Transcripts For CSPAN2 FDIC 20240705 : vimarsana.com

Government after that wonderful panel. Im delighted to have travis hill, the vice chairman of the sdi c. The vice chair is a friend and has outed himself as a very unique and thoughtful voice in town. Thank you so much for joining us. I know you are busy i really appreciate it. Thanks for having me its great to be here. Silicon valley bank was a major event in the banking sector. Maybe i should start by you getting your perspective as to some of your drivers and perception of the policy response. Whats been good and whats been bad thus far . Maybe i will start with the first part of the question, in terms of the drivers i think its a very simple y in 2020 had 2021 the Banking Industry ry experienced an enormous explosion of money coming into the system in response to the unprecedented government stimulus resulting from the pandemic. The growth and deposits far outpaced the loan demand slow a lot of banks did was invested in new funds in government bonds. Silicon valley bank was really a poster child for this phenomenon with the bank experienced a dramatic increase in deposits and invested a large portion of that in u. S. Treasuries and agency in order to earn extra yield they push the maturities out so when the feds started to aggressively raise rates in 2022 scb downed itself with large losses to the point where the loss is effectively wiped out the equity of the bank. On the liability side svp had a deposit base that was almost all uninsured and highly concentrated among a Close Knit Community of depositors once some depositors got scooped and started to take out their money we had what was really a classic bank loan where all the depositors were trying to plot their money as quickly as they could before the bank went under. Really thats kind of a simple story of big losses on the Investment Securities on the asset side and unstable deposit base on the liability side which was a recipe for a bank run. The second part of your question and what was good and bad about the response that is something we probably could spend hours talking about violence a couple of observations when it comes to the failure of scv i talked about this before that i think the biggest take away from me is just the importance of having more urgency and the government being more proactive in trying to find an acquirer as quickly as possible. What we really needed was somebody with very high stature at the top of government reaching out to the Different Bank ceos who could potentially make credible bids for the institution and encouraging them to bed finding out what type of obstacles or impediments there might be to bidding and see what can be done to address some of the concerns. Once the bridge banks open that monday was a reminder to everyone that its a very undesirable place to be as value seeps out. I think by contrast the process for the public bank was a lot better a big part of that was just having a lot of time and runway where everyone knew the bank was in trouble but i also think to the extent that i there were hesitations around certain options i think the lessons of the scb failure helps everyone get over those hesitations so i think is very positive that the bidding process was open to a large number of bank and nonbank bidders all which is not to say the process is perfect but i think it went a lot better than the scb failure. What im hearing here is that time is of the effervescence. When you have that kind of shock or surprise in the circumstances which rightfully noted can be very different depending on not just Silicon Valley bank but obviously signature and First Republic and all the banks that came afterwards which kind of raises this other additional point which is do you still get a sense that there is undue risk in the system . Or is there anything thats keeping you up at night right now. I do think things have stabilized pretty substantially since the initial days and weeks after scb failed and we really havent seen much in terms of unusual outflows in the past few weeks. In the short term the biggest thing is what happens with the closet and deposit funding costs and the biggest factor there is how stubborn is inflation and what is the fed doing with Interest Rate policy. We had four straight quarters of deposits decline the last quarter was the largest decline the largest quarterly decline and deposit since the fdic started keeping records in the early 80s. About 470 billion in deposits left the system in the First Quarter and then as deposits are leaving banks are forced to keep more last quarter deposit costs continue to go up while the growth in the amount banks can earn them assets has fallen off. In a longerterm big question is some point we start to see problems with credit quality and the biggest area people are watching is of course commercial real estate and office in particular. So far the data looks very good all things considered. The question of at some point we start to see deterioration and if so how big is the problem and how much exposure to the bank sound i think those are all things we will watch closely. Those statistics are pretty dramatic. When you think about the mdi and cdf eyes like regional banks its interesting because there have been some who have obviously faced real stress and some pressures of deposit flight as well. Which is really interesting. Its also deposit flight from customers with relatively small deposit basis. Which contradicts our little bit different from what you see these large depositors with over 250,000 trying to exit. What do you think about those drivers and what kinds of policy responses do you think could help stem the tide . I think on mdi specifically and cdf i mdi and cdf i often really are Community Banks they have Business Models that look a lot like traditional Community Banks and customer bases underserved communities after the failure of Silicon Valley bank there was stretched across the industry and a lot of the banks experienced some outflows but the real stress was really concentrated among banks that have certain characteristics like very high reliance on their true deposits large amounts of low yielding fixedrate assets, exposure to the Tech Community Venture Capitalist Community etc. In the eyes and cdf eyes like a lot of the Community Banks didnt have those types of characteristics so the stress really was much more manageable and much less severe than it was at certain other institutions. I think one illustration of that is if you look at mdis and cdf eyes in total in the First Quarter deposits increased so this was in a fourth where we saw record decline in deposits across the industry the mdis and cdf eyes in total with some variety from bank to bank it increase. The second question in terms of policy to potentially stem the tide when it comes to deposits one thing that i think is certainly worthy of consideration is the feds facility. Right now money market funds in certain other counterparties can place substantial amounts at the reverse facility and earned a very high Interest Rate almost as high as what the fed pays out on Bank Reserves but they have much different cost structures so its much easier for them to pass that rate along so that has served as a magnet to pull funds out of banks obviously they have a difficult balancing act but it does seem like there might be small tweaks can be made to try to make them a little less of an attractive competitor. And one other thing i will say on the liquidity side banks have done a lot to try to shore up their defenses by updating their contingency funding plan, building up cash positions and i think those type of things are very helpful and on the government side i think whatever we can do to continue to try to destigmatize using the discount window so its not view has a sign of weakness if the bank borrows from the discount window. Things have been very stable for a while but the more we can try to do to contain things if theres more bumps in the road those types of things are very helpful. Is interesting certainly echoes the discount window and the stigma thats been a challenge for so long and you are right it would be great to figure out how to attack that challenge and then ask you a question that i asked the acting comptroller i was on a little while back has to do with the fact that things are getting many banks are getting a lot bigger is something we heard of the last panel. Obviously we have banks and Financial Institutions tremendous variety and sizes of enormous size and really small Community Banks servicing their community. What does this mean for ndis in terms of how they navigate both policy and economics in terms of how they think about how to survive and how to compete. I totally agree that i think that one of the great strengths of the American Banking system and Financial System and economy is a Great Variety of different types of banks and Financial Institutions that we have ranging from banks that have Global Operations and conserve customers around the world to tiny Community Banks where they know the people in the community and are really part of the fabric of the community and of course in the eyes and cdf eyes into that category where they are serving communities that often are disproportionately low and moderate income and communities that often are underserved. I think from our perspective as regulators its important to be mindful of that and thoughtful about having a regulatory approach that allows small banks to still continue to survive and flourish i think two of the Biggest Challenges that we hear about all the time from small banks are technology and compliance. On the Technology Side i think finding ways to enable small banks to be able to adopt new technologies, partner with thirdparty Service Providers because they dont have the economy to scale in the budgets that large banks do and then on the compliance side theres basically an endless list of rules and guidelines and policies that banks need to stay on top of so as we think about how to balance things i think its important to be mindful of the challenges of small banks and the benefits they provide to their communities. Its really interesting. Certainly owes her issues i really had an interest in in the very last panel they were hitting on many of the points you are making now. One of the more interesting observations right now its not just a question of capital and capitalization if the technology question, Technical Assistance question and how to really keep those banks competitive while also keeping in mind and being mindful of risks that pop up, it wasnt a revolutionary new kind of risk is something thats inherent to banking so just to take that one additional layer forward, when you think about Silicon Valley bank and the lessons there, are there one or two things you are looking at or thinking about this might come to mind when it comes to how we should pursue the oversight of ndis and cdf eyes . I think the answer is not really. I think the ndis and cdf eyes are very different as we think about the policies to address those lessons i think its important not to overreact not to sort of saddle the whole industry with over corrections that may be designed to address targeted problems and what we dont want to do is make it more difficult for institutions like ndis and cdfis to be able to navigate when there is stress. We only have a couple of minutes left but the role of the vice chair of the fbi c is an interesting role. When you look forward in terms of your own priorities in the next couple months particularly against the backdrop of Silicon Valley bank and what it means for smaller and regional banks are there any things you like to see are there any kind of priorities that you have . I think the biggest thing is that as a Banking Agency the ftse and the Federal Reserve the occ financial regulators think about their upcoming rulemakings policies i think is important to keep in mind both the aggregate impact of all the things that are under consideration and the current environment that we are in. The fed in particular has talked about a pretty ambitious rulemaking agenda for the coming months and years. I think this is still at a time where there is still some fragility and parts of the banking sector. In some ways we are still trying to rebuild confidence in the industry. I think at least when i sit here and think about it. Theres a compelling argument to at least just get through the rate hiking cycle and see where the dust settles once we are through that, take a look at the lay of the land see the Lessons Learned and at that point take a look at the potential proposals we could consider and think about which ones are the most worthwhile given the conditions at the time. I think in the absence of that and im saying that being realistic about whats in the works i think it probably would be helpful for some additional clarity whats the universal potential things you regulators are continuing so the industry and markets can kind of prepare for that and it then as the agency starts to issue proposals and move forward i think being mindful of the aggregate impact of everything thats coming which includes not only what the banking agencies are thinking but other agencies like the aajust being mindful of the potential that the institutions that may be feeling the biggest grunt of the regulatory onslaught may also be the ones that are under the most pressure from economic and market conditions. Thank you so so much