nt is hosted by the brookings institution. david: good morning, everybody i'm director of financial policy here at brookings. i'd like to welcome you to this event, both the people in the room and people watching remotely. our subject today is what lessons we have learned from the really interesting episodes of march, 2023,.

a year ago the global financial system sthiferred most significant banking stress the global financial crisis of 2007-2008. as you all probably know, silicon valley bank failed prompting the fdic take it over in the middle of the day couldn't even wait until the weekend, which is really unusual. it's tempting to see this as a one-off event. silicon valley was, for want of a better term, unusual. almost all its deposits were uninsured, it was woefully unprepared for an increase in interest rates, but it was followed by what some have called the panic of 20 if thenature bank and first republic and oversea credit suisse. to arrest what u.s. authorities feared was a spreading and destabilizing bank run u.s. authorities invoked emergency powers to cover all uninsured deposits and create an unusually generous emergency lending facility. this -- these actions stabilized the financial system and they shielded the economy from harm. the

recent troubles of new york community bank corps and the unfortunately named republic first bank corps reminds us there's still banks still in trouble, particularly these who have invested in commercial real esate. so i think it's understood that bank failures are inevitable, despite the rules about capital liquidity andk since the global financial crisis. today we ask what lessons we should learn from the march, 2023 episode, including steps that policymakers, regulator supervisors, bankers should take to reduce the risk that the failure of a couple of banks not the biggest banks, can threaten the stability of the entire financial system. and end up with taxpayers riding to the rescue once again. somebody, i'm not sure who is originally responsible for this phrase, i heard it first from claudia goldman, economic historian who won the nobel

prize recently you don't know where you're going unless you know where you've been. so today we start with a panel that i'm moderating that will look specifically at what lessons we should learn about supervision, regulation, bank risk management and what should be changed. i'm please to have had a very good panel, to bias adrian director of the capital markets of i.m.f. where he's been for seven years. before that he spent 13 years at the new york fed. he and his colleagues at the i.m.f. just today published a report on what we learned from what happened on march 20if he's going to draw on this report about supervision which has been a korchm.f. for a long time. sue lan mclaughlin is on the yale program of financial stability, a 30-year veteran of the new york fed, who importantly for this conversation oversaw the lender of last resort function at the new york fed and as soon as the air traffic controllers allow his plane to land, we'll be joined by bill dencek, who was

chair and c.e.o. of the eighth largest bank in the u.s., he joined p.n.c. in 2002 and has been c.e.o. since 2013. our plan is, i'm going to moderate a panel here. i hope we have time, we're kind of compressed with time. we have two 45-minute panels. this panel will be followed by a conversation with my colleague aaron klein who will hold with patrick mchenry the republican congressman from north carolina, who is now chair of the house financial services committee but was massachusetts famous when they was interim speaker, he was the guy with the bow tie who smield broadly when he finally got relieved of that great job of being speaker of the house. and aaron is going to moderate a that on resolution, the dodd-frank act told us we weren't going to have to have a mores rekeufs bank because we set up a resolution to avoid this, it wasn't invoked for various reasons.

so what have we learned about resolving? re-- about resolving failed banks? his panel will be jared banks garycon., fo economic council and vice chair of i.b.m. and alexa filo, senior policycans for financial reform priestly worked for deutsche bank and u.b.s. and was for 13 years a bank examiner. she can tell us works and why they miss these things. what we're going to do, i'm going to to ask tobias first to talk about bank supervision and what we learned about bank supervision and its weaknesses in the recent, or the year-ago tobias: david, thanks for hosting this event and thanks for brookings staff to organize. so the one-year anniversary for what we call the banking turmoil as opposed to the banking crisis, the banking turmoil of think happened about a week from now, one year ago.

and let noting, you know that the main culprit was the noafght institution that ended up in in distress. when you look at the business model, of s.v.b., but also other banks in distress last year, you know it was highly concentrated exposures on both the asset side and liability side of the balance sheet. a huge amount of risk, a huge amount of liquidity risk, a large dependence on uninsured deposits highly concentrated, you know depositor base. basically the silicon valley firms. and you know it's -- it's the management that led to the failure of the institution. i think the policy question is, could there have been more action to contain the broader

fallout from the failure. as you noted in the remarks, banks will fail. badly managed banks will fail. that is -- that is how life goes. how corporate life goes. but you know, there was first spillover fact so in fact, thinking back of last year, both the federal reserve and the fdic together with the treasury and ultimately the white house you know, had to take emergency measures, they used emergency powers in the case of the federal reserve, certain lepping powers and for the the systemic risk extension of the dodd-frank act. so those are both emergency powers that had to be deployed in order to contain the fallout of the failure of these regional banks. and you know, expose this was very successful but it was a pretty heavy sledgehammer.

they rolled out, you know, all the crisis management tools available, making uninsured two of those institutions. lending with zero haircuts at the discount window. these are very aggressive actions. could more have been done to prevent even going there? so what is interesting when you look at the history, you know a number of reports have been written by the federal reserve by the fdic, that look in great detail as to what happened. the interesting thing there is that supervision i'm going to focus on supervision here, supervisors did flag the issues at svb for months. even years in advance. so they wrote supervisory letters to the management of s.v.b. and other constitutions flagging the liquidity problems,

the interest rate exposure, the failure in risk the letters were being sent. what it did not do is to use their powers to get a commitment by management to remedy those issues. right? so the way we describe it in the painer up is that there were supervisory hesitations. the supervisors hesitated to act vely to, you know, get agreement from management to fix the chart. the issues are there, management basically ignored the letters right? and you know, what is striking is, in the u.s., unlike many other countries, in the u.s. supervisorsegal power to take aggressive actions. supervisors have all the legal basis to very, very forceful but they were not. it's a hesitation of the supervisors that need fixing. they did see many of the

problems but they hesitated to you know when you think about the ex anter regulation, sorry the prudential approach, there are three pillars. there's regulation and there were issues with regulation. happy to talk about that. there's supervision. and the issue with supervision was the hesitancy. and then there's the market discipline. i would argue all three have the supervision was theres.sation as opposed to, you know, the legal powers or the economy or other things. which i'm oft time -- which are often times the issues we see in countries. david: so what's the solution to addressing supervisory hesitation? is it bad incentives? politics? what held them back and how do we change it? tobias: what is interesting when you look at the supervision in the federal banking institutions in the u.s., after

the crisis, there was a massive restructuring on supervision focusing on -- david: on the globally to defensive system. this is an acronym free zone. tobias: so supervision scaled up the senior i have to supervisors engaging with being much more forward-leaning using stress test as a key tool to you know, forward looking analysis in in looking at liquidity and capital issues, at quality issues. always seeing that level of engagement. at the regional banks that was

not being done. in fact, you the the u.s. introduced its regulatory tailoring and it's called regulatory tailoring but it was regulation and supervision that was tailored. so that the smaller regional banks between -- sorry between you know the small, the regional banks were not subject to the same regulations or the same supervision. so you know, the regulations we do think needs fixing. but in the supervision it's about, you know, the culture of the supervisors. how supervision is managed. you know. many of the powers are already there. david: so, susan, the lender of last of central banks historically dates 100 years more back. i guess to walter badgett. is that banks have very ill liquid assets, loans to

marges -- to mortgages and business loans. very lities that can run. just like in the mary poppins movie, you can have a bank rto get their money out and the bank has assets that are still good, but thaw don't have the cash to pay out. and we learned during the great depression that that screw up the whole economy so we set up a sort of deposit insurance to discourage runs, but we want -- it's not a bail utah of the banks when the central -- when the fed or the bank of england says if you have good assessets as collateral, we'll lend you money to make your depositors whole. i think in one of tobias' papers he talked and the synergy between liquidity and solvency. if everyone believe yourself solvent they won't take the money out. in order to assure them they can get their money out, the central bank steps in. you have had a lot of experience in the lender of last resort

function, the discount window and its analogs. there's concern that it didn't work here as it should have. susan: absolutely. i wonderful. last resort is exactly rite. the discount window is the key lender of la to provide confidence about a bank's ability, a solvent bank's ability to continue operating. it also has v run on one bank from spreading to other banks as well. until recently, the debate on lessons from 2023 centered on supervisory reforms and that's understandable. there's been a pretty limited discussion of lenders on last resort, i'll say discount window to mean that here in the u.s. the discussion of the discount window centered on two thing encouraging banks to be ready to use the window in times of stress, and requiring banks to preposition collateral in some position of their run of liabilities. i think that's missing from to debate is the issue of stigma

that accompanies the discount window this. dates back to the 19 20's, for reasons we can talk about later if we have time. but there's a stigma that accompanies the use of the discount banks are unwilling to use the window. this is problematic because banks are reaut to use the tool, the tool can't do its job on stemming run and contagion risk. i see a disconnect also between current messaging from fed officials, which is really encouraging banks to use the disdown window when they need it, and the way the discount window borrowing capacity is treated and how we superbanks. there's a lot of opportunities here which i'll talk about in a minute to make these two tools supervision and lend over last resort, work together and march in the same direction in a way that enhances financial stability. why is stigma a problem? as i noted banks are ready but not willing to use the window,

then the discount window can't do its job in systemic risk. importantly, stigma undermines the cause of bank readiness. so if i'm a bank and i know, eh, my management doesn't want me to use this i'll get criticized by my supervisors if i use it. i don't want to use it, i'm probably not preparing to use it. when i need it, it's going to be very challenging. in fact we saw this last year with both s.v.b. and signature. so s.v.b. had not tested the discount window, their ability to borrow for the past year before their demise. most of their fed eligible collateral was parked at their federal home loan bank. when the time came to try to move it to their federal reserve bank there weren't arrangements in place to do that and there of understanding at s.v.b. about the operational cutoff times that they had to observe to be able to move collateral same day. so obviously by the time they wanted to pivot to discount window funding it was too late. signature, perhaps a more egregious case, they didn't have discount window as part of their

contingency funding plan they hadn't tested the disdown window and their ability to were roe from it for about five years before their demise. when it came time to dry to -- to try to borrow from the discount window, theythey kept trying to blej ineligible collateral to the fed which was not helpful to them. so i thi discount window borrowing would not have saved either s.v.b. or signature, they were experiencing solvency issues, i to say, it could have slowed down the run on those banks and could have slowed or even stopped the contagion of the run to other regional banks with similar characteristics. the window can only be effective if banks are willing to use it when they need it. how to reduce stigma? i think this is a complicated problem. stigma is a multifaceted issue. no one public sector entity can solve it on their own. i think there are things that both the central b bank liquidity regulators can do to

reduce stigma. several things the fed can do. develop and execute a clear long-term communications strategy to the public. to make clear that primary credit saleh jit mat source of funding for solvent banks against good collateral when they need it. last lot of confusion on this point. we have a long, checkered history since the 19 20's abo the discount window tool is something that should be used when needed or is really not ok to use. second, i think the fed could explore a way to administer secondary credit which is really akin to recovering resolution funding. separately from administration of primary credit at the discount window. i think this could help to reduce the kind of muddying the waters of having both sal vent and weak banking programs, lending programs. david: so secondary is for banks that are in trouble? susa it's for banks not eligible for primary credit.

but essentially it's more akin to recovery and resolution funding, i think in practice. other federal banks have drawn a much brighter line between lend toggle solvent banks and lending to weaker banks and those central banks have had much more success in having a destigmatized way to lend to solvent institutions. i think the third thick the fed could do is improve its processes to make the process of pledging collateral and borrowing from the window easier to access for banks. i'm sure you have much to say about this but i'll give one example. borrowing from the window is a pretty manual process. the bank calls, there's a peime where staff are checking to make sure it's ok to approve the loan. i think that pause, again for a solid bank with good sufficient collateral that's unencumbered to secure the loan that waiting period almost seems to signal we don't have to say yes. i think that's -- it's kind of a legacy of this constructive ambiguity that started in the 19 20's. why not automate the check for collateral, primary credit

borrowers and make it a more straight through process. that would be another way to demonstrate, that is legitimate tool to use in times of need. and finally, i thi could probably revisit, it's probably a good time to revisit the appropriate pricing for primary credittween creating stigma if the rate is too high for the discount window and market activity if the rate is too low. for example, what is the right spread for the primary credit raid? is it 100 basis points as it was before the gfc? zero basis points as we have today? that would be a useful effort to kind of look at that. i think also thinking about how primary credit is pr relative to credit extended by federal home loan banks would be a very useful exercise as well. bank regulators also have a role to play in reducing stigma. bank regulators could recalibrate their requirements and guidance regarding liquidity risk management to align more with this idea that the fed is

pushing that primary credit is a legitimate source of short-term funding to meet unexpected needs. for example, if requiring banks to preposition collateral which is being discussed a lot, there are a lot of proposals for this out there, why not consider counting some of the -- some of the i'm sorry acronym violation, nonhigh quality liquidity actions to pledge in recovery. there's a lot of talk out of the t now, good message of encouraging banks to use the disdown window and use it in its contingency funding plan and to test regularly. why not require that? i think it would be an important requirement rather than letting banks decide whether they're going to be ready, require them to be ready. and if we're requiring the disdown window to be part of a bank's contingency funding plan, why not also count it as a source of liquidity in banks' internal liquidity stress tests and funding plans? we can reduce stigma at the

discount window, it's been with us for a long time. it's not going to be easy. it'll require a concerted effort across the central bank. but it's something we should do have an effective lender of last resort tool in the u.s. david: let me pick up on two points. it wouldn't 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, where people are panicking can get -- can pay off depositors. susan: yeah. it provides a source of confidence to investors that the bank will have access t needed. david: and the second thing is we tell banks you have to have a certain amount of liquidity, 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 principle, almost like a line of credit. but we tell them you can't count this access when we decide how liquid you are. so why don't --

susan: i think we need in the u.s. to decide what we're for, for the disdown window. is it a backstop that's legitimate for sound banks to use against good collateral? or is it something that shouldn't be used? this constructive ambiguity doctrine that dates back toes confusion. i think there's confusion stemming from the federal reserve act itself. last provision in 10-b that governs discount window lendin no reserve bank is obligated to provide a loan to a bank. and i think that dates from the era when there was not robust prudential supervision of banks around the time of the dpresmtion. the fed was worried about lending to weak banks. i think now, you know, we have much more robust supervision. yes there's opportunity for improvement, as tobias has noted. we have a strong fundamental system. i think we need to decide what are we doing with our lender of last resort tool? the

weather gods and air traffic control allowed you to miss -- to make it. you missed the glowing introduction i gave you. tobias started out by saying the banks that failed in march 2023, failed in large part because of management. and then he went on to talk about supervision. i'm interested in your responses to susan but i want to ask a broader question first. as a banker, regional bank superregional bank what lessons do you think we should learn if the march, 2023, episode. bill: my primary lesson learned was that regulation is uneven.ed me what the first republic and silicon valley were able to do inside of what i thought was -- what i know is inside of fdic handbook. regulators didn't do their job. nagement was bad and risks were -- lots of different things. but it just, you know, bluntly

if that was an o.c.c. bank that never would have happened. david: when you say regulation you mean not the supervisors but the rules? bill: the regulation is there. supervisors didn't do their job. silicon valley bank was, the day they put on their fixed rate bond position, long before the fed started raising rates they should have been red flagged. they had embedded leverage in their balance sheet that was unsustainable outside of any sort of rate rising. any interest rate risking more would have known that and stopped it. shouldn't have happened after the fedosition that was a long-term capital position. i'm going to go by, you know, $-- i'm going billion of bonds and fund it with hot money. nobody in their right mind would do that and regulators shouldn't have allowed that to happen. you don't need new a regulator to not allow that to happen. david: explain what you mean about the difference between the

federal deposit insurance corporation and the fed. bill: i think we have purposefully i'm simp at the toik smaller banks to have lighter touch regulation. but in the course of doing so we allowed banks to charter shop. david: who are you regulated by at p.n.c.? bill: everybody. [laughter] we are a national bank. so o.c.c. fdic insured. fed member which basically brings everybody into the house. david: in the case of new york commercial bank corps, what role did that play, the difference in regulators in that episode? bill: so, i don't have direct knowledge of that situation, i have more knowledge of the issues from last march. but it's not a coincidence thatge into flagstar, take the o.c.c.

charter and a new regulator is looking at an old book and say oh my god. i think it's very telling. david: interesting. can you reflect a little bit on susan's points about the discount window? how does it look to you as a banker? is it a facility you can count on without getting dinged by the board of directors analysts and regulators? or not? bill: no. to start with, it is the lender of last resort. so the day you hit it for anything other than a test, you know, you effectively have told the world you failed. investors look at that number, it's disclosed because it's by district. nobody wants to -- david: so the fed doesn't disclose the name of the bank that borrows for three years but you can -- two years. but you can figure it out. they publish by each regional

bank, who is borrowing. there's not that many banks. when someone -- suddenly a big thing comes up it's not hard to figure out. bill: even away from that, we call it the lender of last resort. there's a need in this country for regular wave liquidity into the banking system which today is served by home loan banks particularly for smaller banks. that, you know has increased with the advent of money market funds and just excess reserves needed to be held as a function of liquidity ratios. the fed should be playing that role, in my view. the fed is not. because things susan said. it's mechanically, incredibly difficult. you, even when you pre-position, you have to audit what signature loans is discarded. you call your regional fed, somebody answers the phone maybe, then they'll have a meeting to see if it's actually ok for you to draw and then they'll talk to washington and

you draw if i draw from the home loan bank i hit a few key strokes and draw against trashery. it's regular way lending, it's necessary liquidity into the system. i think for the discount window forfirst of all you need to, to comment to your point, it's crazy for to pre-position collateral and get penalized for having done so you need to you know, whatever the monitoring is such that you can access it easilyif you have good collateral. and importantly capital. be able to do it. it shouldn't be a lender of last resort. it ought to 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 capital that makes that a momentary event as opposed to a critical event. david: is it cheaper for you to borrow from a federal home loan

bank than the fed? bill: yes -- well, not right now. the discount window is at a zero spread, the home loan bank is probably about the same. to be fair in. today's moment. but you never -- you know, they change the price. david: talk to me a little bit about what it's like to be c.e.o. of a bank like yours and deal with supervisors. most of us us don't work in a i mean, i have the good fortune to work for "the wall street journal" because of the first amendment where i'm regulated, we have no standards, it's total freedom. can you run a business effectively with a bunch of supervisors who may not be as smart as the people who you employ looking over their shoulders? bill: i -- i disagree with the last statement. one of the things i would tell you about our supervisory which is almost every time true. is when they smell smoke, they are correct. they can't necessarily

distinguish between a one-alarm fire and a five-alarm fire but when they say hey, what do you think of this? we're seeing that? they're almost every time correct in my experience. so at the end of the day, we're in the business of taking risk. that's what a bank does. right? they transform money supply. and anybody who wants to talk to me about risks that i am taking so i can get smarter about it, it's ok by me. david: finally, a lot of people have called attention to an interview you did where you basically said that corporate depositors don't trust that u.s. regulators will keep all banks safe, so they'll likely migrate to the really big bank the j.p. morgans and bank of america so a bank your, $560 billion in assets, eighth largest bank, the only smart thing for you to do is get bigger so you're essentialg to fail. that didn't seem to be the spirit of dodd-frank but it

seems to be the reality. what the hell is going on here? bill: the benefits of scale, forget about the incidence -- incidents last march but the benefits of scale have kind forever. but it basically has taken off and proven true where, you know the economies of scale inside of marketing, inside of ubiquitous brand coast-to-coast technology, cyber protuks product development delivery, are playing out in the banking space. you see since the financial crisis, you know, the two largest banks by deposit, b of a and j.p. morgan, have grown massive organic deposit share they grow at p.n.c. -- they grow a p.n.c. every five years. every other bank in the country and i think this is correct except for silicon valley and first republic, their deposits shrunk in that same period of

time as market share unless you did an acquisition or merged. and so, we already saw, mike mayo calls it winning banks are pulling share, one of them is public that they want to have 20% retail share within the next five years in the u.s. march accelerated it. because what happened in march was a a way -- away from the retail reach youad from deposits. you had corporations basically say, i've got a problem i can no longer trust that you, my banker i love you like a brother, but i have no idea if your bank is safe because these two high-flying great banks just blew apart and i'm not going to, as treasurer of the company take the risk. that you're not safe. i know if i go with b of a or j.p. morgan or at the margin, p.n.c., we have net benefited from this, i'm going to move my money upstream.

that's what's happen. it's accelerating. the doorkeeper: interesting. tobias, susan called my attention to an interesting speech that e.c.b. official frank elderson made where he talked about bank culture he said balance sheets are often scrutinized with a hawk's eye it is often culture that whispers the first sign of trouble. banks are complex organisms driven by a sum of their actions and organisms. it's a bank's culture that favors these interases. he made the case that when supervisors focus only on the balance sheet they miss the red flags. i'm wondering if you agree with that and what we do about it. tobias: i think it's important to keep in mind that there are culture issues in the banks and culture issues in the supervisors. and you know as alluded earlier, when you look at the supervision of the federal banking agencies in the u.s., there was a significant shift in

the culture of banking supervision for the globally systemic important banks, these aret institutions in the u.s., after the crisis. there are really four focus areas of that supervisory approach. one of which is -- so the culture issue is broadly captured in the oversight of governance so there's quite a bit of effort at a very level from supervisors to understand governance mechanisms in the supervised institutions. for the regional banks been the sort of shift in fact, there was a regulatory tailoring that occurred, i in 2019, which tailored both regulation and supervision in the proportionate manner that essentially changed the culture of supervisors of those institutions. and as i alluded to earlier, right, it's really the culture

of the supervisors. they did see red flags but they didn't engage proactively with management to get the commitment of management to make change even though they have a basis to do so. the u.s. has very strong supervisor basis. so it is a cultural issue in the supervise yory agency. david: bill, you saturday of -- you suggested t rate risks is part of the job of being a banker. and when interest rates are zero, you're pretty confident you direction they're going to go eventually. i think. bill: for a while, we weren't. [laughter] david: do you think the fed should have told its supervisors look, as we start to raise interest rates you've got to bear down on the banks to make sure they have adequate risk -- interest rate risk management? or is that not their job in bill: i mean it's their job and it's inside of a stress test environment whether a bank is

subject to official test or not. where you test against variables and see outcomes. i think. the issue of the risk positions we'll use p.n.c. as an example. we invest in fixed rate assets. our fixed rate assets went under water when interest rates went up we own them as a hedge against our noninterest bearing deposits which aren't market to market. we basically went into this somewhat short so rates would go up and on a calculator we made money. gap. had we owned massive amounts of more bonds that would have been a negative outcome through solvency. regulators talk to us about that all the time. that's commonsense risk. i have a certain set of funding and a shortn and i'm going to buy something long against it. i'm going to do my very best -- very best to run a matched book,

recognizing that i have a lot of variables on either side. that's our job. that's what banks do. we talk to regulators all the time about that. david: we have a few minutes for questions, i'll take two or three questions and let the panel -- we're really pressed for time. when you ask a question it should, a, end in a question mark, and b, is short. identify yourself. start here. carter. >> my name is carter doherty, i'm with americans for financial reform a quick question for tobias. what exactly changed in the supervision vition between 2018 and roughly 2022? supervisors were newly empowered after the crisis but something appeared to happen with the fed. i can't resist asking bill, it's almost four years to the day you said banks need to move away from gotcha fees. correctly anticipating the biden administration regulators talking about junk fees. that'd consumer financial protection bureau announced caps

on credit card late fees. is this a good thing? do you see your vision being full field here for a more market? david: i think that was two questions, >> hi, paul is saltsman, i'm chairman of a $2 billion bank here in washington, d.c. i'm curious that no one mentioned deposit insurance reform in this mix of possible solutions. particularly with respect to uh i was wondering if the panel can address that. david: let's start with those. let's start with the last one deposit insurance reform. susan: i don't know where it stands right now. fdic came out with an interesting report, several options, discussion seemed to have dried up. but certainly that's something that i think does need to be addressed. if you think about financial stability framework a country that has resolution authority

lender of last reso insurance, deposit insurance is a key part of that. bill: i would add, we are afraid of uninsured deposits because they can run. if i have collateral in a right-way discount window, doesn't matter. i don't think we need increased deposit insurance. i think that leads to bad behaviors. but i do think that you need to have access to a window with good collateral to be able to cover uninsured deposits should they run. susan: i want to emphasize that it's so important that all these tools work together and are walking in the same direction and we don't have that right now. tobias: on the question, what happened to supervision? the financial sector assessments in countries around the world so every five years we go into every single major jurisdiction and do a very deep dive assessment of the structure -- a -- an assessment of what could

be the stress, and number two what is thesight and the supervisory practices and you were in three, what are the emergency measure, the crisis management tools they have. in the u.s. we did this the last time in 2020. when you go back to the documents, these are extensive documents that are all available publicly on the inch m.f. website. we clearly flagged, for example that on scythe supervision in those regional institutions, you know, went down dramatically. you know, we criticized the regulatory tiering which went hand in hand with supervisory tiering. as i mentioned earli clear shift toward improving supervision and regulation as well as resolution and crisis management of the larger institutions but the tiering was about proportionality in away that lowered the standards.

so you know, i think -- i think what we said back then is very consistent with, you know what has unfolded since then. and again, i think that the legal base and the -- on regulation, things need to change. but on supervision they are very strong legal basis. it is -- it is the culture, the management of the supervisory process that can be enhanced dramatically. david: bill from your point of view as a banker, seems to me we, in regulation of banks as well as many other things, we're now -- we have big pendulum swings. randy quarrels is different than michael barr, the fdic is different under biden than it was under trump. the o.c.c., the comptroller is different, the whole system now and this is true in other regulatory agency, seems to swing from place to place with who is in the white house. is that a problem for you?

hard to, you know, plan and run a business on four-year cycle. you know. we've been in business 165 years. david: do you want to respond to carter's -- bill: i would love to. p.n.c. introduced something called low cash flow, i'll take your word for it, four years ago, seems longer than that. i felt at the time we were hitting customers with fees almost by accident. we called them gotcha fees. somebody didn't intend to pay late or overdraw, something didn't clearering they had plenty of liquidity somewhere else but we charged them a fee. low cash mode, that's how we responded. other banks put grace period in. got rid of de minimus amount. where overdraft is left is, if somebody overdrafts a p.n.c. a conscious choice that that's

their best financial 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're going to do. that, you know, has morphed into what at least one regulator calls junk fees which has become a popular term which is, you know frankly, wrong. banks have a right to make money. we needo making money. and it should otherwise be fair. and by the way, if it isn't fair there's 5,000 banks, we compete somebody will lower a price. i want to distinguish, we shouldn't charge a fee because you didn't understand it. to me that's a gotcha fee. people don't understand, i caught them, aha. that's a bad thing. that's what we stopped. i think that's different than charging legitimate fees for legitimate service. i think up with of the issues that is playing out at least in this administration is an attack any fees in banking which ultimately leads in my view to

bad outcomes, particularly for smaller banks who don't have many fee streams to begin with. david: thank you. congressman mchenry is here, so please join me in thanking the panel. [applause] david: i want to thank you all for being so succinct and thou get up from your seats. the next act is about to begin. aaron: good morning. i'm aaron klein. it's my pleasure, join me in

introducing chairman patrick mchenry. [applause] if you don't know who the chairman is you're probably in the wrong room. but for those of you who need an introduction, and those of you watching at home or online, chairman mchenry has served as chairman of the house financial services committee, he served as acting speaker, this is wrapping up his 10th term in congress representing north carolina's 10th district. north carolina's 10th district. 10 terms. rising to chairman of the financial services committee. acting speaker. and now this is your swan song. you will not be standing for re-election. mr. mchenry: that's right. aaron: now we can tell it like it is, right? mr. mchenry: i've been doing that for a while. everybody says it's because

you're not running for re-election, but no. aaron: you have a reputation for being a straight shooter in a town that has a reputation for getting more crookeds time goes on. let's start right with the real question. a year ago, we had a bunch of banks failing. and the government, treasury, fdic, the fed, broke the glass wrang the alarm bill -- rang the alarm billld out uninsured depositors. did they do the right thing? mr. mchenry: there are two elements. one is in the moment of crisis and the other is what comes thereafter. in the first they did well. because it calmed the crisis. in the second, not so good so let me dive into this. so the fdic should have, at a normative time, been able to take quick and effective action, number one. number two the fed should have

provision for the discount much more quickly. i agree with chairman powell when he says the fed response was clunky. all right. in the immediate piece of it. but when secretary yellen stepped in, that calmed the waters significantly. eventually we got to a good place. i think in the question there, it was to calm the waters and stop -- stem the tide. and i think that happened. it drama. for what we're now a major banking crisis of two banks. right? without any great contagion beyond this. they had an obvious hole in their balance sheet that was visible to everyone. so to me as a policymaker transparency was key there. we've got some 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 fashion 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. when it should have been done at lower levels. now, the second piece of it, so -- in the immediate piece we all rallied to say, let's just be calm, through this thing. the long-term question is, is the regulatory response which was a failure of two banks with a hole in their balance sheet visible to all investors. right? actually one hole in the balance sheet, and that silicon valley bank being the shrapnel, the projectiles taking out other banks. total of t 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 is, we get

a failing grade for thed the response is to raise more capital for institutions that were not affected by this. and actually performed quite well in the moment of trepidation and crisis in march of last year. aaron: on the prior panel p.n.c. was clear in saying in a regulated bank, the hole in the balance sheet is not allowed to happen. immediately after the crisis, the federal reserve promised, quote, an unflinching, end quote, review of its regulatory practices both at the san francisco federal reserve bank which regulated s.v.b. and at the board which had regulatory authority delegated to san francisco. how would you grade a year later that unflinching review? mr. mchenr it's my view of how restrained i was, my third trip to the -- to

the salad bar. actually not the sal lard bar -- salad bar. but i view that initial response of their review, this is the reason why with checks and balances in our government, this is the reason why we have other people do after-action review, not the people who actually committed the action. i think it was a self-serving report with the inclusion that is disconnected from the reality of the situation. don't raise the fed and bar's report very, very highly. i think it is an attempt tooff what barr otherwise wanted to aaron: what steps do you think the fed hasn't done that it should in the years since the failure to reform itsf? the fed says it answers to congress. and you, being the chairman of one of the two committees of congress it mr. mchenry: let's separate this out, congress created the

federal reserve. we gave them the ability to take on monetary policy. substantialal amount of government control that was done states for a century and created a monetary body. they have done very good. independent regulatory policy is stupid and not conforming in law with any country on the globe. we have to have proper oversight. in this functionality in march this matches some regulation. but silicon valley bank shouldn't have failed on a random day of the week. we have not seen it in america. and we have to go back many

generations for us to see something like that. so why? the discount window a time that didn't conform to the reality of the stress in the market. this is an obvious thing. captain you open up window. the reports we get are going to dive in a little more here and said we picked up the phone and we had assets over here because we have these folks that hold mortgages and we gave them the discount window. that's not what they do. you are using the systems in an appropriate. the discount window, i'm sorry we didn't have our capital positioned to use the discount window. excuse me? and you are on the phone. telling me this isn't technology enabled. you have a fast bank r and on the back end, the banks are getting provisions of capital and way they did in the

they are using the phone a little bit now and cheaper to use the phone but using a phone. you are kidding me. why don't have bank capital provisions with the discount window and know what is your balance sheet. should be a push of a button rather than phone calls and done in days. so that piece doesn't fix and this is an operational question. the fdic, they had aweekend and they delayed. they couldn't make a decision and in that first weekend we should have been done with this. we should have been done. it shouldn't have taken secretary yellen and chairma? powell to step in the second week. this should have been done by operation of the feds and the

regional banks number one. number two f dmp ic competent and capable, this isn't a complex resolution. this 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 and excellence 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 mean it's 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 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 a 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. the largest depositor was

circle. a stable coin. $3.3 billion. the biggest risk was the money they had at the bank. 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 of taxpayer money to come out of deposits, which will come out of fees paid by all of us. you have deep in this. in the stable coin world, the money was ink and how did that play into the fact it was over that weekend and the bailout came. had that not come, i don't know what would have happened? mr. 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 which enhances risk. thated decision actually narrowed the number of banks which made it riskier and circle says spreading that $3.3 billion over 100 institutions could only

spread it across a handful. 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 th only thing that relates to digital assets to repurpose for digital 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 to fix it. those folks in digital assets have to hold it on their balance sheets. it is a very bad policy and not

safe for consumersumber one. if the institution fails that puts at risk their product that they think is being held 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 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 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 operational control at the 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 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 deposi made whole in bank resolutions. rare exception where you have account losses. butd zero account losses for those that are insured. we have to ensure that the customer actually knows what there is a lot of discussion at fdic in getting data flows. 250 is an arbitrary number. completely arbitrary, the 250 number, the 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 regulatory costs 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 the to 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 andver 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. all these other questions 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 mentioned that bank had failed in kansas where 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 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 needs to change these authorities. wait 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 could have a institution 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. not the 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.bá

home loan bank system has been at the heart of the bank failures. top borrowers in 2006, countrywide, bank of america. year ago bank 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 snr. mr. mchenry: the fed and fdic are functioning with the debatest capacity. look at 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 regulators, you have to make sure you have consistent regulation of our banking industry. only small and 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 vice president opinions.

no opinions, only questions. mr. mchenry: oh, please, it's washington. >> you mentioned a couple times tay 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. banks pay that by taking the fees because we all need a

bank. you need a bank account. if you don't have a bank account, life is hard and the 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 pointwe are living in extraordinary measures and folks having worked with the 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 wit 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 springf 2023. >> i'm a r is there a reason we couldn't index to inflation rather than revisiting it every generation? >> sounds like 250 for a while. >> we the deposit insurance act in 2005, 2006.

and congress -- >> did a nice job of remodeling the 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'tsit 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 discussed might they go a way that deposit insurance reform are designed to be

reformed. mr. mchenry: discount window, the provision of assets for using the discount window, the speehas 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 and within hours, at 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. what i 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 who have enormous capacity granted to them. we need to understand why they 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 business. we 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 examples of that as well in this administration of folks who are deeply incompetent running agencies of government. that's 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 seniorst 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 is chairman of ibm and served as chairman of the national economic council under president trump. thank you all here for joining us. and let me start by setting the framework, what actually happened a year ago when these banks failed? you were in the room where it happened. what went down? >> first of all aaron and the

brookings institute thank you for having me. i think this is a really timely conversation to have and approach the of silicon valley bank i think it is important to reflect on lessons learned. the fith the regulators performed incredibly well during challenging circumstances being in the room and part of the boots on the ground, folks in washington folks on examination deems worked around the clock to address a lot of the challenges and calm7 the distress in markets among depositors and i recognize their efforts at the outset. that is a level set for the audience. so from march through may of 2023, the three largest bank failures and that is the largest

one in the history of the country. first republic, 13 billion and and silicon valley andig us to the events that took place in the yieldup to the failure on march 10. we had silicon valley attempt to do a capital raise that was unsuccessful. we saw a failure of ratings credit rating downgrade and $42 billion of deposit outflows. on friday morning. the california department of consumer protection and innovation and fdic, appointed receiver and closed the doors on the bank. what makes that quite interesting in the ordinary course, you close banks on friday afternoon at the end of

the banking day and the reason to do that is limit anxiety for consumers who want access to their the deposits. because of those outflows on thursday evening of $48 billion and of deposit tosser the fdic made the difficult decision to close the bank on fridayg. 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 institution and if not they stand up a bridge bank and the bank is under a management and oversight fdic but the bank continues to operate on monday. so there is no real gap.

that didn't happen as smoothly as it ordinarily does because of the closure and set up an institutional bank which is a separate entity and signature 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 o 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 boardhe 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 federalrve funding program which is emergency liquidity. but the two big i 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 run. >>

this was totally dead. nobody ran. nobody ran. and this company to head out and everyone went to the door. and begged to be bailed out. >> you have trouble raising

capital. and that triggers those runs and until we address those. no matter how hard we try with systemic risk. >> let's stay on that, i to have worked on dodd-frank and promised to end these bailouts where all depositors were bailed out out of the taxpayer deposit insurance fund and two regimes for orderly liquidation authority and all new tools in the tool kit and sat there less open than the like worst gift my kid got at a birthday party that got put on a shelf and never touched. does this show that dodd-frank didn't work? >> my short answer is no.

dodd-frank had many important contributions to where we are today. is that enough? no. we have a lon go including with capital. and yet, what we find is that without that long-term debt has not felt the problem. but i would like to suggest. dodd-frank introduced key pieces systemic risk, framework, orderly liquidation a barrier to the nonbank sector. and our largest banks have trillion exposure. so i feel dodd-frank put us in the right direction and need that long-term commitment. i know this is blasphemy but funded in advance, it would have a greater chance of

working and i find similarly in some of the resolution plans they are still not enough liquidity whether single point of entry or multiple. >> gary, we didn't stick with dodd-frank enough. we heard in the first panel criticism of dodd-frank roll back or the tailoring and i don't know why bills get stuck with thats was a significant achievement is s.125 be blamed? >> i don't think anything else got 67 votes in that two-year period. that piece of legislation to tailo based on bank's activities saying if you are a small bank

in iowa and you don't trade securities and don't underrate securities and all you do companies make mortgages you should have a different set of regulations, goldman sachs and jpmorgan, all banks. there was nothing in that piece of legislation that had to do with capital. and anyone who wants to blame it on that piece of legislation would be wrong and it's a false statement. it's more entertaining to listen than to speak. people con flat liquidity and capital. very few banks ever run out of capital. every gets close to running out of liquidity.

and lehman brothers, if you had capital, you got your capital you even though they had no liquidity, they had capital. this is an issue of how much you have and how much you have at the moment. my other comment we are sitting here arguing dodd-frk or not. i think it is a pretty good piece of legislation. dodd-frank k how to die of old age. if you fell out of helicopter and the body can be saved i don't that dodd-frank deals with trauma one care but with death and dying and orderly liquidation and doesn't deal with can we glue the bones together and put screws in and keep the body functioning. >> i agree with gary on this one. i don't see at all that the

rules are to blame for the failure of silicon valley signature. and i think it is what s.2155. in dodd-frank the threshold was a dotted line of assets. s.2155 raised that bottom line.

liquid it covers ratio. at brookings, you get a bill bowl of alphabet soup. the liquidity covers ratio and the tail end rules and if silicon valley bank were subject to them which i think l.c.r. was around 70%. but to be aiblg to stop the run and you know fix the bleeding of the deposits, the l.c.r. had to be twice the limit which was 100%. they would have had to have the 200% l.c.r. to suggest that these problems are complicated.

they are multiple points of view but to zero in on the tail end rules is the culprit for the series of bank failures we had last year is a little inaccurate. >> yeah, sure. i want to clarify, the fed did have the provision before the framework was introduced. and the banks in the band, they are not small banks but large banks. and that could easily go into the higher category of sprfertion and large regional banks that have experience maryland challenges in the past and you had liquidity and capital not sufficient for the systemic risk that they actually had an impact. three or four regional banks

with the same vulnerability same vulnerability that lack of clarity on their balance whether it is v.c., venture capital and hadn't been rolled back or whether it was that alliance from those deposits. irrespective, when you have a number of regional banks, some of them large regional banks with similar patterns that's where investors pulled back because reduction of the barriers that separated banks and shadow banks and get outside concentration and hard not to talk about capital when you have those outside concentration that resulted in some of those rollbacks. >> the high concentration for systemic risk was too many

deposits. i think we all think and all know they had too many deposits coming out of covid. companies are going to shut down the company put a lot of money into savings accounts. had a huge deposit bank you are running a bank and i ran one for a lot of years and massive and amount of deposits your federal regulator tells you to do one thing. zero risk because they have no risk. and those of you don't know are u.s. treasury bills because the full faith of the u.s. what did they buy? they bought u.s. treasury bills. now, then we have this i would say second in my lifetime

because i loved thr vacker days. and in the percentage move, probably b interest rate move from zero to 500 basis months ine-year treasury bills and take that zero risk asset that your regular you hater told you you are supposed to by and hold no capital against it because it has no chance of failing and all of a sudden because of quirky 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 losses. the capital account at a bank is there to absorb losses. so i think we have to understand

they bought these treasury bills because they had to pay their depositors something and 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 risk. you mean zero credit risk. >> zero risk hen you look at reporting requirements. but when we are saying risk, zero chance is going to be default. 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 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 important than me risk. >> let me ask you a question about the depositors. 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 a structural problem, you guys, 2024 year, how much will the next uninsured depositor lose his money? >> chairman mchenry mentioned 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 determination as to whether or not you covered all deposits or just uninsured deposits and is really a determination of how much it actually costs and who should be 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 policy 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 you know a policy position that the u.s. government made following 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 the of variables at play and what the best structure for deposit regime movi think is a complicated question with a lot of interesting answer 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 subject-zero to 5. we hear it all thethis 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 that's the point. 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 we had a firm grasp of how much capital was needed was reliable and consistent models, we might be in a better today. >> when will the next -- >> i don't believe they can now because of this challenge we have, stctural challenge and we end up backstopping because the largest banks enmeshed. >> is every bank insured? >> no. because of the similar voling

nerkts, the run on confidence on a number of things the agencies aren't i 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 to 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 historyuy until 2005. 2006 was the second and the regulators told us what a great system they devised. no failures means we are doing a great job. failures are a natural part of business. >> it is. >> when do you think the next one will fail? >> i'm not sure we'll see>> 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 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 paying high rates of returns and regulators said there is a problem with this bank. the regulators should force that bank out of the deposit business. that should happen. we should never allow that to happen. we can't have a race to the bottom. that would be the worst outcome. >> one of the upshots from the banking situation last year is really small and medium-sized enterprises who are the commercial customers. before silicon valley failed they had one bank.

joe's body shop or the dry cleansers and they have six different shopsthe 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 today the c.f.o.'s and the treasurers who had not lived through a high 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 think that's an interesting country. i mean the framework that we have today i think works relatively well. i mean that in the spring. the regulators and the federal government has different variety 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 in america. you have 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 orderly liquidatio 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 resolution perspective to be able to resolve banks without having amon throws impact on stability. >> in my view order huherly resolution there are core business lines that are healthy and should be maintained for

their value and for the customers that rely on those core 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 more difficult and 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. why don't we 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 react 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 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 i to stop bank failure. there's reasons why banks fail. but we could stop a lot of themuch earlier and the

earlier you stop it, the easier it is to resolve. >> can i just follow up on that point, 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 for supervision at the fed, as well as controller su signaled we're in a high ep forcement environment. last sor f 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 emphasized a failure of supervision. so how much of this is already at the fingertips of regulators anthem not acting, versus

needing to gather additional information 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. what i'm suggesting is there are 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, you know with the 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 12k3w4r do you mean the fed board of governors? the regional bank? who is that? >> i think that's a really great 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 monitoring. there was -- you know, sort of suggestion that if something there wasn't a rule or 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 cool their jets. those type of cultural changes ca years to remedy. >> i'll say this. i published in real time a long set of banks that have relied on overdraft revenue f 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 try two? jarryd, you were in the room, i

read reports after the weekend that by friday afternoon, silicon valley bank had found a' the payroll payments which was initially the main source of concern i thought. was there a way to put a stop to what they were -- the everkill of the resolution at that point? or were h things just way 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, w 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?

>> you guy can pick which one of the 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 amount of sort of press releases and public statements from members of congress, particularly the california delegation, because a lot of the sort of stresses and the bank failures just so happen to be through california west coast institutions. that the qaccess 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 to 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 the ordinary course. and the fdic says, the bank is open business as usual, as of friday. now a lot of customers don'tarily 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 thereso 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. may recall in the ordinary course beingthin. that creates a lot of challenges. i don't think we have a really good structure for how to address those in a future bank stress. but i'll leave the second question to others to answer. >> do you have another question? >> one question is aboutvisory supervisory failure. the consensus seems to be that the supervisors saw the issues

but didn't act or didn't act for that? the lady from a.f.r. seems to think the overhead culture may be part of it. what do you all and the other question, real quick, whether one potential reform would be to incorporate interest rate risk into 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 el 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 models and not fixing issues identified during the great financial crisis. until that is fixed and until incentive compd so that the executive incentive where

their comp is tied to return on equity they have these incentives to build outnd they have these incentives to, you know, accommodate, to boost their comp. and boost share price. in that environment with low -- relatively low capital for capital marks and trading we're -- and comp not alignede 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, the liquidity and the comp. and we haven't heard enough about comp in the whole discussion. thanks. >> i completely disagree, just so you know. 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 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 s. you just write rules and you just write rules. when there's 1,000 thrienls piece of paper you have to follow, 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 today run theirs bank in

the most unbelievably prudent fashion to number one, a protect depositors and b protect their 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 the world. because we have banks that are willing to commit capital. >> we're at time. and as i close just a couple of facts. 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 banks existing in perpetuity, with charters existing in matter what they did or not. the bank failures were in marcho5 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 here today at brookings. we appreciate it very much. thank you. [applause] [captioning performed by the national captioning institute, which is responsible for its caption content and accuracy. visit ncicap.org] [captions copyrigh 2024]

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