekend we should have been done with this bang bank run. we sd have taken secretary yellen and chairman powell, they should have been done by the operations of the fed and the regional banks number one number two the fdic being competent and capable institutions. it's not a complex resolution is something that could have been done in the 1960's, 1970's with less drama in a tech era. we have to update technology and proficiency at these institutions of government that are key and vital. and these are key take-aways. >> it wasn't signature bank failed on a random day of the

week, they went to wire money it was closed. what do you closed? we decided to close at 7:00 p.m. or 6:00 p.m. why isn't it opened longer? i wrote a piece from cato run a third batch of these systems and don't close and that tripped a totally different bank. starting down the real-time payments makes me insane. with that temptation and stick with the different point you raised which is over the weekend, people forget that initially the fdic announced a standard resolution the uninsured depositors which is all the money at the bank, big tech firms that weren't retail, this is not regional bank or the other big regional banks and

i'm a maryland guy and used to be the old maryland bank. fancy fd inch c's. largest depositor was circle. a stable coin. $3.3 billion. the biggest risk was the money they had at the bank. if you look at the market because it is a really weird thing and you could see what the market was thinking in terms of losses and 87 cents not very stable over the weekend. that being said, then they got bailed out and $3 billion of taxpayer money to come out of deposits, which will come fees paid by all of us. you have deep in this. in the stable coin world, the money was in the bank and how did that play into the fact it was over that weekend and the

bail came. had that bailout not come, i don't know what would have haened?mchenry: third ticker to throw in. number one, you have a regulatory issue here. you have the feds putting out to member banks that they have to have an affirmative yes before a bank can hold digital-asset-related items. and this is nare novel product piece. for stable coins, very narrow market of where they could put cash. i mean we are talking about deposits that are not -- this isn't some novel new product, it is cash. very few places to put it whiches

risk. that fed decision actually narrowed the number of banks which made it riskier and circle says spreading that $3.3 billion over 100 institutions spread it across a handful. that is a regulatory question number one. number two this is the reason why we need a federal law. we have no federal law on what is a stable coin. no definition under federal law. the only thing we have is a money transition license that the only thing that relates to digital assets to repurpose for l assets and not conforming with the safest banking system in the world and most diverse and deepest markets in the world. it is stupid policy. we are trying it. folks in digital

assets have to hold it on their balance sheets. it is a very bad policy and not safe for consumers number one. if the institution fails that puts at risk their product that they think is being in custody for them. number two this doesn't conform to accounting rules. not that people care about that but care about the effects of it, so we have to take care of that and taking digital assets many of which have been around for a decade and making them in a riskier set of -- there are things we should resolve as congress and stable coins we can resolve the regime specifically but the fed has to resolve of institutions that can touch those deposits.

>> let's pick up on the rule of law. that is congress' authority the rule of law. the rule of law, deposits over $250,000 are uninsured and if your bank fails, the bank is at risk. first republic there have been two small banks that failed, purchasing assumption resolved at pretty large loss. but the rule of law is still out there. when is the next uninsured depositor going to lose money? mr. mchenry: this is a bad take-away from fdic and qua the chairman not making the big decision. he made the decision and did well and initial weekend that he clearly failed. but in the following two, three

weeks, he made difficult decisions for somebody with his record to fix the resolving institutions. the bad take-away a failed institution based on arbitrary line in the sand that the treasury and fdic dreamed up. we have to make it clear that uninsured deposits are insured. number two we have to make it clear that usually all depositors are made whole in bank resolutions. rare exception where you have account losses. but we had zero account losses for those that are insured. we have to ensure that the customer actually knows what is at risk. there is a lot of discussion at fdic in getting data flows.

250 is an arbitrary number. completely arbitrary, the 250 number, the origin, you know this -- >> i do, i lived it. mr. mchenry: was a pay for for dodd-frank. c.b.o. that 250 could pay for the of implementing d.o.d. frank. and they overshot a shell game on 250. there is no science behind 250. i am happy to review this and understand this but needs to be data driven rather than ensure everyone which would then nationalize our banking system which is an absurd take-away. >> the principles of f.d.r. to

protect the little guy not the venture capitalist. i'm sorry, your money is at stake. and companies and corporate treasurers, i'm sorry, if that's your job, that's your job. when 250 made final under dodd-frank and tarp originally went down in the house, you were there, it wasn't a pretty day and no plan b and over a weekend what do you get. small banks like deposit insurance and people are afraid and reagan moved it from 400 and has it moved since then? the first panel was asked what reforms in congress and there was a chatter. chatter has died down.

not going to be deposit insurance reform this congress? mr. mchenry: highly unlikely. we don't have -- we don't have economic analysis to dictate a term. we have this idea we are going to have payroll accounts protected, how do you do that? how do you judge what is a payroll account and what is not. what type of business account. these other questions of basic implementation as policy makers we don't get into the practical questions but we start with what is the effect. and economic analysis to derive that question. >> economic analysis may drive the number lower. you brought up the home loan bank system. and it is important for people

to realize the single largest borrower. the second largest borrower was first republic. they ramped up their borrowing. susan mentioned that bank had failed inansas where the c.e.o. got scammed and went from zero to 30 million. they never touched a home bank loan and cratering because the c.e.o. is stealing money and went into the home loan bank for advances and nobody thinks this is an issue. mr. mchenry: it's as if there isn't regulators. great discussion in march april, last year. tayloring. regulators say we are going to ask questions.

this seems like to be maybe part of our job. and rapid increasing in the size of an institution, they should be looked at. the fed has that authority to look at them in an enhanced way and did not. to say congress change these authorities. wait a second, you had these authorities and didn't use them and talk to the person who had the decision. you have an institution that triples in size in a short period of time in silicon valley bank and not a second look. this is absurd. the threshold question we have been debating, 50, 100 250 what is the right size, that is not conforming with risk. you a institution doing unsound things that is smaller. they should be hooked at in an enhanced way.

larger institutions that we saw in march, some of them performed pretty damn well. take away i had in 2009, 2010. but largest banks were soon to be bailed out and depositors went to where they could get the bailout. shouldn't have the take-away that they have that same government guarantee.v=

home loan bank system has been at the heart of the bank top borrowers in 2006, countrywide, bank of america. year republic. mr. mchenry: only g.s.c. >> there is an interesting definition when you are in line. do you think congress needs to revisit the statutory reform system for the hole loan banks snr. mr. mchenry: the fed and fdic are functioning with the

debatest capacity. look at the scandals of supervision. we have not updated our view of supervision and not pushed these regulators rather than deploying people in the conference rooms. why do you have to do a data pool when we have this thing called the internet. we have to have a review of supervision to make sure that's right and along the way we'll see how you move to these things. the idea that we have this competing set of regulators to dot same thing and one consistently has have to make sure you have consistent regulation of our banking only large and everything in between is you are dead man walking >> i thoit the consequence

should be moving the authority to the o.c.c. but folks viceident opinions. no opinions, only questions. mr. mchenry: oh, please, it's washington. >> you mention couple times tay uninsured depositors were bailed out which implies taxpayer bailouts but the losses were covered by the deposit insurance fund. could you square that for me? mr. mchenry: i said bailout. >> the deposit insurance fund is on the u.s. budget and reviewed. saying the highway trust fund which we pay by gas. only drivers build the.

it's a shell game. by taking the fees because we all need a bank. you need a bank account. if you don't have a bank hard and the costs get passed on to bank people who are the taxpayers. mr. mchenry: the fdic tapping the fed to bail out the fdic. and we need more information from the fed and fdic on that decision. >> the american banking association came out with a paper talking why was there a 100 basis point penalty? we are living in extraordinary measures and folks having worked with the treasury department you don't get that extraordinary measures are not meant to be

normal and dysfunction and no offense to congress but dysfunction in washington has created a situation that people can live in extraordinary measures without creating other problems and the fact that they happened in that period the deposit insurance fund isn't liquid cash, it's in treasury. mr. mchenry: that is joyful spring of 2023. >> i'm a research assistant. is there a reason we couldn't index to inflation rather than revisiting it every generation? >> sounds like 250 for a while. >> we index in the deposit insurance act in 2005, 2006.

and congress -- >> did a nice job of remodelingthe thrift supervision process. he went from gift to gift. you have your work cut out for you to make sense of this. >> american banker. you mentioned you didn't think deposit insurance reform was happening in this congress or highly unlikely. is that just a matter of nailing down logistics of the things you mentioned or is there actually -- is there durable desire to actually address deposit insurance and second

question is there is also operational problems with the discount window that have been long way that deposit insurance reform are designed to be reformed. mr. mchenry: discount window, the provision of assets for using the discount window, the speed has to increase. doesn't mean that the fed has to hold additional capital. the fed is way too engaged in the market in my view. but they should know what member banks have and member banks should have a strong understanding of how they can quickly within hours, at a minimum within hours, but actually should be much faster within minutes they should be

able to have their assets and the discount window linked up and the fed should know. we do this all the time. we do this all the time in the financial markets and we are world players. the fed has to come up and they are a generation behind you maybe more. the conversations around deposit insurance are not intense. they have not been intense since the spring of last year. focused on is making sure we understood the facts as they were before we actually took action. measured twice and cut once and i think that has been borne out with regulars who have enormous capacity granted to them. we need to understand didn't utilize their powers in a moment of crisis but to

understand that question. the wrong person in the seat is making the decision, it's an operational question of someone making a bad decision. we are still in the people have to put people in positions of power and say it to my colleagues in the house elections have consequences and the president the appointees he or she wants. they may do well and need the confidence and may have a nice regime. there are that as well and some examples in this administration of folks who are deeply incompetent running agencies of government. that's the risk. the president has to answer for that stuff. and having someone janet yellen who has enormous experience has been a great benefit to this administration on that financial

stability question. and i think that sends the right message to folks like me that they are serious about making sure that we have a well protected financial marketplace.

[applause] >> it was being purchased by jpmorgan chase one of the major situations, ramifications of our bank failure system. frank is a senior analyst and he spent 12 years as an examiner at the federal reserve and talk about supervision and what it means to regulate banks on the ground and we have a former supervisor examiner and gary cohen is vice chair well known to everyone from having served as chairman of the national economic council under president trump, so thank you all here for -- for joining us. and so let me start by -- the framework

what actually happened a year ago when these banks failed? >> you were in the room, what went down? >> i just want to thank you all for having me this morning. i think this is a really timely conversation to have and as we approach the one-yearversary of the failure of silicon valley bank i think it's important to reflect on a lot of lessons learned. the first thing i want to stay is the regulators performed incredibly well during very challenging circumstances being in the room and part of the boots on the ground, folks in washington folks on the examination team worked around the clock in trying to address drsome of the challenges and

markets and depositors. i think a level set for the audience, so from march through m may of 2023 we saw the three largest bank failures and the bank failures and mutual was the largest one in the history of the country. so first republic was $213 billion, silicon valley bank was 209 billion and signature was 109 billion-dollar bank. so that -- that sort of leads us to the events that took place in the lead up to the failure on march tenth. we had silicon valley bank attempt to do a capital raise that was -- was unsuccessful. we saw a failure of ratings credit rating downgrade and $42 billion of deposit outflows on that thursday. on friday morning california department of consumer protection innovation and the fdic, well, appointed

the fdic as receiverrer and they closed the doors on the banks. now, what makes that quite interesting is that an ordinary course you close banks on friday afternoons at the end of the banking day and the reason for that is to limit anxiety contagion and aligns outside of bank branches and withdrawal of deposit tosser the fdic made the difficult decision to close the bank on friday morning. so then you have all this sort of confusion. people don't have access to deposits and resolution weekend in the ordinary course where the fdic looks for a buyer of that

failed institution and if not they stand up a bridge bank and the bank is under a management and oversight of the fdic but the bank continues to operate on monday. so theres no real gap. that didn't happen as smoothly as it ordinarily does because of the closure on monday morning and set up an institutional bank which is a separate entity and signature failed that weekend and set up a separate bridge for signature and i think that leads us to why the government limit the fear and to sort of stop the outflow and the way that normally happens is the treasury secretary gets a recommendation from the board of governors of

the federal reserve system, the majority of the board in consultation with the board and waves the magic wand and all deposits are protected. are you in key with your attorney or not. on the same day on sunday when they announced the federal reserve funding program which is emergency liquidity. but the two big issues that washington was most concerned are people going to have access to cash deposits on monday and are people going to get paid on friday. $250,000 that raises a lot of policy questions. >> i just wanted to put out there in the sequence of events

where we are today, there is an important dynamic going on that created the run. and what you have a sale in securities, taking losses and immediately going out and looking for capital that's a real signal there. i just want to call out that when things get tough depositors and investors look for simple measures, simple, simple. what do they look for common equity they look for the leverage ratio so we can talk about the failuressequence of events and where it broke down and failures of the systematic risk, but i also want to put out the criticality of tal with those regional banks particularly around those.

front-page showing this thing totally dead. nobody ran nobody ran. six companies to and everyone went for the dog. >> you have trouble raising capital, you have a capital problem. and that triggers those runs and until we address that fundamental fact i believe those are effective no matter how hard we try. >> so let me --ked on dodd-frank and tdodd-frank promised to end these bailouts to end these open bank assistance where all depositors were bailed out of the taxpayer funded deposit insurance fund. they set up the whole title regime for orderly liquidation authority which you just referenced and it was all the new tools in the tool kit and

they sad there less open than the like worst gift my kid ever got out of the birthday party that got put on the shelf and never touched. does what happen show that dodd-frank didn't work? >> my single answer is no. dodd-frank had many, many important contributions to where we are today and we are better off. is that enough? no, we have longer way to go including with capital and yet whatit we find is that without that long-term debt has not solved the problem. these -- better resolution plan has not solved the problem but dodd-frank introduced key ey pieces, systematic risk, framework, orderly liquidation a barrier to the nonbank sector where as now we have banks largest banks have a until dollars of exposure. what does that mean when we

backstopping so i department of defense put us in the right direction but you needed the long-term commitment, long-term commitment and authority worked. it may bey, expensive to find it in advance but it would have had a greater chance of working and i find it similarly in resolution plans there's still not enough capital and liquidity in that resolution scenario whether it's single point of industry or multiple. >> we heard in the first panel criticism of dodd-frank roll-back or tailoring of 2155,

why some bills get names and other bills get with numbers but that was signature achievement of the trump administration and people are pointing the finger at it. s2155 to blame? >> well, that would be wrong. you mean the bipartisan 67 piece of legislation. i don't think anything else gets 67 votes in that 2-year period. that piece of legislation to ta tilor regulation based on the nkbank's activities saying that if you're a small bank in iowa and you don'ts, you don't

underwrite s do is take deposits make mortgages and have credit cards, you should have a different set of regulation than goldman sachs and you name your favorite. all that did is so that the small regional requirements

-- one thing you get at brookings is a big bowl of alphabet soup when you ht a panel. there are acronyms. based on tailoring rules even in silicon valley bank had been subject to them which i think that lcr was around 75% tailoring rules would have to be able to a stop the run and you know, fix the bleeding of the outflow of

deposits theld have been twice regulatory limit which was 100%. so would have 200% lcr. so, you know, i think this suggests that like, you know, these problems are -- are complicated. there are multiple points of view but to zero in on the tailoring rules or s2155 being the culprit for the series of bank failures that we had last year i think is a little inaccurate. >> yeah, sure. first of all i want to clarify that the fed did have risk-base supervision before the framework b was introduced. and the ban -- the banks in the ban that was the same as are not regional banks they are large banks and if one of them were to fail and you combine to it i can easily go to the higher categories of

supervision. so you have the large regional banks that, you know, have experience, you know, challenges in the past and you have liquidity and capital not sufficient for the systematic risk that actually had an impact in the system if you have three or four regional banks with the same vulnerabilities or similar vulnerabilities high reliance on uninsured deposits, lack of clarity on balance sheet, whether it's vc, venture capital that wouldn't have gone to concentrated levels or whether it was that intensive etreliance onse concentration uninsured deposits. irrespective when you have a number of regional banks some of them large regional banks with similar patterns that's where investors and depositors pull back because of similar patterns of increased excessive concentration due to reduction

of those barriers that separated banks andar shadow banks and allowing them to get outside of concentration. so it's hard not to talk about capital when you have those outside concentrations and so on that resulted from some of those rollbacks. >> so as i understand it, the highh concentration of systematic risk at spb was too many ing out of covid the company is going to shut down, the government had put a lot of money into savings accounts. spb had a huge deposit account. ..

oncen in a lifetim second in my lifetime even. i am older than most of you. in an absolute percentage move probably bigger interest rate move where we go from zero six month treasury bills and one year treasury bills and you take that asset that your regulatortold you you are supposed to buy we will tell you to hold no capital against it because it has no chance of failing. circumstances of not being able to raise capital because some people want their money out, you have to start treasury bills at

a loss if you hold the maturity are 110 you have to start absorbing losses. the capital account at a bank is there to absorb losses. think we have to understand they bought these treasury bills because they had to pay their get an equal rate of return. i think the regulatory reports if you read all this, it clearly admits that the management was asheep at the wheel. but callly, the regulators were asleep at the wheel. you should put an interest rate hedge on them. >> let me be clear, you say zero risk. you mean zero credit risk. >> zero risk hen you look at your reporting requirements.

but when we are saying risk, zero chance to be default. the value of that asset if you sell it have gone down and we use the word risk. there is a commercial bank, zero risk, as you said, you don't get paid back. there is a risk if interest rates go up the asset will fall and that risk existed and not in the and the bank and they needed some bonuses and returns for shareholders. so. >> they had no risk maiminger. he or she was their adviser at the at the time. >> it was more important than

risk. >> let me ask you a question about the depositors. were corporations not people. 90-plus percent. >> i don't want to pick a fight but corporations are people. >> i'm with you. the question i want to ask when will the next uninsured depositor lose money? the chairman said we have aural problem, you guys, 2024 year, how much will the next uninsured depositor lose his money? >> chairman mchenry menti during the last session that the answer to this should be data driven and there is a fair amount of research that hasn't been done yet because to make a determination as to whether or not you covered all deposits or

just uninsured deposits and revise the system is really a determination of how much it actually costs and who sho responsible for bearing that cannot. -- cost. i think part of the confusion amongst the american public and policy makers in washington is when you have a double digit billion loss to the and 16.3 billion loss, the banks paid the price for that. large banks, they didn't impose a deposit assessment on but who held the most deposits paid that cost. around the time the banks failed i heard policy makers saying that that $250,000 limit

is a bailout, which is, you know a policy position that the u.s. government made fo the great depression and standing up the fd inch c in 1933 to ensure that customers have faith in the financial system and when stress impacts banks they don't want to their banks. so there are a lot of variables at play and what the best structure for deposit regime moving forward is i think is a complicated question with a lot of but the economists and the researchers that focus on these issues particularly at the central bank or other agencies it would be great to spend time on imfer

empirical research to support those positions >> we talked about how interest rates went from s we hear it all the time. this time it's different. this wasn't about capital. well the next time it's going to be ai or climate. it is always different. we don't know what's around the corner and point. and measuring ourselves against these outdated capital measurements, i would challenge and do those internal models. i think we have experience in that area. and if had a firm grasp of how much capital was needed was reliable and consistent models, we might be in a better position today. >> when will the next --

>> i don't believe they can now because of this we have, structural challenge and we end up backstopping because the largest banks being enmeshed. >> is every bank insured? >> no. because of the similar voling nerkts, the run on confidence on a numbergsgencies aren't in a position to let it happen. the authority and systemic risk didn't go far enough but to be viable and strong enough and robust enough and we can do that but there is a resistance prefunding, doing the difficult work that takes more money. i'm not concerned with the largest banks' bottom line. they have done pretty well over the last 10 years in this period after dodd-frank.

and i believe they were set up strong because of the robust stress test and resilience of dodd-frank did inspire confidence and certain things got eroded. >> you think all insured depositors are effectively insured? banks have failed. banks failed every year in american history up until 2005. 2006 was the second and the regulators told us great system they devised. no failures means we are doing a great job. failures are aatural part of business. >> it is. >> when do you think the next one will fail? >> i'm not sure we'll see one. >> we have a defacto system? >> it's possible, but we have to portray a scenario and won't be

an obvious answer where a failed deposit will come from. >> should we change the law and enshr all deposits? >> no. then you have a massive race to the bottom. you as a depositor would not care the size or capital but the rate of return. i as a depositor would put my money that would pay me the highest rate of return and no burden on myself. that would be a bad outcome and to the extent that you saw banks rates of returns and regulators said there is a problem with this bank. theator should force that bank out of the deposit business. that should happen. we should never allow that to ha we can't have a race to the bottom. that would be the worst

outcome. >> one of the upshots from the situation last year is really small and medium-sized enterprises who are the commercial customers. before silicon valley failed theyad bank. joe's body shop or the dry cleansers and theyops or the landscaping company that has half dozen trucks, those business relationships that were tied to one bank because they process their payroll and all their business expenses and got business loans from that institution, i think more and more today the c.f.o.'s and the treasurers who had not lived through interest rate environment get smart and ensuring their payroll needs to

be process and business kojts torl operate in the normal course and have banking hrl relationships. >> damian wrote what does a successful resolution of a bank failure look like? what is a successful failure? >> i t interesting country. i mean the framework that we have today i think works l. i mean we saw that in the spring. the regulators and the federal government has different of tools to exercise limit contag inch on. you will have some businesses that will do well and succeed and others that take risk or they don't engage inappropriate

risk management and they fail and that's what should happen inica. you have winners and losers. so long as we have a rapid and orderly resolution system, we have resolution plans for the largest institutions and how to unwind them and emergency measures that the federal government can backstop deposits. i think all of those are really useful tools to exercise in a crisis. and the back stop of the liquidation authority and title i establishes a framework for how you would resolve the largest most systemic institutions. so i'm not sure of how much more you can do from a perspective to be able to resolve banks without

having amon throws im stability. >> in my view order are core business lines that are healthy and should be maintained for their value and for the customer those core businesses, critical services payments, making sure they are open for businesses. all of these aspects keeping that open -- >> financial institution is code word for big bank. >> keeping it open in the grace period is unrealistic to think you can fund and liquidity in the capital and fund the long-term debt. so it comes back to -- a lot of these features would be great and they fall down because there is bt nt a foundation for liquidity and capital that would

sustain the critical service in the core service lines. which is in a vulnerable period and where there is risk of others. >> two points. let's not go down to the analogy you applied, if we go down that path, we are going to see it and complicated. i'm going to throw this curable at you. we keep having bank failures. i'm not sure we'll ever not have bamg failures. but the definition of insanity is to keep doing the same thing and expecting the same -- expecting a different jut come. we have technology today that could help us. start using analytics on predictive human analytic behavior? there's tools today that you can use this and certain industries

use that look at the way people within w inside institutions at certain things. there are companies that can monitor banks and see how employees are reacting and are acting on a real-time basis. the way that banks tend to work is they tend to work once something happens they tend to react to it. we tend to react to the crisis when it hits. why don't we try something really revolutionary why don't we monitor people's behavior on a real-time basis and try to honor bad behavior and catch things before they happen. so if something like silicon valley bank, we'd catch the fact that the risking more wasn't managing risk. that would have shown up in predictive human analytic behavior. we would see that the end of day report that showed risk management report wasn't going out. there are ways to circumvent a

lot of these things. the technology exists. companies exist today. so my own view is, we're never going to stop bank failure. there's reasons why banks fail. but we could stop a lot process much earlier and the earlier you stop it, the easier it is to resolve. >> can i just follow that point, gary? how much of the data and potential analytics to regulators already have access to and they're not being forceful enough or historically they have. and i think michael barr, vice chair fo as acting controller su signaled we're in a high forcement environment. last sort of fast and furious notion behind bringing enforcement actions documents them particularly amongst banks in that $100 billion to $250 billion bucket. but you know, in the postmortem

reports from the fdic and the fed, they pointed to a failure of management but also emphasiz of supervision. so how much of this is already at the fingertips of regulators anthem not acting, versus needing to gathern and data to make more informed decisions? >> the quick answer, i don't think they have any of it real time. it's all after the fact. whatre are real time ways to get the data today. and there are real-time companies that are providing this data today. and look, when i used to run a bank, i didn't realize i was doing it, but i was doing it real time. to me if i got risk reports from every desk by 4:30 and i knew if i didn't get one by 4:30, i knew there was a problem. nothing good coming if i didn't get it by 4:30. >> yeah, you know, i think these are interesting points to be made improved technology and indeed, i think the federal reserve has pursued a lot of the improved data, improved

technology. i haven't been there for a while but i do believe. one challenge i have is, youe changes made in the prior administration in supervision there was a sort of you know, look away, look away. if it's not illegal look away. if you're coming on to too hot and heavy, too i aggressive, look away. >> do you mean the prior administration or the san francisco fed? >> i mean the agency heads. 12k3w4r do you mean the fed board of governors? the regional bank? who is that? >> i think that's a reagr question. so just let's be clear. you had tone from the top clerly. you had tone from the top coming from the board of governors whether it was tone reflected down to the new york side or the san francisco side. >> isn't that the same person? is that jerome powell? >> correct. jerome powell influencing tone from the top and you know, what we saw was that there wasn't this close monitoring. there was -- you know, sort of

suggestion that if something there wasn't a rule or reg that made something illegal examiners shouldn't be looking at it. that was the tone coming from the top both with regard to regs don't look at it if it's not illegal and then internally telling examiners to jthose type of cultural changes can take years to remedy. >> i'll say this. i published in real time a long set of banks that have relied on for their entire -- one bank lost money on everything other than overdrafts for over a decade. through multiple comptrollers. should they close it? if you had all this magic, this information, should a regulator go in and close a bank that's operating at a profit but in a way that is clearly unsustainable? because it's a more muscular government if you have it. we'll turn to audience questions. in this situation.

pat and justin. i saw pat, then we'll work our way front. >> i actually have two can i y two? jarryd, you were in the room, i read reports after the weekend that by friday afternoon, silicon valley bank had found a way to make the payroll payments which was initially the main source of concern a way to put a stop to what they were -- the everkill of the resolution at that point? or were h things just way too for a advanced? and the second is, we've talked about no -- noninsured -- no uninsured exoz tore ever facing a loss. would it be credible, would an act to have congress do it to say next time the systemic risk exception is used, noninsured

depositors must face at least a 5% loss or some lower number that covers the fdic's losses? is that a feasible thing to do? can pick which one of the two. >> i didn't -- i can go for the first one. so, like i mentioned earlier when silicon valley bank and signature failed on friday, and i think there's a fair only of -- a fair amoun of press releases and public statements from members of congress, particularly the california delegation, because a lot of the sort and the bank failures just so happen to be through california west coast institutions. that the question of, will people have access to their deposits on monday morning? will people get paid on friday? was a really complicated one because all deposit accounts,

regardless of whether they're used for your mortgage or to pay your car insurance or pay 1,000 employees, are capped at $50,000. so when you have a bank failure there are a lot of outgoing deposit requests, particularly when you stand up a bridge bank. you signal to the public that the fdic is now in charge. you install a temporary c.e.o. so the bank can'ts to run and function. in course. and the fdic says, the bank is open business as usual, as of friday. now a lot of customers don't necessarily take that at face value and say, i know this bank is sort of probably not long nor world. it will either be acquired or wound down and resolved. let me take my cash, let me move my business relationship to another institution that's more stable. and i think we saw a fair amount of deposit outpull, not even

just from bridge banks but from other similarly situated regional banks. and they went upstream. and -- >> globally systemic commercial bank the handful of banks that are even larger. >> so there were those. so ultimately the question of how you pay people in a bridge bank scenario, there's a lot of money moving out of the bank. people are changing business relationships. most of that is den through wires. you're conducting payroll. effectively in a queue in an increased demand from everyone wants to move cash out.ary course being sandwiched within. that creates a lot of challenges. i don't think we have a really good structure for how ton a future bank stress. but i'll leave the second question to others to answer. >> do you have another question?

>> oneuestion the reason for the supervisory supervisory failure. the consensus seems to be that the supervisors saw the issues but didn't act or didn't act quickly new what's the reason for that? the lady from a.f.r. seems to think the overhead culture may be part of i what do you all think? and the other question, real quick, whether one potential reform would be to incorporate inte treasuries, no longer zero risk asset. >> i just wanted to thank you for giving me the opportunity to say what i really think. what i really think is that we're focusing on complex and important issues but not the big elephant in the room. to me, to us, and importantly to the public, what you see you see an industry particularly in the largest banks and their capital marks and trading

activities, that they are undercapitalized because of their reliance on their internal not fixing issues identified during the great financial crisis. until that is fixed and until incentive comp is fixed so that the executive incentive where their comp is tied to return on equity they have these incentives to build out outsize concentrations and they have these incentives to, you know, accommodate, to boost their price. in that environment with low -- relatively low capital for capital marks and trading we're -- and comp not aligned incentive wise, we're not going to be able to have a a resilient financial system that's stable. we're going to be in this cycle of boom and bust and bailout. and so for me, you focus on the capital, and the comp. and we haven't heard enough about comp in the whole discussion. thanks. >> i compl

we don't need to spend time but i think the big tbhevengs united states are capitalized and will go further capitalized where to get adequate return for shareholders they'll take more risk than they want to take. at some point you force banks to hold so much capital to get a rate of return to attract shareholder capital you have to take risks farther than you'd want to take to be able to get a return on capital. i think that you've got to balance those needs. and the last point i would make, this is, i think is one of the things with silicon valley. when you sit in the glass house of regulatory, you know, washington, d.c. you just write rules. you just write rules and you just write rules. when there's 1,000 thrienls piece oow, you can't follow 1,000. you try to pick the two or three or four that you think are most important. and you follow them. that literally is what happened. so you end up migrating your

business to run to the rules that you think are the most important. to protect your shareholders to protect your customer, protect the capital. and do those things. and i think that every banking more taythe most unbelievably prudent fashion to number one, a protect depositors and b protect thei franchise and integrity, and protect employment. and they're not thinking about taking risks. they're thinking about growing our economy. and our economy is the biggest economy in theuse we have banks that are willing to commit capital. >> we're at time. and as i close just a couple america had bank failures repeatedly as our economy grew to be the world's, one thing terrifies me more than a world of bank failures is a world of no bank failures. of the hundreds of banks existing in perpetuity, with charters existing in matter

what they did or not.failures were in march near st. patrick's day. in 2008, bear stearns failed in march, near st. patrick's day. so everybody come march 16 happy st. patrick's day. and thank you all very much for being with us hereodt brookings. we appreciate it very much. thank you. [applause] [captioning performed by the national captioning institute, which is responsible for icicap.org] [captions copyright national cable satellite corp. 2024]

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