In Wake of SVB, Former FDIC Regulator on NEXT Steps in Washington: “I Hope Cooler Heads Prevail”
The Consumer Bankers Association (CBA) closed out CBA LIVE 2023 yesterday with a panel discussion on what’s NEXT for banks in the wake of the Silicon Valley Bank (SVB) failure.
Introducing the panel – which included former FDIC Chair Jelena McWilliams, former head of retail at PNC Neil Hall, and Brookings Institute Senior Fellow Aaron Klein – CBA President and CEO Lindsey Johnson said:
“All eyes have been on the banking industry over the last several weeks, from Wall Street to Main Street, from Silicon Valley to the Florida Panhandle, from both ends of Pennsylvania Avenue and everywhere in between. As policymakers look for answers about what happened, we are very fortunate to have a panel of experts here with us today to discuss what comes next for America's leading banks and the consumers they serve.”
Excerpts from the discussion are below:
On What Happened
McWIlliams: “Probably the most surprising thing I saw was how expeditiously and quickly the deposits ran out. […] We’re talking about a matter of hours, $42 billion of deposits. And that’s something that, you know, we can get more into. But when you think of a bank run, you don’t think that you can lose $42 billion of deposits in a matter of hours.”
Klein: “It’s easier to do that when you have 95% of your accounts as uninsured. I mean, Silicon Valley wasn’t a bank in the sense of a $200 billion regional bank with a thousand branches that banked people. Right? It didn’t bank people, it banked start ups and a couple of random executives of theirs. The thing that blew my mind was it blew itself up on simple interest rate risk.”
Hall: “So, in this situation, the problem with SVB isn’t that they were tech firms or biotech. The issue here is you had a very small number of people with a very large amount of deposits.”
On The Role of Social Media
McWilliams: “I don’t want to call it a ‘Twitter run.’ Twitter was a vehicle, it may have exacerbated the conditions that were happening at the bank, but I wouldn’t say Twitter caused Silicon Valley Bank to fail.”
Hall: “Thinking about the fact that – so maybe it wasn’t a ‘Twitter-run’ – but every one of us, I think, has to confront the fact that Twitter and social media can affect a bank’s reputation – fairly or unfairly. And I think that that has to be something that is very much in the forefront of our risk management.”
On Proposals to Increase or Eliminate Deposit Insurance Cap
Klein: “If we go to unlimited deposits, we are losing the important value of market forces and having people with real money. 98% of Americans roughly have less than $250,000 in their bank account. So, make no mistake about it, the ordinary Americans are well protected in their current deposits. If you move to infinite deposits, then you’ve taken that market force of depositors away from exerting and you’re putting all your eggs in the government. And no matter who’s running the government, they’re going to screw it up.”
McWilliams: “On unlimited deposits, I will tell you this as someone who has had to deal with deposit assessments – it comes at a cost. There’s the moral hazard cost, there’s the market discipline cost, and then there’s the actual dollar cost that banks like yours will have to pay in assessments. […] Everything comes at a cost. And quite often you don’t know what that cost is going to be. And to your point, Aaron [Klein], [regulators] invoked the systemic risk exception. That should be studied more, in my opinion, because that’s a big deal, to do what they did.”
On What Industry Can Take Away
Hall: “Looking ahead, one of the things I think will be important for the banking community, particularly the regional banks and the community banks, would be to understand that if you not growing core customers that create core value deposits, you’re not going to win. And I think that part of that is going to require a more granular understanding of how to acquire customers efficiently and also to probably [focus] on retention more than we have in the past.”
On What Policymakers Should (or Should Not) Do NEXT
McWilliams: “In Washington – you ‘never let a good crisis go to waste.’ […] That’s exactly what happens any time there is a financial situation or crisis. You never let an incident go without saying ‘let’s get this passed.’ A bill gets filed and then things get added. So, beware of fast-moving legislative vehicles. We will probably get some legislation. I don’t know how far, how much, of what, but I think people will have somewhat of a knee jerk reaction. I hope cooler heads prevail […] look at the causes of what happened at Silicon Valley […] and not just throw everything out there.”
Klein: “You can’t legislate competence and judgment. […] SVB didn’t fail the honors test. They failed the remedial banking test. So we’re going to have a debate about whether or not the honors test would have caught it. I’d rather have an interesting debate about what at the San Francisco Fed prevented them from enforcing what was very obvious there. [Regulators] must ask the question, why did the bank fail, what was the supervisor in judgment, and why didn’t we let the bank fail?”
Background
Entering its 14th year, CBA LIVE attracts the top leaders and influencers from across the country who gather to discuss the most pressing issues facing the retail banking industry. With more than 70 hours of dynamic programming and 14 forum sessions tailored to different bank segments, CBA LIVE offers key insights for professionals motivated to learn new trends and share ideas with the most influential decision makers in the business. To view press releases highlighting all three days of CBA LIVE 2023, click HERE, HERE, HERE, HERE, and HERE.
Stay Tuned: Full recordings of all general sessions will be available in the coming days.
