The Financial Times Editor-at-Large Gillian Tett and American Banker Washington Bureau Chief John Heltman join Yahoo Finance Live to discuss First Citizen Bank acquiring much of Silicon Valley Bank, the expectations for the U.S. Senate Banking Committee hearings on Tuesday, regulation, the state of the U.S. banking system, and the outlook for inflation.
Video Transcript
JULIE HYMAN: So banks hoping to ride the Wall Street recovery here today as we are watching all of this news. First Citizens buying the remnants of Silicon Valley Bank, or at least some of the remnants. Regulators playing a key role in calming markets by promising coverage, perhaps, of uninsured deposits, not explicitly. But did regulators help stave off the worst of the crisis, or did they increase risk taking at banks? There's going to be a hearing on that front tomorrow in Congress.
And to talk more about that is John Heltman, American Banker Washington Bureau chief, and Gillian Tett is with us once again, editorial board chair and editor at large for the US at the Financial Times. Thanks to you both for being here. Appreciate it. Gillian, I want to start with you here as we get news of this deal, First Citizens buying some of those assets of Silicon Valley Bank. Where are we in this crisis, right? What does that deal tell us about where we are and maybe how much further we have to go?
GILLIAN TETT: Well, what it shows is that the FDIC playbook of looking at when a bank fails, taking it over, and trying to sell it to another bank to promote consolidation in a sector, that is alive and well, and that's absolutely what the US regulators are trying to do. And kudos to them for actually trying to get a deal done. Now what's very interesting is that they couldn't do this deal two weeks ago when Silicon Valley Bank was going down, partly because the speed at which the markets reacted, the first big bank run on Twitter and Slack if you like, simply overwhelmed the regulators and gave no time to craft a solution or carry out an auction in a normal way.
And so one of the really interesting questions going forward is that, yes, it does seem like the worst of the panic around the banks is easing. Yes, it seems as if the regulators are starting to get more in control of the situation at long last. Why on Earth would it take them such a long time to do this? And what kind of shifts in the regulatory regime will they need going forward, given that we're dealing with a system which is basically plagued by two addictions-- an addiction to easy money in the last 10, 15 years, and an addiction to digital technology that has changed the way that bank runs occur and changed the way that people communicate and panic and erupt.
BRAD SMITH: John how, do we ensure that this hearing doesn't become just another element of political theater, and that there are questions for the everyday American, all the way from someone who just has money deposited with one of these banks to the larger businesses, perhaps, that rely on the financial services that these banks have offered as well?
JOHN HELTMAN: Well, I'm not sure that there is any way to make this not devolve into political theater. I think that's somewhat baked into the assumptions here. But I think that the way that things have settled down, it seems, is that Republicans have kind of identified their line of questioning as around what did the regulators know, when did they know, and why didn't they do more to keep this from happening in the first place, whereas Democrats seem to be congealing around-- see this as proof that Congress's rollback of certain aspects of Dodd-Frank in 2018 was a mistake.
Both of those things can be true at the same time. But what will be interesting to me is seeing what certain members of the Senate Banking Committee-- specifically, I'm thinking of Jon Tester who's up for reelection in 2024-- I'm interested in seeing what he's going to say, whether he sounds more like the Republican or the Democratic line of questioning and attack.
JULIE HYMAN: And I guess, Gillian, then the question is and the old saw goes, you're always sort of litigating the last crisis and not looking ahead to the next one. So probably mistakes will be made this time around, as they look at how to fix what happened. But what do you think sort of the most likely outcome is of all of this from a regulatory standpoint?
GILLIAN TETT: Well, one of the key issues that's caused this crisis is that too many investors-- and it seems regulators-- have been fighting the last war. And the 2008 financial crisis was very much focused on credit losses, the fact that mortgages went bad, and people have been looking at credit issues in the last dozen years and strengthened the banks' capital reserves to absorb more credit losses, loans going bad. What caused the crisis this time, though, wasn't credit losses, it was actually interest rate problems on the balance sheet because Silicon Valley Bank had not prepared for the rise in interest rates properly.
And that raises two questions. Firstly, subsequent to Silicon Valley's collapse, we've heard that some of the regulators were, indeed, looking at Silicon Valley Bank, but one big question is if they were supervisors in Silicon Valley Bank, why on Earth didn't that message get to the very top of the Fed? Why was nothing done in time to stop it imploding?
Secondly, what other institutions have these big wrong way interest rate bets? Because many parts of the financial system, like insurance companies, have been essentially exposed far too long to the idea of easy money staying in place. And so people should be looking at insurance companies, private equity companies, and asking whether they're properly hedged.
Thirdly, are there going to be new credit losses coming along as we begin to go into recession? I mean, commercial real estate is the sector people are watching very carefully right now. And fourthly, the really big question is, do the regulators have the right regime in place to cope with the world shifting towards higher interest rates? Or is this going to force the central banks to essentially raise rates at a much lower rate or even start cutting them in the future? Because certainly, the markets are betting that all of this is going to force central banks to start cutting rates going forward. And if that's the case, that raises big questions about the inflationary outlook.
BRAD SMITH: John, just to add on to that, I guess, what would regulators also-- I mean, given that we're going to have lawmakers speaking with the representatives from the FDIC, Federal Reserve, of course, and then additionally, the US Department of the Treasury, what do you expect them to say about the subsequent acquisitions, but ultimately, I mean, I think it's fair to say, fire sales that have had to happen just in order to keep some of these banks who they still have clients that they need to answer to and make sure that people have access to their funds. What do you expect them to say about the consolidations that have taken place thereafter? And if there is, to Gillian's point, more systemic risk that is still out there, what we should continue to expect on that front?
JOHN HELTMAN: Well, I expect that they will probably hail this as a success. I think they're going to say, hey, look, we sold the parts of the failed banks that we could sell to other banks that can make good use of them. And just look at the markets. Things are bouncing back. People are getting more confident in the banking sector. So all is clear. I think I expect them to say that, although I expect lawmakers to kind of press them on that.
As for the broader contagion, I mean, or the broader risk of having underwater assets, that isn't in itself a problem. It's only a problem if you have to sell them. And I think the kind of broad and sort of rapid change in the interest rate environment over the course of the last year has baked a lot of that risk into the system. But it's really kind of investor confidence in public confidence that kind of decides whether that's a problem or not. So I think they're going to try to just give reassuring messages and try to paint this as a victory.
JULIE HYMAN: John, for those who are not familiar, American Banker covers the banking industry probably more closely than any other publication, right? That's what you guys do. So I'm curious from the bank perspective, what American Banker's reporting is finding, like sentiment amongst the banks, the level of alarm, and are we really seeing a bifurcation of that between the bigger banks and the smaller regional banks right now?
JOHN HELTMAN: There's a pretty broad diversity of opinion in the banking sector about what moment we're in and what it means. I think there is still a decent amount of concern among smaller banks, especially smaller banks that have assets that they want to hold to maturity and don't want to sell, that they don't lose their deposit base. I think the concern is that if you're a depositor and you're kind of thinking about running, where do you run to? You run to a bank that you kind of know is too big to fail, even though no banks are supposed to be too big to fail. Everyone knows that's kind of not true.
So and what you're seeing is maybe kind of a hastening of a trend that's been going on for decades, which is consolidation in the banking industry, particularly at this-- the smaller end. But that said, I think there's also a lot of this intervention was intended to stop that and to kind of keep this from turning into a extinction event for smaller banks. And so, as a result, I think there's still-- I think people are still cautiously optimistic, I think is the way I would paint it at this point, and hoping that if there's any further problems, that rescue will be readily available to them from the government.
BRAD SMITH: Gillian, within the turmoil that we've seen within banking, last week during our conversation, you also brought up the topic that we hadn't heard in a while or the phrase that we hadn't heard in a while, which is moral hazard. Do you expect that that will have or should have a considerable portion of the discussion that takes place within the Senate hearing?
GILLIAN TETT: Absolutely, and the only thing that's worse than moral hazard is completely ambiguous moral hazard that no one is able to predict where the boundaries of the moral hazard actually lie or not. And that, unfortunately, is where we are right now because the reality is that for the last 12 years or so, not only have we had extremely loose monetary policy, free money, we've also had essentially a Fed put, an assumption that the Fed would always bail out the markets and institutions as needed.
Now, the Fed has started to try and step back from that. It has been raising rates. It's running off the balance sheet. But the problem is, with something as we've seen around the whole issue of the FDIC protection of depositors at Silicon Valley Bank, what that episode has shown is that when there was a crisis or crunch, the rules that exist, and of course, before SVB went down, the rule said you only got protected for the first $250,000 of your deposits, the rules will get ripped up.
And so, going forward, it's going to be very hard for the Fed to signal whether it's actually backing individual institutions or not, whether it's backing the markets. It's going to be hard for anyone to know what the FDIC rules are. And the fact that Janet Yellen herself, the Treasury Secretary, appeared to flip back and forth last week around that indicates the sense of confusion. So I definitely expect to hear Republicans in particular raise a question of moral hazard and the uncertainty about just how far the government is propping up the system or not going forward.
JULIE HYMAN: Yes, there's definitely some confusion around all of these questions. I'm sure they'll all be answered in the hearing tomorrow. No, they won't, but that's OK. John Heltman, American Banker Washington Bureau chief, and Gillian Tett, editorial board chair and editor at large for the US at the Financial Times, thanks to you both. Appreciate it.
