Nt is hosted by the brookings institution. David good morning, everybody im director of financial policy here at brookings. Id like to welcome you to this event, both the people in the room and people watching remotely. Our subject today is what lessons we have learned from the really interesting episodes of march, 2023,. A year ago the Global Financial system sthiferred most significant banking stress the Global Financial crisis of 20072008. As you all probably know, Silicon Valley bank failed prompting the fdic take it over in the middle of the day couldnt even wait until the weekend, which is really unusual. Its tempting to see this as a oneoff event. Silicon valley was, for want of a better term, unusual. Almost all its deposits were uninsured, it was woefully unprepared for an increase in Interest Rates, but it was followed by what some have called the panic of 20 if thenature bank and First Republic and oversea credit suisse. To arrest what u. S. Authorities feared was a spreading and destabilizing bank run u. S. Authorities invoked Emergency Powers to cover all uninsured deposits and create an unusually generous emergency lending facility. This these actions stabilized the Financial System and they shielded the economy from harm. The recent troubles of new York Community bank corps and the unfortunately named Republic First Bank corps reminds us theres still banks still in trouble, particularly these who have invested in commercial real esate. So i think its understood that Bank Failures are inevitable, despite the rules about capital liquidity andk since the Global Financial crisis. Today we ask what lessons we should learn from the march, 2023 episode, including steps that policymakers, regulator supervisors, bankers should take to reduce the risk that the failure of a couple of banks not the biggest banks, can threaten the stability of the entire Financial System. And end up with taxpayers riding to the rescue once again. Somebody, im not sure who is originally responsible for this phrase, i heard it first from claudia goldman, economic historian who won the nobel prize recently you dont know where youre going unless you know where youve been. So today we start with a panel that im moderating that will look specifically at what lessons we should learn about supervision, regulation, Bank Risk Management and what should be changed. Im please to have had a very good panel, to bias adrian director of the Capital Markets of i. M. F. Where hes been for seven years. Before that he spent 13 years at the new york fed. He and his colleagues at the i. M. F. Just today published a report on what we learned from what happened on march 20if hes going to draw on this report about supervision which has been a korchm. F. For a long time. Sue lan mclaughlin is on the yale program of Financial Stability, a 30year veteran of the new york fed, who importantly for this conversation oversaw the lender of last resort function at the new york fed and as soon as the air Traffic Controllers allow his plane to land, well be joined by bill dencek, who was chair and c. E. O. Of the eighth largest bank in the u. S. , he joined p. N. C. In 2002 and has been c. E. O. Since 2013. Our plan is, im going to moderate a panel here. I hope we have time, were kind of compressed with time. We have two 45minute panels. This panel will be followed by a conversation with my colleague aaron klein who will hold with Patrick Mchenry the republican congressman from north carolina, who is now chair of the House Financial Services committee but was massachusetts famous when they was interim speaker, he was the guy with the bow tie who smield broadly when he finally got relieved of that great job of being speaker of the house. And aaron is going to moderate a that on resolution, the doddfrank act told us we werent going to have to have a mores rekeufs bank because we set up a resolution to avoid this, it wasnt invoked for various reasons. So what have we learned about resolving . Re about resolving failed banks . His panel will be jared banks garycon. , fo Economic Council and vice chair of i. B. M. And alexa filo, senior policycans for financial reform priestly worked for Deutsche Bank and u. B. S. And was for 13 years a bank examiner. She can tell us works and why they miss these things. What were going to do, im going to to ask tobias first to talk about Bank Supervision and what we learned about Bank Supervision and its weaknesses in the recent, or the yearago tobias david, thanks for hosting this event and thanks for brookings staff to organize. So the oneyear anniversary for what we call the banking turmoil as opposed to the banking crisis, the banking turmoil of think happened about a week from now, one year ago. And let noting, you know that the main culprit was the noafght institution that ended up in in distress. When you look at the business model, of s. V. B. , but also other banks in distress last year, you know it was highly concentrated exposures on both the asset side and liability side of the Balance Sheet. A huge amount of risk, a huge amount of liquidity risk, a large dependence on uninsured deposits highly concentrated, you know depositor base. Basically the Silicon Valley firms. And you know its its the management that led to the failure of the institution. I think the policy question is, could there have been more action to contain the broader fallout from the failure. As you noted in the remarks, banks will fail. Badly managed banks will fail. That is that is how life goes. How corporate life goes. But you know, there was first spillover fact so in fact, thinking back of last year, both the Federal Reserve and the fdic together with the treasury and ultimately the white house you know, had to take emergency measures, they used Emergency Powers in the case of the Federal Reserve, certain lepping powers and for the the Systemic Risk extension of the doddfrank act. So those are both Emergency Powers that had to be deployed in order to contain the fallout of the failure of these Regional Banks. And you know, expose this was very successful but it was a pretty heavy sledgehammer. They rolled out, you know, all the Crisis Management tools available, making uninsured two of those institutions. Lending with zero haircuts at the discount window. These are very aggressive actions. Could more have been done to prevent even going there . So what is interesting when you look at the history, you know a number of reports have been written by the Federal Reserve by the fdic, that look in great detail as to what happened. The interesting thing there is that supervision im going to focus on supervision here, supervisors did flag the issues at svb for months. Even years in advance. So they wrote supervisory letters to the management of s. V. B. And other constitutions flagging the liquidity problems, the Interest Rate exposure, the failure in risk the letters were being sent. What it did not do is to use their powers to get a commitment by management to remedy those issues. Right . So the way we describe it in the painer up is that there were supervisory hesitations. The supervisors hesitated to act vely to, you know, get agreement from management to fix the chart. The issues are there, management basically ignored the letters right . And you know, what is striking is, in the u. S. , unlike many other countries, in the u. S. Supervisorsegal power to take aggressive actions. Supervisors have all the legal basis to very, very forceful but they were not. Its a hesitation of the supervisors that need fixing. They did see many of the problems but they hesitated to you know when you think about the ex anter regulation, sorry the prudential approach, there are three pillars. Theres regulation and there were issues with regulation. Happy to talk about that. Theres supervision. And the issue with supervision was the hesitancy. And then theres the market discipline. I would argue all three have the supervision was theres. Sation as opposed to, you know, the legal powers or the economy or other things. Which im oft time which are often times the issues we see in countries. David so whats the solution to addressing supervisory hesitation . Is it bad incentives . Politics . What held them back and how do we change it . Tobias what is interesting when you look at the supervision in the federal Banking Institutions in the u. S. , after the crisis, there was a massive restructuring on supervision focusing on david on the globally to defensive system. This is an acronym free zone. Tobias so supervision scaled up the senior i have to supervisors engaging with being much more forwardleaning using stress test as a key tool to you know, forward looking analysis in in looking at liquidity and capital issues, at quality issues. Always seeing that level of engagement. At the Regional Banks that was not being done. In fact, you the the u. S. Introduced its regulatory tailoring and its called regulatory tailoring but it was regulation and supervision that was tailored. So that the smaller Regional Banks between sorry between you know the small, the Regional Banks were not subject to the same regulations or the same supervision. So you know, the regulations we do think needs fixing. But in the supervision its about, you know, the culture of the supervisors. How supervision is managed. You know. Many of the powers are already there. David so, susan, the lender of last of Central Banks historically dates 100 years more back. I guess to walter badgett. Is that banks have very ill liquid assets, loans to marges to mortgages and Business Loans. Very lities that can run. Just like in the mary poppins movie, you can have a bank rto get their money out and the bank has assets that are still good, but thaw dont have the cash to pay out. And we learned during the Great Depression that that screw up the whole economy so we set up a sort of deposit insurance to discourage runs, but we want its not a bail utah of the banks when the central when the fed or the bank of england says if you have good assessets as collateral, well lend you money to make your depositors whole. I think in one of tobias papers he talked and the synergy between liquidity and solvency. If everyone believe yourself solvent they wont take the money out. In order to assure them they can get their money out, the central bank steps in. You have had a lot of experience in the lender of last resort function, the discount window and its analogs. Theres concern that it didnt work here as it should have. Susan absolutely. I wonderful. Last resort is exactly rite. The discount window is the key lender of la to provide confidence about a banks ability, a solvent banks ability to continue operating. It also has v run on one bank from spreading to other banks as well. Until recently, the debate on lessons from 2023 centered on supervisory reforms and thats understandable. Theres been a pretty limited discussion of lenders on last resort, ill say discount window to mean that here in the u. S. The discussion of the discount window centered on two thing encouraging banks to be ready to use the window in times of stress, and requiring banks to preposition collateral in some position of their run of liabilities. I think thats missing from to debate is the issue of stigma that accompanies the discount window this. Dates back to the 19 20s, for reasons we can talk about later if we have time. But theres a stigma that accompanies the use of the discount banks are unwilling to use the window. This is problematic because banks are reaut to use the tool, the tool cant do its job on stemming run and contagion risk. I see a disconnect also between current messaging from fed officials, which is really encouraging banks to use the disdown window when they need it, and the way the discount window Borrowing Capacity is treated and how we superbanks. Theres a lot of opportunities here which ill talk about in a minute to make these two tools supervision and lend over last resort, Work Together and march in the same direction in a way that enhances Financial Stability. Why is stigma a problem . As i noted banks are ready but not willing to use the window, then the discount window cant do its job in Systemic Risk. Importantly, stigma undermines the cause of bank readiness. So if im a bank and i know, eh, my management doesnt want me to use this ill get criticized by my supervisors if i use it. I dont want to use it, im probably not preparing to use it. When i need it, its going to be very challenging. In fact we saw this last year with both s. V. B. And signature. So s. V. B. Had not tested the discount window, their ability to borrow for the past year before their demise. Most of their fed eligible collateral was parked at their federal Home Loan Bank. When the time came to try to move it to their Federal Reserve bank there werent arrangements in place to do that and there of understanding at s. V. B. About the operational cutoff times that they had to observe to be able to move collateral same day. So obviously by the time they wanted to pivot to discount window funding it was too late. Signature, perhaps a more egregious case, they didnt have discount window as part of their contingency funding plan they hadnt tested the disdown window and their ability to were roe from it for about five years before their demise. When it came time to dry to to try to borrow from the discount window, theythey kept trying to blej ineligible collateral to the fed which was not helpful to them. So i thi discount window borrowing would not have saved either s. V. B. Or signature, they were experiencing solvency issues, i to say, it could have slowed down the run on those banks and could have slowed or even stopped the contagion of the run to other Regional Banks with similar characteristics. The window can only be effective if banks are willing to use it when they need it. How to reduce stigma . I think this is a complicated problem. Stigma is a multifaceted issue. No one Public Sector entity can solve it on their own. I think there are things that both the central b Bank Liquidity regulators can do to reduce stigma. Several things the fed can do. Develop and execute a clear longterm Communications Strategy to the public. To make clear that primary credit saleh jit mat source of funding for solvent banks against good collateral when they need it. Last lot of confusion on this point. We have a long, checkered history since the 19 20s abo the discount window tool is something that should be used when needed or is really not ok to use. Second, i think the fed could explore a way to administer secondary credit which is really akin to recovering resolution funding. Separately from administration of primary credit at the discount window. I think this could help to reduce the kind of muddying the waters of having both sal vent and weak banking programs, lending programs. David so secondary is for banks that are in trouble . Susa its for banks not eligible for primary credit. But essentially its more akin to recovery and resolution funding, i think in practice. Other federal banks have drawn a much brighter line between lend toggle solvent banks and lending to weaker banks and those Central Banks have had much more success in having a destigmatized way to lend to solvent institutions. I think the third thick the fed could do is improve its processes to make the process of pledging collateral and borrowing from the window easier to access for banks. Im sure you have much to say about this but ill give one example. Borrowing from the window is a pretty manual process. The bank calls, theres a peime where staff are checking to make sure its ok to approve the loan. I think that pause, again for a solid bank with good sufficient collateral thats unencumbered to secure the loan that waiting period almost seems to signal we dont have to say yes. I think thats its kind of a legacy of this constructive ambiguity that started in the 19 20s. Why not automate the check for collateral, primary credit borrowers and make it a more straight through process. That would be another way to demonstrate, that is legitimate tool to use in times of need. And finally, i thi could probably revisit, its probably a good time to revisit the appropriate pricing for primary credittween creating stigma if the rate is too high for the discount window and market activity if the rate is too low. For example, what is the right spread for the primary credit raid . Is it 100 basis points as it was before the gfc . Zero basis points as we have today . That would be a useful effort to kind of look at that. I think also thinking about how primary credit is pr relative to credit extended by federal Home Loan Banks would be a very useful exercise as well. Bank regulators also have a role to play in reducing stigma. Bank regulators could recalibrate their requirements and guidance regarding li