Rohit Chopra, the director of the Consumer Financial Protection Bureau, said regulators will need to assess how fast communications can precipitate a bank run, even at banks that had previously been considered well below the thresholds to create a systemic risk.
Chopra gave a blow-by-blow account of the liquidity crisis and the response by regulators to invoke a systemic risk exception that bailed out the depositors of Silicon Valley Bank and Signature Bank Tuesday during a panel at a Consumer Bankers Association conference in Las Vegas. Chopra highlighted many issues that are now known about both banks: they served a specific niche of corporate not retail depositors, had high levels of uninsured deposits and were not diversified, which made them more vulnerable to a bank run.
"It's a clear data point that $100 billion-dollar banks can really cause a lot of systemic risk and ultimately contagion across the financial system," Chopra said. "There's no question that one viral social media posting really could have a contagious effect."
Chopra said he is specifically worried about deposits kept in peer-to-peer payment applications. Regulators also are focused on payments-clearing, settlement providers and nonbanks — including mortgage servicers, and the potential chaos that a nonbank failure could have on individual households.
"I'm not sure there are clear solutions other than us as regulators and industry accepting that faster communication is an opportunity and a risk," he said. "I think you'll start seeing greater attention about liquidity, managing interest rate risk, making sure that there is a robust capital framework, and of course, quite a bit more on resolution planning and stress testing."
Chopra pegged the start of the crisis to March 1st when crypto-friendly Silvergate Bank, based in La Jolla, Calif., warned investors of its ability to operate as a going concern. Silvergate
"The market reaction to both of these [events] was fast and furious," Chopra said. "The rapid deterioration just proved to be too challenging in terms of doing due diligence, and getting a bid. So on Sunday, [March 12] all of the FDIC board, the Fed board and the Treasury, we decided to take a very dramatic step once we learned that Signature Bank had also failed to really activate some emergency powers and to guarantee the uninsured deposits of both Silicon Valley and Signature Bank."
Silvergate Bank, Silicon Valley Bank, and Signature Bank all had some exposure to "the digital asset ecosystem," Chopra said. In addition, the deteriorating condition of Credit Suisse added to uncertainties in the market, forcing regulators on both sides of the Atlantic to take action, he said.
Venture capital investors, Chopra said, "were actively advising on social media how to pull out of certain institutions."
He cautioned that the bailout of depositors at Silicon Valley Bank and Signature Bank may send the wrong message to consumers.
"It does demonstrate to the public questions about fairness," he added. "When a lot of consumers and households deal with liquidity hiccups, they don't necessarily have the same safeguards as the largest institutions sometimes have. So we're going to need to put a lot of things on the table to figure out how we make sure the system stays resilient."
Chopra's comments come the same day that Federal Reserve vice chair of supervision Michael Barr, Federal Deposit Insurance Corp. chair Martin Gruenberg and Treasury undersecretary for domestic finance Nellie Liang
