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