The immediate banking crisis of March 2023 has subsided, but what will the consequences be? On this episode of the BankShot podcast, experts explain what they think will happen next.
Transcription:
Chana Schoenberger (00:00):
Welcome to BankShot, a podcast from American Banker where our journalists report the stories behind banking, finance and the economy. I'm Chana Schoenberger, editor-in-chief of American Banker. On this episode of BankShot, John Heltman, our Washington Bureau Chief, explores what happens after the wild roller coaster of March 2023 when the country plunged into a banking crisis.
SVB Ad (00:24):
As an innovator, you're all about creating something new. And that's the journey we understand. At SVB Private, we're focused on serving the innovation economy — by collaborating with the people who drive it.
John Heltman (00:40):
This is an ad for Silicon Valley Bank Private, the wealth management arm of California based Silicon Valley Bank, which if you are not a tech or biomed startup you may not have heard of before last month. While SVB's customers may have been all about creating something new, SVB itself will likely be best remembered for bringing back something quite old, a bank failure driven by a run on deposits. But even in that respect, SVB was not unique.
Signature Ad (01:05):
Do you ever feel like your task is bad because your clients are sounding really mad? Do you feel like you're buried deep in, your management doesn't hear you scream? You've just gotta ignite the light and let it shine. Just walk on in and join your kind. Now you've come to Signature, tell your clients what you're worth. Make them say Oh, oh, oh! Clients just won't let go, go go!
John Heltman (01:52):
That very cringey take on a Katy Perry song is a 2011 ad-slash-music video for New York-based Signature Bank, a cryptocurrency-friendly institution that also failed on the same weekend as SVB. And both of those failures came on the heels of the voluntary self-liquidation of crypto-service bank Silvergate that prior Wednesday, which is not technically a failure but certainly isn't a success.
SVB and Signature were two of the largest bank failures in history, and while the particulars of what led those institutions to fail appears — for the time being — to be somewhat idiosyncratic, those banks' failures and the regulatory response to them has nonetheless called the safety of the U.S. banking system into question and reshaped the market's expectations about what it means for a bank to be systemically risky. And while the immediate threats to financial stability seem to have ebbed — for now — what went wrong at Silicon Valley Bank, Signature, and to a lesser extent Silvergate will very likely inform the trajectory of banking regulation for the next several years.
So what shape is that trajectory taking? And will regulators — and, for that matter, Congress — learn the right lessons from this debacle?
From American Banker, I'm John Heltman, and this is BankShot, a podcast about banks, finance, and the world we live in.
John Heltman (03:09):
Boy, what a couple of weeks.
Karen Petrou (03:11):
It's certainly has been nonstop. I told other people it felt like finals all over again.
John Heltman (03:18):
That's Karen Petrou, managing partner at Federal Financial Analytics. And the banking crisis of the last month or so is not her first rodeo — or her second.
Karen Petrou (03:26):
I mean, this is my fourth banking crisis, because I've been doing this so long. We advised the National Commission on the origins of the S&L crisis, and what were the takeaways from the S&L crisis. Well, they were two things in very broad strokes: the need for rigorous capital requirements and for rapid supervisory intervention. And so you see a lot of it, the causes of the crises are different in that the S&Ls had interest rate risk and credit risk. And then the banks in the late 90s had mostly credit risk and the commercial real estate, and then in '08, it was a combination of credit of capital and liquid credit, and therefore capital and liquidity and complexity risk. But in each case, you see a huge amount of supervisory forbearance.
John Heltman (04:21):
But let's not get too far ahead of ourselves. What exactly happened with all these banks that start with the letter S that made them fail in March of 2023?
Karen Petrou (04:30):
There's more to know. What I think is clear — and this is true — in all three cases, there's a common thread and the thing that unites each of these very different banking organizations together and the reason each failed, was that — with in full sight, because all of these numbers were on their financial disclosures — each bank failed, because it had large amounts of held to maturity, government securities, and in Signature's case, also illiquid loans, and inadequate capital to reflect the risk of any form of a liquidity shock, which forced recognition of mark-to-market values.
John Heltman (05:21):
There's an old banking joke known as the
In this case, each of the S banks had something in common: they bought government-backed securities that were very liquid and safe on the one hand, but also that payed low, fixed rates of interest — rates that were no longer attractive or competitive. In and of itself that's not a problem — if the banks hold those assets to maturity they will make a little more than they paid to buy them. The problem is if they are suddenly short on capital and have to sell assets at a loss — that's known as interest rate risk. As Karen said, it was well known that these banks were holding underwater and/or illiquid assets, but it wasn't necessarily obvious that they were in immediate danger.
John Court (06:29):
I don't think there was a lot of indication that the storm that came was actually coming. I think it was hard for people to see.
John Heltman (06:36):
That's John Court.
John Court (06:38):
John Court. I'm the general counsel of the Bank Policy Institute. So we are a trade association. We have 41 members and the members are generally the largest banks that operate the United States.
John Heltman (06:49):
And he says that if you want to go back to the beginning, you might rightly date the beginning of this year's March Madness to last year, when the Federal Reserve started hiking interest rates rapidly and dramatically in response to spiking inflation.
John Court (07:01):
It was clear that that was going to put pressure on the asset side of bank balance sheets, to the extent that banks have investment securities portfolios and that those portfolios have longer duration, that that was going to put a lot of pressure on them. So if you have a treasury security or an agency-backed security, and it's paying one, one and a half, two percentage points, and then you're funding that with assets on the liability side of your balance sheet. And though your funding is generally zero to 100 basis points, as the Fed starts raising rates, your bank funding costs are going to be going up. And it's going to quickly sort of outpace what you're earning on those investment securities on the assets on your balance sheet.
John Heltman (07:44):
John Court (07:53):
Either by liquidating and selling investment securities at a loss and reinvesting those proceeds in higher yielding securities. I'm not a banker, I'm a lawyer by training. So I'm not the expert in this. But that's what banks were doing. They were proactively managing their balance sheets to account for the rising rate environment, and position themselves to have durable balance sheets. Clearly, one bank that was doing this more slowly than others was Silicon Valley Bank. And I think that is basically what led to their downfall was their lack of proactively managing their balance sheet to account for these risks.
John Heltman (08:34):
But another thing also happened in the last couple of months, something that you may have heard about: FTX, one of the biggest cryptocurrency exchanges, went bankrupt late last year. Silvergate Bank, its banking partner with $15 billion or so in assets, faced a steep loss of deposits through that and other crypto partnerships, and after a great deal of consideration, decided to
John Court (08:54):
I'm glad you raised Silvergate, because that is a critical part of the story, if only because these two ships were passing in the night, but they are very different ships. Silvergate was a bank that catered to the crypto non bank, crypto industry — stable coin issuers, other crypto firms — and Silvergate also was a fast-growing bank. But silver gate is probably actually a lesson in responsible management. They recognize that their business model was not long term durable, and they actually engaged in a volatile voluntary liquidation and dissolution where they were actually able to pay their depositors back and wind themselves down in a way that pose no risk to the FDIC or, and have little to no role for the for the government. ... But I say they're two ships passing in the night because as Silicon Valley Bank's management was sort of getting its act together — probably late, late in the game — ... and this is on Wednesday, and that second week of March. This is where the two ships passing the night. Silvergate announced its responsible, voluntary liquidation, and I think, you know, people in the market saw that and took note of it. Unfortunately, on the same day, Silicon Valley Bank ... publicly announced their plan for dealing with the risks that had built up and cleaned up on their balance sheet. I think the market didn't like that. They were confused by that. They wondered if it evinced deeper problems with Silicon Valley, either on its balance sheet or or in its management. And there was clearly sort of a loss of confidence.
John Heltman (10:32):
What made that lack of confidence fatal for Silicon Valley Bank was the fact that
Aaron Klein (10:36):
They didn't bank people.
John Heltman (10:37):
That's Aaron Klein.
Aaron Klein (10:39):
Aaron Klein. I'm the Miriam K. Carliner Chair and Senior Fellow in economic studies at the Brookings Institution. A typical $200 Billion Dollar Bank, also known as a regional bank, has about 1000 branches — those bank people, communities. Silicon Valley Bank banked tech firms and startups and venture capitalists and some really rich people associated with that.
John Heltman (11:01):
That makes a difference because regular people's deposits tend to total far less than the $250,000 FDIC insurance limit, which means most retail depositors don't have to worry about their bank failing and banks in turn don't have to worry about massive withdrawals. But in the case of SVB and Signature, the vast majority of both banks' deposits were uninsured — meaning the balances of individual accounts was way in excess of that $250,000 limit.
Those banks also turned to the Home Loan Bank system to pledge securities in exchange for advances — cash, in other words — to buy them some time.
Aaron Klein (11:32):
As the value of their assets is falling, their stock price is falling, and they say "Well, geez, we need to figure out a way to make some money with these mortgages that are now worth a lot less than what we bought them for. So we're going to run to the Home Loan Bank of San Francisco, pledge these mortgages there for advances in collateral, and then use that liquidity and money to try and make some more money to dig ourselves out of this hole." Now, as folks who know the intricacies of finance know, when you pledge assets at the Home Loan Bank, that in a way hollows out your core, because should you fail, then the losses are borne more by the FDIC.
So, the failure of Silicon Valley Bank had four screaming red flags all the way through, right? Giant growth, quadrupling in assets; unhedged risk, in this case, interest rate risk; tremendous amount of uninsured deposits, it doesn't take many of these folks to make a run for the door until you find that you're insolvent. And the fourth red flag was this huge blow up at the Home Loan Bank, where they were going. And that's what caused the bank to fail.
John Heltman (12:46):
When a bank fails, there's kind of a standard playbook that goes something like this: Bank becomes insolvent, the state and/or FDIC steps in and closes the bank — typically on a Friday after business hours — and puts all insured deposits into a receiver bank. Come Monday morning, all insured deposits will be available at that new bank, and the FDIC goes through the process of selling the bank's assets, and eventually takes the proceeds from those sales to make uninsured deposits as whole as possible. But in SVB and Signature's cases, the FDIC and Treasury Department decided to invoke something called a systemic risk exception, which allows them to insure all deposits because they think not doing so would pose a risk to the financial system. This is FDIC chair Martin Gruenberg before the Senate Banking Committee last month.
Martin Gruenberg (13:28):
With other institutions experiencing stress, serious concerns arose about a broader economic spillover from these failures. After careful analysis and deliberation, the boards of the FDIC and the Federal Reserve voted unanimously to recommend and the Treasury secretary in consultation with the president determined that the FDIC could use emergency systemic risk authorities under the Federal Deposit Insurance Act to fully protect all depositors in winding down SVB and Signature Bank.
John Heltman (14:08):
For the most part, that intervention had its intended effect, at least insofar as no other banks have yet failed. But this entire episode has raised some very important questions about what comes next. We'll talk about that after this short break.
Banking crises come in a wide variety of flavors. Some are little blips, but they can also be slow burns like the Savings and Loan crisis of the 1980s or giant catastrophes like 2008. So what kind of crisis is this, and what stage are we in it?
Aaron Klein (14:32):
Bear Stearns had its problems and was bailed out in March of 2008. Fannie and Freddie were in August, Lehman and AIG were in September. So just because there have been a few weeks in between turmoil, doesn't mean that the contagion has been dropped. There are reasons to believe that this is very different than '08 in which subprime mortgages and toxic mortgage backed securities had infected like a virus to every organ in the fina ncial system. Here, this interest rate risk unhedged seems small, but not zero.
Kathryn Judge (15:07):
There's a short term component and a long term component.
John Heltman (15:13):
That's Kathryn Judge.
Kathryn Judge (15:14):
My name is Kathryn Judge. I'm the Harvey J. Goldschmidt Professor of Law at Columbia Law School. The short term component involves really trying to figure out how big are the potential losses elsewhere in the financial system? And what steps do we need to take to make sure banks individually — and the banking system as a whole — is prepared to endure those additional losses without us having to again invoke the special emergency authority. And I think that remains a very real challenge.
John Heltman (15:51):
This is important because what the ultimate policy response will be very much depends on how dramatic of a response the crisis at hand requires. The Covid pandemic required extraordinary measures, but it wasn't really a banking crisis so much as an overall economic paralysis brought on by a very sudden and very intense change of plans. And the failure of two very large and one not very large but all very unique banks could, in theory, be a blip, even if it's a blip that serves as a wake-up call that spurs changes in how regulators regulate and supervisors supervise banks.
But there's reason to think this may not be a blip, we are not out of the woods, and the reckoning will be deeper and more consequential than we think.
Kathryn Judge (16:29):
We know, for example, that office occupancy remains well below where it was pre-pandemic, and the nature of commercial real estate, means there's oftentimes a significant lag between when people are not fully utilizing their office space. And when that comes through, with leases not being renewed, and in commercial real estate borrowers not being able to pass those loans. But there's reason to be concerned that there's still significant losses in the commercial real estate portfolios, a lot of banks, and a lot of that is held by regional and community banks. There's the held to maturity losses that other banks have yet to fully realize. And so — particularly, depending on what direction interest rates go from here — there could be further losses on any fixed rate instruments that banks are holding.
John Heltman (17:32):
The studious reader of American Banker will know that commercial real estate ain't what it used to be. The pandemic and the fundamental shift between workers and work has meant that fewer people are going into the office five days a week — and more and more companies are going fully remote. That means there is a structural change in the value of office space that very well may result in credit losses on CRE loans. So while Silicon Valley Bank's failure — and, to a lesser extent, Signature's failure — weren't really a credit risk event so much as an interest rate risk event, there may still be a credit risk event still to come. And there's more.
Kathryn Judge (18:03):
Another key factor is, we've already seen some deposit outflows from banks preceding these events, because we were suddenly in a much higher interest rate environment. And there were some depositors who said, "I'm not going to leave my money bank, we're earning next to nothing, when I can put it in a money market mutual fund, it's going to pay me significantly more."
John Heltman (18:25):
Between March 8 and March 22 of this year total commercial bank deposits
This may seem like a digression, but the thing about the moment that is now in this crisis is that the question of what will regulators do to fix this tends to fall into two distinct buckets: What they will do versus what they ought to do.
There are two investigations currently ongoing at the FDIC and Federal Reserve that will both release their findings on May 1, and that's when we will know with any specificity what exactly happened, where regulators think the problems lie, what and how pervasive those problems are, and perhaps even some indication of what they intend to do about it. Federal Reserve vice chair for supervision Michael Barr has said before all this went down that he was reconsidering a regulatory framework for banks between $100 and 250 billion dollars in assets that was engineered by his predecessor, Randal Quarles, who was appointed by President Trump.
Michael Barr (19:43):
We are evaluating whether application of more stringent standards would have prompted the bank to better manage the risks that led to its failure. Staff are also assessing whether SVB would have had higher levels of capital and liquidity under those standards, and whether such higher levels of capital and liquidity could have forestalled the bank's failure or provided further resilience to the bank. We need to move forward with our work to improve the resilience of the banking system, including the Basel III endgame reforms, a long term debt requirements for large banks and enhancements to stress testing with multiple scenarios, so that it captures a wider range of risk and uncovers channels for contagion, like those we saw in the recent series of events. We must also explore changes to our liquidity rules and other reforms to improve the resilience of the financial system. In addition, recent events have shown that we must evolve our understanding of banking, in light of changing technology and emerging risk.
John Heltman (20:45):
In 2018, Congress passed and the president signed a bill, S. 2155, that gave the Fed broad discretion on how to apply post-2008 regulatory requirements on banks between $100-250 billion of assets, including how frequently those banks would have to undertake stress tests, submit living wills, hold liquidity under the liquidity coverage ratio, and lots of other stuff. As of right now, the Fed's framework takes a lighter touch with those things than there was before, and every indication is that that light touch will be replaced with a heavier hand. It's worth noting that all of those things are agenda items that were probably on Barr's radar before all of this. But the collapses of Silvergate, Silicon Valley Bank and Signature have given these reforms a new salience, and probably a new trajectory.
John Court (21:28):
I think it's, like, certainly politically expedient for certain people to blame that tailoring for that loss — for the losses at Silicon Valley and its failure. And so that may or may not make sense, but certainly I don't think anybody's done the work yet and looked at the review. I mean, for example, some people have talked about the LCR and that if the LCR still applied to banks, from 100 to 250, that that would have mitigated SVBs problems. I don't think that's true at all. But some people are sort of suggesting that. I do think that there are probably certain areas where policymakers will be looking to see what part of the tailoring framework might need some adjusting. And I you, I think you've very smartly key off of it, you know, resolution planning 165 D resolution plans for holding companies of banks between 100-250 That that requirement was eliminated after 2155. You could see that requirement may be reinstated.
Karen Petrou (22:28):
We're going to count a lot on a bank's resolution plans.
John Heltman:
Right.
Karen Petrou:
And that's fair, the bank needs to say how it's going to put itself out of business. But the fact is that the resolution planning plans have been getting longer and the cycle got [extended]... this is one of the things that's going to change. The resolution planning cycle is going to get tightened and more banks are going to come back under it.
John Heltman (22:50):
But beyond making the existing rules tougher, there's also reason to believe that more fundamental questions about the rules themselves may be called into question, particularly in the way that asset size alone has largely come to serve as a proxy for a bank's relative systemic risk, with the idea being that the very biggest banks are systemically risky, the very smallest are not, and those in the middle are in the middle. Taking a more dynamic view of what it means to pose a systemic risk makes sense in the abstract, but could be challenging to articulate as policy.
Karen Petrou (23:18):
We're not talking about marginal changes in capital requirements or relative competitiveness, we're really talking about whether certain bank business models will be allowed to survive. It isn't just size, that determines safety and soundness that just to me, is very much of a "duh" recognition. But it … the whole framework … all of the tailoring rules is asset size. Right now, what's going to be novel? And what does that mean, in terms of how the rules are applied? And will they permit innovation or continued specialized business models? I hope they do. But that doesn't mean they will.
John Heltman (24:02):
But leaving aside regulation, this experience has also called into question the role of bank supervision. Sure, these banks put themselves in a position to fail, but bank supervisors are presumably watching over their shoulder the whole time. So why didn't they stop these banks from making stupid mistakes that amounted to a systemic risk?
Aaron Klein (24:19):
What the 2155, what the rollback did was it made enhanced prudential standards, which let's say is the honors test. And it said the honor says used to be mandatory for everybody over 50. Now, you can't give it to anybody under 100. Between 100-250 Federal Reserve, you have the discretion to apply the honors test, and over 250, you have to. So why is this not relevant in this case? Number one, Silicon Valley Bank problems, didn't need an honors test to figure it out, the basic test would have caught it. This wasn't a complicated set of problems with the bank. It doesn't matter what test you have if the test is asking the wrong questions. Or if the person grading it is just writing A or B regardless of what you got right or wrong. So the problems are structural when it comes to the Federal Reserve and its regional banks in its supervisory business model. One. Two, right, the Federal Reserve said we have the option to apply it, and we will apply it if the bank is systemically significant — if its failure would create a systemic risk. So by not applying it, they're telling the world this isn't a systemic institution. Then how on earth did the Board of Governors vote unanimously to bail them out using the systemic risk exemption? One of those two things is in deep tension with the other.
John Court (25:38):
It seemed clear to us -- to me, to us at BPI -- that this was a, this was a management failure, for sure, and I've already talked about that a little bit. It seems that it's also an examination failure and a supervisory failure. One of the things that a bank examiner is supposed to do is to examine the bank for how its managing its risks. And there are basic risks that have always existed in banking -- credit risk, interest rate risk, deposit funding, funding risks, liquidity risks, you know, risks that you'll have to, you know, meet a lot of outflows at one time. And, and, and so it seems like some of the things that cause SVB failure were really basic bank management 101, and bank examiner 101 types of things. So it does call into question where was management on this, where were the examiners on this?
John Heltman (26:34):
And while regulatory burdens are somewhat tailored to a bank's asset size, Rebeca Romero Rainey, President and CEO of the Independent Community Bankers of America, says that supervisory burdens can be just as heavy or heavier on the smallest banks that are least risky to the financial system.
Rebeca Romero Rainey (26:50):
From a community bankers perspective, given the smaller scale, the scope of what an institution does, I would argue that the level of regulatory scrutiny and examination is actually higher, because they have line of sight into everything that that organization is doing. There's not a trade off that because you're smaller, if you have a smaller, lesser regulatory standard or burden, I would say that, from an examination perspective, there's actually further scrutiny planted on those community banks, because, again, you know, look at the percentage of a loan portfolio that's reviewed, or the level of engagement in terms of how these practices are, are examined, and community banks that, again, those practices and everything that we saw that that had been allowed to continue over some period of time and SVB, would argue, would not be allowed in a smaller community bank. So the unfairness is not just the unfairness of the sort of different punishment. It's more of like an unfairness — like, a supervisory unfairness.
John Heltman (27:46):
This brings us back to the question of not what will happen, but what should happen in response to this banking crisis. That blue sky thinking necessarily expands the scope beyond what regulators can accomplish unilaterally — and, perversely, reduces the likelihood of any of those things actually happening.
Rebeca Romero Rainey (27:55):
Exactly. There's both aspects of it here.
John Heltman (27:59):
This brings us back to the question of not what will happen, but what should happen in response to this banking crisis that blue sky thinking necessarily expands the scope beyond what regulators can accomplish unilaterally and perversely reduces the likelihood of any of those things actually happening.
Aaron Klein (28:15):
I mean, the first question is, should the federal reserve be in bank regulation? Should they be a bank regulator? Right, I've come to think -- I've been reading more philosophy, John, and there's a part of ancient Greek philosophy, which says that anything — any organization, any person — can only have one Telos, one true north star, one top priority. Organizational Management teaches you that if you say everything's your top priority, then you have no priorities. So what is an organization's Telos? What is its true Northstar? Well, the Federal Reserve is America's central bank. Its Telos is monetary policy. That's its true north star. And that's right. And then you say, Well, what's important as part of that, well, lender of last resort, right? And then you look at what is the Federal Reserve historically neglected? You know, we've talked at great length for many years about their radical neglect of America's payment system, which is a laughingstock globally. Bank regulation has been a problem at the Federal Reserve. We saw it in the past crisis in 2007 and 2008. Now we see it again with Silicon Valley Bank. You know, maybe the answer is less because everything you're asking them to do is not part of their Telos. And when you assign organizations things that are not their top priority, one shouldn't expect them to get first treatment.
Kathryn Judge (29:39):
My ideal right now would be to put some type of backstop into place so regulators have the courage to discover bad news they might not otherwise want to discover. And then once they discover that bad news, they engage in the closures, recapitalizations that might be necessary to really shore up the health of the banking system. So one of the things you don't want to have it just a slow simmering crisis, which is not as headline grabbing, or attention grabbing, as the panic that we saw at SVB, but they can have very adverse consequences for the health of the broader economy, because you have very tight credit conditions. And you suddenly have banks potentially competing with riskier banks to try to hold on to deposits. And so there's a number of different, not-so-great dynamics that could arise if we aren't able to make sure that banks, broadly speaking, are as well capitalized as they need to be given the potential losses.
John Heltman (30:46):
And that same principle applies beyond the banking sector. One of the most durable effects of the regulatory response to the mortgage crisis in 2008 was the migration of mortgage origination away from banking and toward less-regulated nonbanks, in large part because new rules made it far less profitable for banks to do so. One aspirational outcome of this crisis could be a renewed effort to apply the rules that have improved banks' capital and liquidity to other systemically risky activities.
Karen Petrou (31:12):
Everything you do, whether it's as a person or as a regulator has a second order effect. The Fed's thinking, "We're going to make the banking system super resilient, especially the really big banks." So they huffed and they puffed and they blew the house together. And they created the resilient banking system, which they love to keep saying, "Oh, look how resilient the banking system is." And every one of their semiannual financial reports ability reports that the banking system is super, super stable. And therefore the financial system is stable. And they keep saying this, even as more and more of the financial system has nothing to do with banks, or relies on banks for funding or interconnections into the payment system, but otherwise isn't where the risk lies. It's outside the banking system. So that's why in 2020, the Fed had to bail out the money market funds, the bond funds the corporate debt market. And they promptly went back to saying, "Yeah, but look, the banking system was really resilient."
John Court (32:18):
You saw Yellen speak about this, I think the week after the SVB failure or two weeks after the SVB failure, immediately pivoting and talking about the shadow banking system, and maturity transformation happening there. And what if what if a bank run happened, again, in the in those industries. That's where the government doesn't have the kinds of tools that they do in the banking industry to mitigate and to dampen contagion. They don't, they don't really have those tools. And so I think it is the great piece of unfinished business from the great financial crisis. And in fact, if you look back also during Covid, I mean, when the Fed was backstopping different things, you know, the banks were generally fine, but the shadow banking system was not. And that's what required nearly all of the Fed's attention during the COVID crisis. And so I think Janet Yellen is very wise and prescient to think that the risks if they came in the shadow banking system, it's unclear whether the government would have the tools necessary to fight it.
John Heltman (33:27):
We don't really know with great clarity what will come of this as-yet-unnamed banking crisis — some of my personal favorites are The Lost Weekend and Control S Delete, but I digress. We know it won't be nothing, and we have reasonable certainty that, at least in the short term, it won't involve Congress. But it has shaken people's confidence in the banking industry, and it very well may not be over. And one of the more near-term effects could be a change in the way regulators oversee the financial industry in general — and who does the overseeing.
Aaron Klein (33:55):
it does look, the absent another failure, May 1, May Day, is coming, in which the regulator's internal reviews are going to be released. I have pretty low expectations for the Federal Reserve's ability to internally review itself. However, I do think regardless of how much is swept or attempted to be swept under the rug, this structure gives Vice Chairman Barr tremendous institutional ability to reshape the career staff in soup and rag at the Fed. And I think there's going to be a reshuffling of the regulatory and supervisory staff and senior leadership at the Fed, which will have long-lasting implications. Folks that are in the know about financial regulation know the incredible power that senior staffers have at regulators, and how frequently appointed officials are unable to get around or beyond senior staff who may share different opinions. And so one of the I, I predict one of the longest tails of Silicon Valley Banks, failure is going to be the correspondent reshuffling of senior career people at the Federal Reserve.
Chana Schoenberger (35:12):
This episode of BankShot is written and produced by John Heltman. Our sound engineer is Kellie Malone, and our executive producer is Chana Schoenberger. Special thanks this week to Columbia University Law School, the Brookings Institution, Federal Financial Analytics, the Independent Community Bankers of America, The Bank Policy Institute, CSPAN, and to Signature Bank and Silicon Valley Bank for making those ads you heard at the top. If you like this episode, you should subscribe to American Banker, which you can do by visiting americanbanker.com/subscribe. For American Banker, I'm Chana Schoenberger. Thanks for listening.