If there is one thing that QED Partner Amias Gerety says needs to happen right away, it’s to stop using the world bailout to describe what happened when the FDIC stepped in to rescue Silicon Valley Bank.
Gerety told Karen Webster that to have a constructive dialogue on what was done, and what needs to be done, the term is best avoided.
“The bailout dialogue is deeply counterproductive,” he noted, “and the reason it’s counterproductive is that the phrase has zero meaning….it’s, irrevocably, a negative statement, and it obscures more than it clarifies.” In Gerety’s telling of what really happened, no one got “bailed” out — investors in SVB itself certainly weren’t made whole.
This as tomorrow, Tuesday, March 28th, looms as a red letter day in banking. That’s the day that the House Financial Services Committee has lined up witnesses and policymakers to weigh in on the state of the industry.
That day Martin Gruenberg, chair of board of directors at the Federal Deposit Insurance Corp. (FDIC), Michael S. Barr, vice chair for supervisors at the Federal Reserve’s board of governors, and Nellie Liang, under secretary of the treasury for Domestic Finance, will be on hand to weigh in via testimony and to field questions from lawmakers.
Get ready for fireworks.
The hearing’s titled “Recent Bank Failures and the Federal Regulatory Response.” At the center of the discussion will, of course, be what went wrong at Silicon Valley Bank and Signature Bank, and whether the steps taken by regulators amid bank runs and bank failures were the right ones.
Whether they were timely enough. Maybe even whether the examiners are looking at risk the right way.
The Real Systemic Risk
There’ll no doubt be a lot of red-hot back and forth as the cameras record every utterance, every question, every response on risk, controls, and especially on deposit insurance designed to be boiled down and digested as soundbites.
Better, instead, Gerety said, to drill down on actual, specific policies rather than politicize the seismic events of mid-March:
“If you want to say, ‘I don’t think uninsured depositors should have been backstopped at the bank,’ that’s a legitimate perspective,” said Gerety. “That’s OK to say. Now we’re having a debate about the proper actions to be taken.”
A constructive debate — and we may or may not get it this week — would focus on the ways and means, the whys and whether people can or should be protected by the fact that they were not paying full attention their banks’ risks, and whether they should lose money due to that lack of attention.
Were Gerety in charge of the questioning Tuesday, he told Webster that the hearing offers up a key chance to ask regulators whether they have the authority they feel they need — the full proverbial “toolkit” at hand.
“This is a good opportunity to zoom out and actually ask people who are on the ground and in the room, ‘What are you seeing? Are the things that you wish we had done differently? Are you things that you wish you had?’”
“Knock it Off” Vs. Policy and Procedure
We’re a long way from the days when, as Gerety said — recalling his own interactions during his time with the Treasury Department, where he had occasion to rub shoulders with storied former Fed Chairman Paul Volcker — a loud, authoritative voice could reset banking policy and stop risky behavior in its tracks.
Call it the “autonomous Volcker” rule.
The 6’7’’ Volcker was imposing, to say the least, and was adamant back in the late 70s and 1980s that banks should not make risky trading bets with customer deposits. When he found a few rogue banks making such bets, according to Gerety, he simply phoned up the offenders, usually the banks’ CEOs, and issued a forceful edict:
Knock it off.
“But nowadays,” said Gerety, “regulators have been taught over the past 40 years that the proper way to handle an issue is to find a process.” The process uncovers the risk, the bank examiner examines the risk, the board talks about it, the board recommends a course of action, the bank’s management follows the recommendation and reports back.
In evidence that the “procedural loop” did not go as planned, even as the Fed had identified and reported on those risks over the past few years: The run on SVB came before things could play out in the by-the-book process.
“And this is the real tension in our society,” said Gerety. “Do we want people like Chairman Volker just calling CEOs and telling them to knock it off? Or do we want a more procedural, slower process?” We’ve put our eggs, heavily, in the second basket, falling back on process at the expense of quick decision making.
This time around, we saw the downside of waiting for procedure to catch up with what needed to happen — and there needs to be a reconsideration of the tradeoffs between speed and fairness.
Why the Valley Let SVB Crater: Speed and the Scarcity Mindset
Asked by Webster about why Silicon Valley did not come to rescue its eponymous bank — and, in effect, killed a golden-egg-laying goose — Gerety mused that in order to save SVB, the tech community would have had to have had a collaborative mindset in place.
But, he said, with bank accounts running low, and with fears over what might happen next, “there’s a ‘scarcity mindset’ that makes it had to conduct forward-thinking, collaborative activity.” No VC wants to, ultimately, become a bank holding company, and the focus through the past 18 months has simply been to survive, amid a high cost of capital.
“No one could summon the will for a collective action that was a big bet on the future,” said Gerety.
Gerety reflected that, where he might have initially been dismissive of the idea of a “Twitter-fueled bank run,” he’s now come around to the idea that the friction to move money was so low that everything could be done via mobile devices — and, as we’ve seen with GameStop in years past, the Internet can become a grand engine of “coordinating” behavior that ultimately becomes unstoppable.
“There are some real lessons here bout how quickly things can move, and about having contingency plans in place,” he said.
To Insure or Not to Insure
In the wake of the SVB collapse, the very fabric of the banking system itself has changed, he said, because there is an implicit guarantee — and it’s less than a full guarantee — around uninsured deposits. Nothing’s been set in stone, not yet, and per Janet Yellen’s comments made last week, some banks will get the full-insurance treatment, and others will not.
And, said Gerety, there are separate forces shaping what happens with deposit insurance.
Under the laws passed in Dodd-Frank, explained Gerety, there’s a provision that says there needs to be a joint resolution in place to guarantee deposits. The Biden administration has not asked for that resolution to be passed.
“Politics can be complicated,” noted Gerety, “and the politics have not ‘settled out’ yet.” As to what happens in Congress, he said, well, that’s anyone’s guess — Gerety noted to Webster that in D.C., there’s what’s known as the “secret Congress,” as “back room” bipartisan dealmaking can wind up crafting legislation, quietly, that winds up being effective because it’s not done in the spotlight, where partisanship is a blood sport.
In the meantime, Gerety noted that in the absence of that clear-cut resolution, there are some tools clearly baked into extant laws that can help boost confidence in the banking system (and again, they fall short of guaranteeing deposits fully). Regulators can find, through the Fed, ways to handle liquidity problems in the banking system. We’ve seen banks, for example, boost their use of borrowing from the Fed’s discount window in order to boost liquidity.
Another Silicon Valley Bank?
Looking ahead, with the warning signs of Silicon Valley Bank in the rearview mirror, Gerety said the rise of another tech-centered banking powerhouse — though not at the scale of SVB — may, surprisingly, be ahead of us.
Inflation’s still rampant, capital’s more expensive, and we may or may not see a soft economic landing. Among the consequences of SVB’s collapse has been a dampening of sentiment within tech. At the moment, capital’s in flight to larger banks, the marquee names like J.P. Morgan. There will be less lending for startups on the horizon (there’s that “scarcity value” concept again). But SVB, he said, was an important provider of connectivity between the FinTechs and the banking and payments ecosystems.
The financial services landscape will be more fragmented than it was. Other banks and private credit providers will come into the tech space — at higher prices and lower volumes. But as time goes on, he said, the tech sector’s just too big a part of the global economy not to attract providers ready to scale breadth and scope of the services and loans they provide — not at the size of SVB, but sizable nonetheless. “There’s a low probability in the short term — but in the long term, the probability’s pretty high,” he said.
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