Sheila Bair, Former FDIC Chair and Senior Fellow to the Center for Financial Stability, discusses bank executives' testimonies and reasons behind the regional banking failures, including interest rate risk management, the role of social media, and deposit runs.
- Well, banks have been a focus on Capitol Hill this week, thanks to a series of hearings focused on the failures of Silicon Valley Bank and Signature Bank. Regulators are on the hot seat today, with lawmakers on both sides of the aisle taking aim at the CEOs on Capitol Hill earlier this week.
- Your lack of judgment, Mr. Becker, shows that you should not have been running the bank.
- There are CEOs in banks all across this country that are having to pay up for your mistake.
- And the taxpayers of America had to pick up the tab for your stupidity, didn't they?
- It sounds a lot like the dog ate my homework.
- Your opinion on what is a responsibly managed--
- And the answer is--
- --is now laughable.
- This was bone deep, down to the marrow stupid.
- Joining us now is former FDIC Chair Sheila Bair. Sheila, we should note that was all directed at the SVB CEO Greg Becker. A lot of finger pointing here, but he certainly didn't point the finger back at himself. There's questions about whether, in fact, the-- the bank had too many uninsured accounts, whether social media had some kind of play, whether it was about digital banking. As you take a step back and look at what has played out so far, where do you think the regulation needs to focus on?
SHEILA BAIR: Well, interest rate risk management-- at the-- at the core, that's-- that's a pretty basic function for bank management, is to manage interest rate risk, which-- which they just didn't do. And that became particularly devastating when they also had cultivated a very unstable deposit insurance base with such excessive reliance on uninsured deposits. They probably assumed, since these big depositors had other relationships with them-- it was all part of the same Silicon Valley venture capital club-- they would remain loyal, which-- which obviously, they didn't do.
So-- but at the heart, it was interest rate risk management. They had-- they had a lot of unrealized losses on securities they were counting as liquid that were not liquid, because if they had to sell them to meet the deposit withdrawal demands, which they had to do, they were gonna have substantial losses, which is gonna wipe up their-- wipe out their capital. So it's not-- that's what happened.
It's-- you know, I-- I don't say I have sympathy. I do think that the larger environment of, you know, the pandemic spending, all this deposit money coming in, massive amounts of Treasury debt issuance, a lot of banks had a-- had increased amounts of uninsured deposits and bought a lot of government securities that somebody had to buy, and there's a lot of it out there. But this-- so that's a-- that's a broader challenge for the system, which they can manage.
But this bank, in particular, really loaded up on long-dated stuff to get yield. And they-- and really had an unstable deposit base. And-- and it worked until it didn't.
- Sheila, what about the role of social media here and what that played in the role of the deposit withdrawals? How should banks be assessing the risk that social media poses now?
SHEILA BAIR: Well, I-- I don't know if there's-- there's much you can do about it, other than, you know, cultivate a stable deposit base and-- and have a clean bank. I mean, some of the-- yeah, social media did create the problems. I would say with Silicon Valley, though, those-- those deposits were gonna run as a group. It was all part of the same kind of closely-affiliated community. They-- they didn't need Twitter to communicate with each other that-- that they were running that bank. So I think with regard to SVP-- SVB, that is-- that is an overstated risk.
But it certainly just underscores the importance of having stable liquidity. You know, long-term debt's another way you can supplement your deposit funding. That's really stable. People buy long-term debt, they're stuck there for a while. And then, again, having a good, strong insured deposit base. And if you have uninsured deposits, people that-- that have a true affiliation and loyalty to the bank. But most important, don't take stupid risks. Have a good strong balance sheet, and you won't have a deposit run regardless of what somebody might be saying on Twitter.
I do think this short selling thing-- I don't support a ban on short selling, but I do think there have been some short-- I would suspect-- I don't know-- I suspect there's been a lot of shorts out there spreading misinformation on social media. That creates downward pressure on the stock, which also scares people. And I think the SEC should be all over that. I agree with the banking organizations that have called for the SEC to vigorously investigate some recent incidents and hope they will do so.
- Let me follow up on Shauna's point, though, because it's not just about SVB where we've heard this argument, that is to say that, look, anybody can raise the alarm on Twitter, any kind of social media platform, and then the ease and speed with which you can withdraw your deposits through digital banking only accelerates the problem regardless of what that liquidity picture looks like. So number one, is that a fair argument? And is there anything that can be done on that front?
SHEILA BAIR: Well, look, it's not completely new. I mean, during the great financial crisis, when I chaired the FDIC, we were constantly fighting rumors on the internet. We didn't-- social media was not so much a force, but stuff went viral on the internet very, very quickly about the FDIC-- the FDIC was running out of money. Boy, did I have to keep batting that down. So it's-- this is not a new problem, it's just different venues can-- can spread this misinformation very quickly.
I'm not sure there is much you can do about it, except, you know, when people are manipulating markets through misinformation, the SEC has some authority there to crack down. They should crack down. But most importantly, it just underscores the importance of having a well-managed, well-run, strong balance sheet for your bank.
The truth will eventually prevail, as it is, I think now. You know, there was all this scare about regional banks, you know, writ large. And now, I think, through some good communication from the government, analysts, people like me-- no, the vast majority of these banks are just fine. The truth is prevailing. Things are calming down.
But, you know, the ones that are vulnerable, and there's still a few out there that are vulnerable, they're gonna have to keep batting this stuff down. And again, it just emphasizes that even more important now to have stable deposits and-- and a strong-- a strong capital base and-- and good assets on your balance sheet
- And Sheila, when it comes to the stress that we've seen in regional banks, the Fed's role in this-- is the Fed making it worse by continuing to raise rates? And what happens if we see another rate hike in June?
SHEILA BAIR: Yeah, well, I-- actually, on Yahoo, I called for a pause on December. You know, and I'm-- I'm an inflation hawk. I really don't like inflation. I really don't like low interest rates. I've been worried about it for years, creating the kind of instability, leverage, asset-- inflated asset values that we're having to unwind now. So, yeah, I think it-- it looks like they're gonna probably be hitting pause next time.
Pause is not a stopping. Pause is not reducing rates. Pause is just a pause-- assess what the impact of these really rapid dramatic rate increases have been over the past year. So I hope that-- those are the signals, and I hope that's what they do.
I think it's better to tolerate a little more inflation a little longer than precipitate a financial crisis, at which point, we're gonna have a very severe recession. And they're gonna have to take rates back to zero again. And you know what, we're gonna be right in the soup. So that is the worst case scenario they should avoid at all cost. Slow down, stop at this point-- pause, not stop-- pause, assess, and-- and let the markets and the economy adjust to these dramatic rate increases that they've undertaken.
- And Sheila, the other big issue that the market's watching closely is the negotiations down in DC over the debt ceiling. What risk does this potentially pose to the economy, to the markets? And are you confident that we'll get a deal before that x date?
SHEILA BAIR: Yeah, well, I-- I am confident. I've seen these-- these kinds of games. And I've said in other contexts, it's-- it's a global embarrassment. Why we put ourselves through this, I do not know. At the 11th hour, they will have an agreement. I think people broadly understand on both sides of the aisle, the US government cannot default on its financial obligations, and nor can you pick and choose what-- you're gonna pay these people, but not these people. That's just not what a developed world economy-- a sophisticated economy, a sophisticated Democratic institutionally managed government should be doing.
So I think they will get an 11th-hour agreement. But the drama around this is scaring people. I get emails and calls, you know, are my T-bills-- I've got to redeem my T-bills. What am I gonna do? It's really-- it's scaring people. And are my-- are my mortgage rates gonna go up? It's scaring people. It's unnecessary.
And, you know, both sides are right. We shouldn't be defaulting on our debt or even talking about it. On the other hand, we are on a fiscally unsustainable path. We have to get spending under control. We should be looking at tax revenues too. So both sides are right, and it's frustrating. But yeah, I have very high level of confidence they'll get an 11th-hour deal. I mean, there have been some positive signals already from both the President and-- and the Speaker. So fingers crossed, it gets done soon.
- Coming down to the wire. All right, Sheila Bair, former chair of the FDIC. Thanks so much.