A little easier to do yours. Sparklight supports cspan as a public service, along with these other Television Providers, giving you front row seat to democracy. Now the chairman of the federal deposit insurance corporation, Martin Gruenberg talks about the regulation of large regional Financial Institutions in the wake of the Silicon Valley and Signature Bank collapses. From the bookings Brookings Institution, this is just over an hour. [indistinct conversations] good afternoon, everyone. Thank you for coming. My name is ben harris, and as of this very morning, i am the Vice President and director for economic studies of the Brookings Institution. It is a true privilege and honor to have the opportunity to again be joined at this famed institution. There are many reasons why i found a return to brookings appealing, but a major motivation is events like the ones we are hosting today. Fdic chair marty gruenberg, who will be introduced by aaron klein and moments, was one of the key officials to help mitigate the fallouts if the Silicon Valley bank and Signature Bank failures early this year. We are very lucky to happen with us today. I suspect that this afternoons event must feel like a bit of a victory lap to the fdic chair given in 2019 he sadness very real and ward in great detail about the risk of failure by a large Regional Bank. His remarks, which are required reading for anyone trying to understand the issue, he warned of the risks posed by the failure of these banks and highlighted the destabilization risks of outside uninsured deposits while the also cautioned that specific regulatory actions taken in 2019 would weaken Bank Regulators ability to respond to a crisis if and when they occur. It is as prophetic a speech as you will see in public policy. Of course, chair gruenbergs track record shows he is more than just a financial crisis clairvoyant but has also played a massive role in the financial crisis. In march of this year, when svbs concerns materialize, i was serving at the treasury department. My role at treasury meant i was afforded a front row view to the crisis and had a deep appreciation of the Economic Risks associated with widespread regional Bank Failures. I had two broad takeaways. The first is that precarious weekend in march 2023 was the most concerned i had been about the state of the u. S. Economy from january 2021 today. The statement is saying a lot, as this period included the omicron and delta variant, russias invasion of ukraine, yearoveryear cpi inflation topping 9 in june 2020 two, and widespread supply chain disruptions that threatened to leaves for shelves bear around the holidays. Our macroeconomy was on a razors ad for a couple of weeks and it was not possible that last spring would be the start of a painful recession ignited by the run at a bank. Threading the needle in march 2023 and preventing widespread Bank Failures. The experienced guidance from banking officials was crucial to preventing a broader crisis, and less adept leadership could have led to a loss in our Banking System and severe financial disruption. Policymakers often do not get credit for crises averted, but here, namely yellen, bloomberg, freighter, and powell and their staff, prolonged their ongoing economic expansion good to close, let me know that events like today highlight the value of working as a duchenne in general and the Broader Community in general. Brookings scholars tackle our most pressing economic and social challenges, making from policy to Financial Regulation, and in the policy arena, being an effective policymaker means a commitment to continue learning and a drive to seek wisdom from policymakers like marty gruenberg, which is why todays event is so relevant. If you devote aaron klein and marty for making this event happen. I look very much forward to this discussion, and i now turn it over to brookings dudes working iss aaron klein. Mr. Klein thank you for joining us in person, online, or however you find it. I am making a chair on the center of regulation and market, and in Financial Regulation, there is a cycle. Theres a crisis. Theres new regulation, theres the regulation, and theres a crisis. That cycle has played on for a long time, and we can debate what contributes to what, why the cycle of phenomenon happen, but they do. We here are focused on this throughout that cycle. It becomes very trendy to lean in when there is a crisis, and as the crisis is forgotten, the attention goes away, and issues remain. As we try to get a better and more stable and secure and stronger economy, it requires a better Financial System and Higher Quality relation. In fact, we were more concerned in march during the financial crisis and all the other litany of economic threats to underscore why Financial Regulation is so critically important in why we keep returning to this. It is my honor and privilege to return to the brookings stage fdic chair Martin Gruenberg, to give you more background and history on marty, marty has been a board member of the ftse since 2005, for 18 years, which the fdic turns 90 this year, so roughly about 20 at the fdic posing history, marty has been there. He has seen it. 2005 was the year he was first confirmed. Was also the first year in American History without a single bank failure. 2006 was the second year. People mistakenly took the impression that the absence of any Bank Failures that we were wellregulated able to dispute the idea that the Financial System started in 2007 and found their strength and safety in regulation. So, by the way, the next year in American History without a single bank failure, 2020, 2021, and here we are, 2020 three, having gone through this crisis in the spring, and the question is not we will talk a bit about what caused it, what happened, but what are we going to do Going Forward . I can think of nobody more well situated, experienced, who has fought through and experience these issues throughout the entire cycle than chairman gruenberg. I am curious to see how he will approach it, given the experience of the spring, the experience hes had before, and given the very issues he has raised on this stage, as Vice President harris called in 2019, when he warned that our system had become overconfident, that we were in a good place to deal with the failure, because whenever you think about how i feel your was del clement was very clear we were not in a structurally strong place to handle what started out as one failure and very quickly ensconced other massive Financial Institutions. So, mr. Chairman, i think the floor is yours, and we are eager to learn what we ought to do to make the system better, stronger, and more resilient in the future. [applause] chair gruenberg good afternoon, everybody. Let me congratulate you on being here in washington in the middle of august. [laughter] i obviously did not expect this large a crowd, this time of the year, so we appreciate you all coming. I want to also thank ben and aa ron for their very kind comments. As a bank regulator, candidly, im not used that, so i will take it where i can get it. I wanted to begin by thanking the Brookings Institution center and my friend, aaron klein, for inviting me to speak here today. As both ben and aaron mentioned, four years ago, i did have the opportunity to speak at brookings about an unappreciated risk, large Regional Banks in the United States for better or worse, it is probably fair to say that risk is perhaps better appreciated today than it was a few years ago. The key point made in that speech is that while Regional Banks may not be as large and complex and internationally active as the socalled global, systemically important banks, the gsibs, they posed risks. That was the key message of late speech. In particular, the speech pointed out, the regulatory banks is a core vulnerability. That alliance have the potential to create a destabilizing contagion effect on other banks. If one Regional Bank were to fail and uninsured depositors took license. And we had evidence i did not make it up there was evidence to support this. In order to illustrate the point, the speech contrasting the failures of Washington Mutual bank and indymac bank during the Global Financial crisis of 2008. As both aaron and been mentioned, ive been around long enough to remember those experiences. Washington mutual, a 300 for billiondollar institution, was the Largest Bank Failure in u. S. History. Later, it was resolved at no cost to the Deposit Insurance Fund, and uninsured depositors suffered no losses. Indymac, which was a 30 billiondollar, 1 10t ofh the size of Washington Mutual, get it proved to be the costliest failure in fdic history up to that point, had over 12 billion, and uninsured depositors suffered losses. Now, in number of reasons led to the different outcomes in those two cases, but it particularly important when im going to talk about today was that Washington Mutual has sufficient unsecured debt to absorb all the losses of the bank, and indymac had none. If we had any doubt about the challenges in resolving Regional Banks and the potential for significant adverse impact on the Financial System, those doubts were dispelled by the failure in the spring of three large Regional Banks Silicon Valley bank, Signature Bank, and First Republic bank. While the fdic resolved all three of those institutions in a manner that mitigated Systemic Risk, that outcome was by no means certain. In particular, the resolution of Silicon Valley bank and signature require the use of extraordinary authority by the ftse, the Federal Reserve, and the treasury, the socalled Systemic Risk exception, under the federal deposit insurance act, to protect depositors, setting aside the least cost requirement to the Deposit Insurance Fund. That experience should focus our attention on the need for meaningful action to improve the likelihood of an orderly resolution of large Regional Banks under the federal deposit the expectation under the federal deposit insurance act, without the expectation of invoking it. So i would like to discuss this issue in light of our recent experience, and in particular, i believe there are important changes to capital regulation, Resolution Planning requirements, including longterm debts, bank supervision, and deposit insurance pricing that would make a repetition of the current much less likely. So just to provide context, peoples memories are remarkably short, even two or three months. Just to provide context, and may be worth recounting events of earlier this year, just as a reminder. When Silicon Valley bank failed overnight, on friday, march 10 i do remember it well the fdic initially established what we call a Deposit Insurance FundNational Bank under fdic control , so that depositors would have access to their insured funds on the monday after failure. Uninsured depositors would have access to a substantial portion of their funds through the payment of what we call an advanced dividend, but a portion of those uninsured deposits would be holdback in receivership and would extend losses, depending on the losses to the Deposit Insurance Fund. That is the way it normally works. Now, as it turned out, the prospect that uninsured depositors at Silicon Valley bank would experience losses alarmed uninsured depositors at other similarly situated banks, and they began to withdraw funds. Signature bank and First Republic bank experienced heavy withdrawals. A contagion effect became apparent at these and other banks. There was clear evidence that the failure of a Regional Bank, in which uninsured depositors faced losses, could cause genuine systemic disruption. So in response, on sunday, the authorities invoked the Systemic Risk exception to the fdics least cost test. This allowed the fdic to protect all depositors at Silicon Valley bank and at Signature Bank. They were placed into separate bridge banks under fdic control, Silicon Valley bank to flagstone bank, asus is very great, and Silicon Valley bank was sold to weeks later to First Citizens bank of north carolina. And, as you will know, First Republic bank in california also experienced a large outflow that weekend and managed to survive at least the bank the weekend. The bank tried to raise capital but was unsuccessful. The state of California Closed the bank. The fdic had time before the bank was closed to conduct a Competitive Bidding process, which resulted in Jpmorgan Chase submitting the least cost bid and submitting all of the deposits of First Republic. The winning bid had the insured depositors under the leastcost test and did not require a Systemic Risk exception. In brief, that was the story in march and april. So what should we learn from this episode . What should we take away from this experience . The three banks that failed this spring shared comment characteristics that made them more vulnerable. Reports from the Federal Reserve and the fdic on the failures of Silicon Valley bank and Signature Bank, respectively, found that they were poorly managed and not responsive to supervisory feedback, and their supervisors were not forceful enough and requiring them to take corrective measures. In addition, the three banks grew rapidly and relied heavily on uninsured deposits for funding. Two of them had uninsured deposits approximating 90 , about 90 of their funding, and a third approached 70 . Further, two of them had unrealized losses on security or low you will loan portfolios that were large. All three had little or no longterm debt outstanding. These characteristics proved to be a toxic combination when each bank faced stress. In addition, the Resolution Plans that have been received from two of the three banks were limited in content. So theres some obvious lessons here that we now have an opportunity to address, and that is what i want to talk about. Let me begin by Capital Requirements and the capital treatment of these unrealized losses on the Balance Sheets of the banks. In late july, the three federal baking banking agencies usually notice of proposed rulemaking to implement the basel three capital rule. Theres a lot in that couples proposal, as you probably know, what is a step to addressing one of the key vulnerabilities to failures. Under the proposal, unrealized losses, which flow through regulatory capital for all banks , is over 100 billion in assets. That means, to be clear, that those banks, in order to maintain their capital levels, would have to retain or raise more capital as these unrealized losses occur. Its worth noting in regards to Silicon Valley bank that those its failure was caused by a liquidity vine, the loss of market confidence that precipitated the run was by the sale at a substantial loss that raised questions about the capital adequacy of the bank. This loss of confidence follow the announced self liquidation of another local institution, silvergate bank, of bay area, in case you have all forgotten about that is addition. That paint had announced its sales available at a substantial loss and plan capital rates just a week earlier. At Silicon Valley bank, th