Transcripts For CSPAN FDIC 20240704

Good afternoon, everyone. Thank you for coming. My name is ben harris, and as of this very morning, i am the Vice President and director for economic studies of the Brookings Institution. It is a true privilege and honor to have the opportunity to again be joined at this famed institution. There are many reasons why i found a return to brookings appealing, but a major motivation is events like the ones we are hosting today. Fdic chair marty gruenberg, who will be introduced by aaron klein and moments, was one of the key officials to help mitigate the fallouts if the Silicon Valley bank and Signature Bank failures early this year. We are very lucky to happen with us today. I suspect that this afternoons event must feel like a bit of a victory lap to the fdic chair given in 2019 he sadness very real and ward in great detail about the risk of failure by a large Regional Bank. His remarks, which are required reading for anyone trying to understand the issue, he warned of the risks posed by the failure of these banks and highlighted the destabilization risks of outside uninsured deposits while the also cautioned that specific regulatory actions taken in 2019 would weaken Bank Regulators ability to respond to a crisis if and when they occur. It is as prophetic a speech as you will see in public policy. Of course, chair gruenbergs track record shows he is more than just a financial crisis clairvoyant but has also played a massive role in the financial crisis. In march of this year, when svbs concerns materialize, i was serving at the treasury department. My role at treasury meant i was afforded a front row view to the crisis and had a deep appreciation of the Economic Risks associated with widespread regional Bank Failures. I had two broad takeaways. The first is that precarious weekend in march 2023 was the most concerned i had been about the state of the u. S. Economy from january 2021 today. The statement is saying a lot, as this period included the omicron and delta variant, russias invasion of ukraine, yearoveryear cpi inflation topping 9 in june 2020 two, and widespread supply chain disruptions that threatened to leaves for shelves bear around the holidays. Our macroeconomy was on a razors ad for a couple of weeks and it was not possible that last spring would be the start of a painful recession ignited by the run at a bank. Threading the needle in march 2023 and preventing widespread Bank Failures. The experienced guidance from banking officials was crucial to preventing a broader crisis, and less adept leadership could have led to a loss in our Banking System and severe financial disruption. Policymakers often do not get credit for crises averted, but here, namely yellen, bloomberg, freighter, and powell and their staff, prolonged their ongoing economic expansion good to close, let me know that events like today highlight the value of working as a duchenne in general and the Broader Community in general. Brookings scholars tackle our most pressing economic and social challenges, making from policy to Financial Regulation, and in the policy arena, being an effective policymaker means a commitment to continue learning and a drive to seek wisdom from policymakers like marty gruenberg, which is why todays event is so relevant. If you devote aaron klein and marty for making this event happen. I look very much forward to this discussion, and i now turn it over to brookings dudes working iss aaron klein. Mr. Klein thank you for joining us in person, online, or however you find it. I am making a chair on the center of regulation and market, and in Financial Regulation, there is a cycle. Theres a crisis. Theres new regulation, theres the regulation, and theres a crisis. That cycle has played on for a long time, and we can debate what contributes to what, why the cycle of phenomenon happen, but they do. We here are focused on this throughout that cycle. It becomes very trendy to lean in when there is a crisis, and as the crisis is forgotten, the attention goes away, and issues remain. As we try to get a better and more stable and secure and stronger economy, it requires a better Financial System and Higher Quality relation. In fact, we were more concerned in march during the financial crisis and all the other litany of economic threats to underscore why Financial Regulation is so critically important in why we keep returning to this. It is my honor and privilege to return to the brookings stage fdic chair martin gruenberg, to give you more background and history on marty, marty has been a board member of the ftse since 2005, for 18 years, which the fdic turns 90 this year, so roughly about 20 at the fdic posing history, marty has been there. He has seen it. 2005 was the year he was first confirmed. Was also the first year in American History without a single bank failure. 2006 was the second year. People mistakenly took the impression that the absence of any Bank Failures that we were wellregulated able to dispute the idea that the Financial System started in 2007 and found their strength and safety in regulation. So, by the way, the next year in American History without a single bank failure, 2020, 2021, and here we are, 2020 three, having gone through this crisis in the spring, and the question is not we will talk a bit about what caused it, what happened, but what are we going to do Going Forward . I can think of nobody more well situated, experienced, who has fought through and experience these issues throughout the entire cycle than chairman gruenberg. I am curious to see how he will approach it, given the experience of the spring, the experience hes had before, and given the very issues he has raised on this stage, as Vice President harris called in 2019, when he warned that our system had become overconfident, that we were in a good place to deal with the failure, because whenever you think about how i feel your was del clement was very clear we were not in a structurally strong place to handle what started out as one failure and very quickly ensconced other massive Financial Institutions. So, mr. Chairman, i think the floor is yours, and we are eager to learn what we ought to do to make the system better, stronger, and more resilient in the future. [applause] chair gruenberg good afternoon, everybody. Let me congratulate you on being here in washington in the middle of august. [laughter] i obviously did not expect this large a crowd, this time of the year, so we appreciate you all coming. I want to also thank ben and aa ron for their very kind comments. As a bank regulator, candidly, im not used that, so i will take it where i can get it. I wanted to begin by thanking the Brookings Institution center and my friend, aaron klein, for inviting me to speak here today. As both ben and aaron mentioned, four years ago, i did have the opportunity to speak at brookings about an unappreciated risk, large Regional Banks in the United States for better or worse, it is probably fair to say that risk is perhaps better appreciated today than it was a few years ago. The key point made in that speech is that while Regional Banks may not be as large and complex and internationally active as the socalled global, systemically important banks, the gsibs, they posed risks. That was the key message of late speech. In particular, the speech pointed out, the regulatory banks is a core vulnerability. That alliance have the potential to create a destabilizing contagion effect on other banks. If one Regional Bank were to fail and uninsured depositors took license. And we had evidence i did not make it up there was evidence to support this. In order to illustrate the point, the speech contrasting the failures of Washington Mutual bank and indymac bank during the Global Financial crisis of 2008. As both aaron and been mentioned, ive been around long enough to remember those experiences. Washington mutual, a 300 for billiondollar institution, was the Largest Bank Failure in u. S. History. Later, it was resolved at no cost to the Deposit Insurance Fund, and uninsured depositors suffered no losses. Indymac, which was a 30 billiondollar, 1 10t ofh the size of Washington Mutual, get it proved to be the costliest failure in fdic history up to that point, had over 12 billion, and uninsured depositors suffered losses. Now, in number of reasons led to the different outcomes in those two cases, but it particularly important when im going to talk about today was that Washington Mutual has sufficient unsecured debt to absorb all the losses of the bank, and indymac had none. If we had any doubt about the challenges in resolving Regional Banks and the potential for significant adverse impact on the Financial System, those doubts were dispelled by the failure in the spring of three large Regional Banks Silicon Valley bank, Signature Bank, and First Republic bank. While the fdic resolved all three of those institutions in a manner that mitigated Systemic Risk, that outcome was by no means certain. In particular, the resolution of Silicon Valley bank and signature require the use of extraordinary authority by the ftse, the Federal Reserve, and the treasury, the socalled Systemic Risk exception, under the federal deposit insurance act, to protect depositors, setting aside the least cost requirement to the Deposit Insurance Fund. That experience should focus our attention on the need for meaningful action to improve the likelihood of an orderly resolution of large Regional Banks under the federal deposit the expectation under the federal deposit insurance act, without the expectation of invoking it. So i would like to discuss this issue in light of our recent experience, and in particular, i believe there are important changes to capital regulation, Resolution Planning requirements, including longterm debts, bank supervision, and deposit insurance pricing that would make a repetition of the current much less likely. So just to provide context, peoples memories are remarkably short, even two or three months. Just to provide context, and may be worth recounting events of earlier this year, just as a reminder. When Silicon Valley bank failed overnight, on friday, march 10 i do remember it well the fdic initially established what we call a Deposit Insurance Fund National Bank under fdic control , so that depositors would have access to their insured funds on the monday after failure. Uninsured depositors would have access to a substantial portion of their funds through the payment of what we call an advanced dividend, but a portion of those uninsured deposits would be holdback in receivership and would extend losses, depending on the losses to the Deposit Insurance Fund. That is the way it normally works. Now, as it turned out, the prospect that uninsured depositors at Silicon Valley bank would experience losses alarmed uninsured depositors at other similarly situated banks, and they began to withdraw funds. Signature bank and First Republic bank experienced heavy withdrawals. A contagion effect became apparent at these and other banks. There was clear evidence that the failure of a Regional Bank, in which uninsured depositors faced losses, could cause genuine systemic disruption. So in response, on sunday, the authorities invoked the Systemic Risk exception to the fdics least cost test. This allowed the fdic to protect all depositors at Silicon Valley bank and at Signature Bank. They were placed into separate bridge banks under fdic control, Silicon Valley bank to flagstone bank, asus is very great, and Silicon Valley bank was sold to weeks later to First Citizens bank of north carolina. And, as you will know, First Republic bank in california also experienced a large outflow that weekend and managed to survive at least the bank the weekend. The bank tried to raise capital but was unsuccessful. The state of California Closed the bank. The fdic had time before the bank was closed to conduct a Competitive Bidding process, which resulted in Jpmorgan Chase submitting the least cost bid and submitting all of the deposits of First Republic. The winning bid had the insured depositors under the leastcost test and did not require a Systemic Risk exception. In brief, that was the story in march and april. So what should we learn from this episode . What should we take away from this experience . The three banks that failed this spring shared comment characteristics that made them more vulnerable. Reports from the Federal Reserve and the fdic on the failures of Silicon Valley bank and Signature Bank, respectively, found that they were poorly managed and not responsive to supervisory feedback, and their supervisors were not forceful enough and requiring them to take corrective measures. In addition, the three banks grew rapidly and relied heavily on uninsured deposits for funding. Two of them had uninsured deposits approximating 90 , about 90 of their funding, and a third approached 70 . Further, two of them had unrealized losses on security or low you will loan portfolios that were large. All three had little or no longterm debt outstanding. These characteristics proved to be a toxic combination when each bank faced stress. In addition, the Resolution Plans that have been received from two of the three banks were limited in content. So theres some obvious lessons here that we now have an opportunity to address, and that is what i want to talk about. Let me begin by Capital Requirements and the capital treatment of these unrealized losses on the Balance Sheets of the banks. In late july, the three federal baking banking agencies usually notice of proposed rulemaking to implement the basel three capital rule. Theres a lot in that couples proposal, as you probably know, what is a step to addressing one of the key vulnerabilities to failures. Under the proposal, unrealized losses, which flow through regulatory capital for all banks , is over 100 billion in assets. That means, to be clear, that those banks, in order to maintain their capital levels, would have to retain or raise more capital as these unrealized losses occur. Its worth noting in regards to Silicon Valley bank that those its failure was caused by a liquidity vine, the loss of market confidence that precipitated the run was by the sale at a substantial loss that raised questions about the capital adequacy of the bank. This loss of confidence follow the announced self liquidation of another local institution, silvergate bank, of bay area, in case you have all forgotten about that is addition. That paint had announced its sales available at a substantial loss and plan capital rates just a week earlier. At Silicon Valley bank, they required to hold capital gives the on realized losses on its available sale facilities as the proposed basel iii framework would require, the bank might have averted the loss of market confidence and liquidity run, it simply wouldve had more capital against those assets. Not complicated but relevant. In addition to capital, the banking agencies will, in the near future, propose a longterm debt requirement for banks with 100 billion or more in assets. In october of last year, the fdic and the Federal Reserve jointly issued whats called an advanced notice of proposed rulemaking on resolution related Resource Requirements for large banking organizations. Based on that feedback from that anpr, advance notice of proposed rulemaking, the agency is, that will be controlled by the office of agency, the three agencies works to develop the proposed rulemaking, and the three agencies look forward to acting on their proposal soon. The agencies expect to propose that each covered bank be required to issue longterm debt sufficient to recapitalize the bank and resolution. While many Regional Banks have some outstanding longterm debt, the new proposal will likely require issuance of new debts. We expect the proposal to provide for a reasonable timeline to meet the debt requirement and to take into account existing debt outstanding. As indicated, the proposal is likely to apply to all banks over 100 billion in assets, and outcome certainly influenced by the events of earlier this year. Such a longterm debt requirement bolsters Financial Stability in several ways. First, it absorbs losses before the depositor crash, the fdic and uninsured depositors take losses. That lowers the incentive for uninsured depositors to run for second, even if the institution fails, the buffer of longterm debt reduces cost to the Deposit Insurance Fund and make them more likely that a closing weekend sale can comply with the statutory leastcost test and avoid the need for a Systemic Risk exception. Further, it creates additional options and resolutions, such as capitalizing the field bank under new ownership, or breaking up the bank and selling portions to different acquirers as an alternative to a merger with another large banking institution. Further, since it is longterm, it will not be a source of the quiddity pressure when problems of liquidity pressure when problems become apparent. Investors know they will not be able to run when problems arrive. It gives them a greater incentive to monitor risks and exact pressure to better manage risk. Finally, because these instruments are publicly traded, their prices serve as a signal of market risk in these banks. So that is longterm debt. Now let me turn to the Resolution Plans, which i think are a critical complement here. Unimportant complementary longterm debt requirement is meaningful Resolution Plans for these large Regional Banks. Theres currently a requirement for these banks to file plans that address the resolution and insured depository instructions under the federal deposit insurance act. Just to be clear, that is separate from the dodd frank act title i resolution that apply to the largest bank holding companies. The fdic will soon propose changes to the idi pla requirementsn that would make them significantly more effective. We want to walk through this, because this is an important part of addressing the issue. The idi plan, or insured depository is addition planned, was first adopted in 2011. It requires banks with over 50 billion in total assets to periodically submit Resolution Plans, to provide the fdic with information about the bank that is essential to effective Resolution Planning and to support the execution of a resolution if necessary. Demonstrating how they can be resolved in an orderly and timely manner in the event of receivership your over the years the fdic has given banks feedback and guidance with respect to their plans and has considered different approaches to planning requirements. The fdic has content has continued to consider ways to improve the effectiveness of these plans and to set clear expectations for banks with respect to their content. We have determined that a rulemaking is the best approach to meet those goals in a way that is both transparent and effective. And to that end the fdic plans to issue a noticed of notice of proposed rulemaking in the near future that will be a comprehensive restatement of the rule for notice and comment. In developing the proposal we have incorporated the most useful elements of past feedback and guidance as well as Lessons Learned from past plans and resolutions. Institutions i should note under 100 billion dollars can also present resolution challenges and we do not propose requiring full plans for these banks under the strengthened rule. We will propose requiring certain information from banks over 50 billion to inform our Resolution Planning. The importance of this work was underscored this spring. While Silicon Valley bank and First Republic had been required to file Resolution Plans which provided basic information that was useful, far more robust plans would have been helpful in dealing with the failure of these institutions. Signature bank failed just before it wouldve been required to file its first Resolution Plan in june. Let me give you some examples. Some of the elements that wouldve been helpful this spring to include in these plans would be the bankscapability to properly as that which a virtual Due Diligence data room and populate it with enough information for interested parties to bid on the bank or certain of its assets to allow an effective bidding process. Maintenance of information necessary for operational continuity of the Bank Including a more thorough description of key personnel and retention plans, critical thirdparty and shared services, and payments and trading activities. And third, the ability to describe Communication Systems and strategies for reaching internal and external Key Stakeholders in the event of a resolution. These were all things we had to deal with, frankly, in march and april. While each of the three Bank Failures this spring ultimately concluded in a sale to a single acquirer, it is also clear that a sale to a single acquirer given the size of these institutions may not always be possible. Therefore the proposed rule will seek to expand the options available to the fdic. The proposed rule would require a bank to provide a strategy that is not dependent on an over the weekend sale. It would require a bank to explain how we could be placed into a bridge, how operations can continue while separating itself from the parent and its affiliates and the actions that would be needed to stabilize the bridge. The rule would also require bengs to identify franchise components such as Asset Portfolios or lines of business that could be separated and sold in order to provide additional options for exiting from resolution by disposing of parts of the bank to reduce the size of the remaining institution and expand the universe of possible acquirers. A stronger Resolution Planning requirement for large Regional Banks combined with a longterm debt requirement would provide a much Stronger Foundation for the orderly resolution of these institutions. It is really as straightforward as that. So finally, the Bank Failures earlier this year highlighted the vulnerabilities that can result when banks have a heavy reliance on uninsured deposits. The significant proportion of uninsured deposit balances exacerbated deposit run vulnerabilities and made all three banks susceptible to contagion effects from the quickly evolving financial developments. Heavy reliance on uninsured deposits for funding carries a number of Liquidity Risks, just to be clear. First, large uninsured depositors such as businesses, nonprofit organizations, and wealthy depositors are likely to be more sophisticated and more attuned to market developments and read then retail depositors and thus may be more likely to withdraw funds more quickly. Second, such deposit accounts are often concentrated in a relatively small number of depositors also making them more susceptible to runs. Third, electronic thinking services allow for the instantaneous withdrawal of large uninsured deposits and finally liquidity runs on uninsured deposits can be amplified and exacerbated through social media. For the Banking Industry as a whole, reliance on uninsured positive funding has been increasing significantly. The fdics report options for reform that we released in may notes that in the aggregate uninsured deposits rose from about 18 of domestic deposits in 1991 to nearly 47 at their peak in 2021, higher than at any other time since 1949. The aggregate concentration of uninsured deposit funding has come down slightly from 2021 but still remains high. Concentrations of uninsured deposit funding are more common among large banks. At year end 2022, bangs with more than 50 billion in assets were approximately 1 of all bangs in the United States but held nearly 80 of all uninsured deposits. And the majority of domestic deposits that were uninsured, the majority were uninsured for more than 40 in those institutions. Of the reliance on uninsured deposits is a concern for larger banks it is not exclusively a large bank issue. Uninsured deposits comprised the majority of domestic deposits for about 15 of bangs between one billion dollars and 50 billion in assets. As noted previously, uninsured deposit funding tends to come from a relatively small number of deposits. You get the drift here. At the end of 2022 less than 1 , less than 1 of all deposit accounts had balances above the deposit insurance limit of 250,000. But accounted for over 40 of Banking Industry deposits. At the time of its failure, Silicon Valley banks 10 largest deposit accounts collectively held 13. 3 needless to say, more forward leaning supervision of large Regional Banks is certainly a key lesson from the events earlier this year. In particular the fdic is reviewing whether its supervisory instructions on funding concentrations should be bolstered to better capture risks related to high levels of uninsured deposits generally. For example, fdic examiner instructions could establish a specific threshold to devote supervisory attention to the concentration. Regulators and other stakeholders may also benefit from more granular and more frequent reporting of deposits and needless to say these are matters of priority attention for the fdic. In addition i might add riskbased deposit insurance pricing can the turbines from allow it relying too heavily on uninsured deposits and to maintain fairness by charging bengs with unstable Funding Sources for the risk that they pose to the Deposit Insurance Fund. For this reason it is worth reexamining the ways in which deposit insurance pricing captures the risk of uninsured deposits. Calibrating precisely the risk of uninsured deposits is a challenge therefore while deposit insurance pricing may be a useful tool, it is probably best seen as a complement to other tools to that mitigate the risk of overreliance on uninsured deposits. So, in conclusion, there is an end here, in conclusion here the failure of three large Regional Banks this spring and the need to exercise a Systemic Risk exception to protect uninsured depositors demonstrated clearly the risk of Financial Stability that large Regional Banks can pose. It makes a compelling case for action by the federal Bank Regulatory agencies to address the underlying vulnerabilities that made the failure of these institutions possible. The federal banking agencies have the Statutory Authority to address these vulnerabilities. As i have outlined, the agencies actions include requiring longterm debt, capital recognition of unrealized losses for availableforsale security, strengthened bank Resolution Plans as well as enhancing supervisory attention to uninsured deposit concentrations, and considering adjustments to riskbased pricing for deposit insurance. Once implemented these measures will mitigate these risks and enhance the stability and resilience of the u. S. Banking system. These are perhaps lessons we should have learned from the 2008 financial crisis, however, the events of this year provide us with another opportunity. This time, if i may say, i dont think we are going to miss. Thank you, all, very much. [applause] you made a lot of news and gave us a lot of room to think for a monday in the middle of august. Lets start with where you wind up which is you just and the value of having that on subordinated debt kind of making a huge difference. Imagine that your speech at brookings in 2019, that requirement had been put into place, the requirement coming from the unsecured debt. Would that have been enough to avoid the Systemic Risk resolution . Chair gruenberg you are raising a hypothetical but i think, without a doubt, it would have helped. And i try to outline that. You cannot say with certainty it would have avoided the failure. I think had they had an unsubstantial amount of unsecured debt that wouldve been reassuring to uninsured depositors and might it influence their behavior. And even if it had not been sufficient to avoid the run and the banks still failed, having that unsecured debt as a buffer would have mitigated the loss to the deposit insurance and might have put us in a position to avoid exercising a Systemic Risk exception. Whether it could have avoided the failure altogether, we cannot say. I think there is a chance of that. And even if it would not have, it could have been quite beneficial in mitigating the impact of the failures. The common sense of extending such a requirement to the Regional Banks to me is pretty persuasive. To be clear, i think the failure was a good thing in the sense that that bank deserved to fail. It was a poorly managed institution with an unstable funding base and a bad business model. Stopping bank failure, speaking just for myself, stopping the use of Systemic Risk perception is very different. And i take it that it is your belief that the imposition of this loss absorbing capital would have impacts on both a particularly on stopping the need for Systemic Risk exception authority in creating enough for buffer above where the taxpayer and the fdic fund lay. Chair gruenberg i think that is true. But if i may say sitting where i sat the possibility of avoiding the failure and the distraction to the system, if that were an alternative scenario that would have been of great value to the system, to the Financial System and to the economy. So if i may say i dont discount that potential benefit as well. Aaron there will be a lot of focus on as you said you already had a anpr out and now you are moving to a notice of public rulemaking. The second part has to do with the Resolution Plans. And the upcoming rule on that. It is easy to think of those separate and apart and not together. What do you think the combinatorial value is of having both of these together as opposed to just saying, we have Resolution Plan in economics we sometimes look for interactive variables, what are the combinatorial effects . Chair gruenberg from the standpoint of the agency actually responsible for executing the resolution in an orderly way, having the loss absorbing resource in a sense as a threshold, but you cannot overstate the value of having the information and the strategic thought and the option a la thank you prepared and the optionality prepared ahead of time that can be used to deploy the additional loss absorbing capability which is why we placed a lot of importance on the two going together, acting on the longterm debt requirement and significantly strengthening the Resolution Plan requirement for these Regional Banks as going hand in glove and particularly giving us as the agency the information and the Strategic Thinking well ahead of time. It would put us in a much stronger position and i think taken together it is just common sense. And a much Stronger Foundation for dealing with the possible failure of one of these institutions. And look, if we, in addition and we have already proposed it, requiring capital against these unrealized losses, let me put it this way, hypothetically just to be clear, but if we had had a buffer of unsecured debt for Silicon Valley bank, if we had had a robust Resolution Plan, and if Silicon Valley bank had been required to hold capital ahead of those unrealized losses, you know, it is hypothetical but we could have had a different scenario. I think that is plausible. I think that is plausible and given the cost and risks associated with the failure, the potential failure of the institutions of this size, the policy case for having these requirements to me is, as i say, pretty compelling. Aaron you make the point about speed and time and i struggle with this because every day has 24 hours whether it was monday, march 8 or friday march 11th, they both had 24 hours but it sure felt like one was a longer day than the other. And the speed with which your agency had to react monday, the market is opened and no one was talking about svb that much. The equity markets and then friday, proof. And then friday, poof. Is that why having these plans ahead of time is so valuable . Chair gruenberg that is part of the story and it raises the local entity risk of other deposits which is the other part of the story and i think these measures actually help with. But i think we learned, we did learn a lot of lessons about Liquidity Risk in the episodes earlier this year. Meaningful difference even from the 2008 episode. The speed of the run within a 24 hour period bringing about the failure of a substantial 200 billion bank almost overnight was eyeopening. And to me it adds to the need to take meaningful actions. I think the things we outlined in addition to the supervisory attention of uninsured deposits why any bank should have 90 reliance is a serious question to ask and a serious supervisory matter. Supervisory matter for examiners to Pay Attention to. And deposit insurance pricing obviously would be relevant there as well. And an important point to keep in mind here is these are all things the agencies currently have under our authority. We dont have to look anywhere else. We have the authority now to take these steps that would be, i think, meaningful and effective and could really make a difference the next time around. But we need to take advantage of the opportunity now so we will be in a stronger position in the future. Aaron picking up on that authority, these are legal authorities you have now after 2155 which rolled back certain provisions of doddfrank. There has been a lot of debate pointing left and right about what impact that law had as it related to the failures this spring. How do you weigh in on that . Chair gruenberg i am not frankly looking to point fingers. But the conclusion i take away from this episode is that banks that have 200 billion in assets can in the right circumstance result in significant Financial Stability risk. And i made this point before and i made it again today in thinking about our prudential requirements for capital, for longterm debt, for Resolution Plans, for liquidity, i think we need to keep that in mind and it ought to be part of our thinking as we establish these standards. Aaron as i turned to a question that we received from the internet and then we turn to a question from the audience. You guys are on deck. Jim from great point financial, he asked a question about the speed of payments including the speed of fed now. You mentioned a couple of times about payments. The Federal Reserve just this in july released their platform. Some people speculate that may play a role in bank failure. Is the speed of the retail Payment System a relevant factor for these types of bank runs . Chair gruenberg i think it is a practical matter im not sure how a run could get much faster candidly than what we experienced in march. The affinity for these large uninsured depositors, they have the capability now of instantaneous electronic withdrawals and deposits. That can cause immediate liquidity crisis for an institution. On the retail payment and, i dont think that will change that fact. I think we are already there in terms of the liquidity speed and risk. And this goes back a long way. It is not even that newsy. The large and sophisticated depositors ability to make large withdrawals has been around for a while but it has really demonstrated itself in these recent events. Aaron this speed a Large Organization has to move its money that was the question online. Now we turn to questions in the room. Thank you for the informative introduction. You addressed both of these in your presentation but criticisms from the left and the right at the most philosophical level we would like to hear u. S. Bonds. From the left is the criticism that this was all about bailing out millionaires and not the average american. The vast majority of uninsured are very wealthy depositors. Why are we not letting them take care of themselves . And from the right the criticism is, if you teach the market that the government in whatever form is always going to come in and bail out everybody no matter how reckless management or depositors are, they will always be bailed out, then you do not give an incentive. There are criticisms from the left and the right at the philosophical level. It would be helpful to hear your response to both. Chair gruenberg those are fair points candidly and it is why frankly i feel such an urgency to address the vulnerabilities that make that made what i think was a necessary action to take with regard to the Systemic Risk exception. It was a very consequential decision that i think we would have preferred to avoid for the obvious reasons. I think the evidence was pretty clear particularly following the failure of Signature Bank and the pressures that were evident to the regulators and stress on other institutions that we had a genuine Financial Stability risk here. And that if we did not act, the repercussions for the system could have been very significant. I think that was the judgment. You can secondguess it. But based on the facts at the time i really do not secondguess it and based on the experience since, frankly, i dont secondguess it. But that being said, we should not underestimate the consequence of the decision as you i think appropriately, and others, properly point out which is why we really need to take meaningful actions to address these issues. Thank you for your remarks. I wonder if you gave any thought and the old days when there was a bank run would run to the bank and line up and get your money. Now you do not run to get your money but you run to move your money and in this case money is all being moved to the g sids. Uninsured deposits are still uninsured deposits, they are just in a different place where there is a belief that the government will never let them fail. Arent we really dealing with some of the symptoms, albeit important to do at regional levels. It highlights the bigger problem still hanging over the country from the g sids. Have you given any thought to that . Chair gruenberg it might surprise you but the answer is yeah. [laughter] look, there was some of that but actually, according to the data that we have, perhaps less then what was commonly thought, most of the liquidity that left the regional bengs was actually going to nonbank Financial Institutions by depositors seeking higher yield rather than into the g sids. But it raises a fair point. And so for a long time we had been preoccupied with thinking about the resolution of g sids. And then we woke up and realized these Regional Banks can cause a lot of trouble and we have now had an episode where that has been demonstrated. I think the attention on the g sibs is still critical. It is an enormous challenge. I would argue and this is another speech or discussion about the framework we have put in place in regard to the g sibs in terms of a lack of longterm debt requirement for them and an array of authorities under title 2, the doddfrank act particularly relating to Financial Derivatives and the ability to place a consolidated company, meaning a Holding Company and affiliates in addition to the bank, it gives us a framework potentially to manage the orderly failure of one of these institutions but we have not executed it yet. One should be, to say the least, modest with regard to the decisions made. I do think we have a framework in place that holds that potential but maybe that is another conversation a conversation for another day. Aaron so, we would be delighted to have you come back for another conversation. I would be remiss if i did not point out that you were here talking about Digital Assets beaking about that being prophetic and the warns of Digital Assets entering into the Banking System last summer when there was a big hotshot Company Called ftx going around. When there were banks leaning into crypto of which we focus a lot on at svb. You did a good job in your speech about pointing out the silver gate, the first of the four which was the most heavily crypto. A subject for a different time. We will bring you back to talk about that. One final since it is a subject that is important, you raised that money flowing out of the Banking System to nonbanks seeking higher yields. Some people might interpret that to a reference to money market mutual funds who are nonfederally insured, vehicles who per our first question had received government bailouts from the treasury and the Federal Reserve both in the 2008 financial crisis and again during covid. We would be odd to think about money leaving the Banking System that is highly regulated with regulators with the authority to provide the Systemic Risk exemption to money market mutual funds where no such authority exists from their market regulator. We get the bailouts phenomenon. I have been critical in that space. I thought your speech did an excellent job of reminding that on friday you did not invoke the Systemic Risk exemption, you invoke the depository resolution system that would have set up a system in which these 10 large uninsured folks wouldve received some losses and it was not until sunday that you made that choice. Why am i wrong . Why was at the right ways to make . Why was that the right choice to make . Chair gruenberg by sunday it was quite clear from where we were sitting that the system was at risk. That the contagion effect through uninsured deposits that had brought about the failure of both Silicon Valley bank and signature and and First Republic was hanging by a thread that weekend and could have failed and ultimately did a few weeks later. And there were other institutions under stress. If we had not acted it was really not clear how far this could go and it had the potential frankly to go up the chain of the system and down the chain of the system. The responsible officials at the three agencies involved under the law the board of the fdic and the board of the Federal Reserve have to vote to recommend the exercise of the Systemic Risk exception and then the treasury secretary in consultation with the president have to make a determination to exercise the authority and frankly by sunday all of the responsible members of the fdic board and the board of governors at the fed unanimously voted to make that recommendation and then the secretary in consultation with the president made the determination. I think the risk was real. And i think if we had not acted we would be in a worse spot today. So i dont secondguess it. It was not something we wanted to do. And as i indicated it was consequential and quite critical that we learn to take actions to avoid a reoccurrence. But do i have second thoughts, and believe me, i am a professional in that category, i dont have second thoughts on this. Certainly on our actions at the time and based on ensuing events. Aaron one thing you learned about working in the senate is the chairman always gets the last word. Thank you very much, chairman gruenberg. [applause] [captions Copyright National cable satellite corp. 2022]