About the collapse of silicon bank west church of the largest Bank Failures in u. S. History. Congressman mchenry discussed the role the Federal Reserve and the Deposit Insurance CorporationBank Regulation of Risk Management. This event as hope and by the brookings institution. Kground noises] [background noises] good morning everybody. Im director on fiscal and Monetary Policy and be half the hutch and Center Center on me you to this event both the people in the room and the people watching remotely. Our subject today is what lessons we have learned from the really interesting efforts of march 2023. A year ago the glol Financial System suffered the most significant banking stress since the Global Financial crisis of 2007 and eight. As you all probably know if event Silicon Valley bank failed prompt and the fdic to take it over the middle of the dayay could not even make d it to the weekend which is as a one off event. Silicon valley was certainly for lack of a better term unusual. The deposits were uninsured is woefully unprepared for decrease in Interest Rate that eroded the values of its securities portfolio it was followed by with some of called the panic of 2023. The phillies of Signature Bank and itsoversees to arrest what u. S. Authorities fear is a destabilizing bank running u. S. Authorities invoked Emergency Powers to cover all uninsured deposits and create an usually generous emergency lending facility. Thesein actions stabilize the Financial System and shielded the economy from harm. The recent troubles of new York Community bank or court bancorp and unfortunately named first bank core are reminders that there still banks that are in trouble. Particularly those who invested in commercial real estat so i think it is understood Bank Failures are inevitable despite all the changes to rule the liquidity regulation and Risk Managementriskmanagement since a global crisis. A but today we ask what lessons weou episode of policy policymakers and regulators not the biggest banks can threaten the stability of the entire Financial System. And up with tax payer writing to the rescue once again. Somebody im not sure who was originally responsible for this phra first from the , economic historian who originally won the nobel prize you dont know where youre going and what you know where youve been. So today were p going to start the panel i am moderating that will look specifically what lessons we should learn about su regulation, Bank Risk Management and what should be changed at the the very good panel agent isirector of Capital Markets department where he has been for seven years. Beforese that he spent 13 years with the new york fed and his colleagues at the imf have today published report on what we learned about what happened march 2023 its also going to report about supervision which has been a concern for a long time. Susan mcglaughlin is at the program and Financial Stability a 30 year veteran of the new york fed who important for this conversation oversaw the lender ofof last resort function at the new york fed. Controllers allowed to land ill be joined by billll who is chair and ceo bill joined in 2002. Has been the ceo since 2013. Our plan when to moderate a panel here i hope we have time this planet will be followed by a conversation with my colleague erin klein hes going to hold with patrick my henry im sorry the republican congressman from north carolina. Who has chaired the House Financial Services committee but was made famous when he was the interim speakers about the bow tie who smiles broadly when he finally got relieved of that great job of being speaker of the house. Going to moderate a Panel Following that. On resolutions the dodd frank act told us we were not going to have to have any more rush rescues of bank because we set up a resolution system that was supposed to avoid this. It was not invoked for various reasons as to what we learned habout resolving failed banks . Would be cochair of paul weiss former chairman of the White House NationalEconomic Council and vice chair of ibm. Senior policy analyst americans previously worked at deutsche bank. In it for 13 y examiner. She can tell us how it works and why they missed all these things. What we are going to and ask to be the first to talk about Bank Supervision and what we learned about bank supersion. And its weaknesses during the year ago crisis. Thank you for hosting this event and thank you for bookings staff to organize. The one Year Anniversary for breaking terminal as b opposed to the bankinge crisis, the banking turmoil of 2023 happened about a week from now when year ago. Let me start by noting was the management of the institutions that ended up in distress. When you look at the Business Model and some of the other Regional Banks that were distressed lastin year it was highly concentrated exposure on both the appetite and liability side of the Balance Sheet two. Withni the large dependence uninsured deposits highly concentratedn valley firm. Its ultimately with the institutioninstitution the policy question is could there have been more action enter to contain the broader fallt out . As you noted in the opening remarks from banks will fail. How corporate life goes. There was a spillover effect. In fact, thinking back of last year both the Federal Reserve together with the treasury and ultimately the white house had to take emergency measures they use the Emergency Powers in the case of the Federal Reserve for lending powers the r extension. To contain the followup of the failure of these Regional Banks. Very successful. The Crisis Management tools available making uninsured these are very, very aggressivedo actions. It worked very well but could done to prevent even going there . So what is interesting when you look at the history a number of reports by the fdic that really look in great detail as to what happened. And the interesting thing there is supervision and im going to focus on supervision here. Supervisors did like the for months instead of years in and other institutions flagging the liquidity problems of the Interest Rate risk exposures. The failures and Risk Management. They are clearly they they are, the letters were being sent but what they did not do is to use their powers to get the commitment by management to remedy those issues. The weight we describe it in the paper you held up as there is supervisory hesitation. The supervisors hesitated to act aggressively to get agreement from management to fix the shop. Me the issues where they are and management basically ignore the letters. But striking in the. S u. S. Supervisors dont have the legal power to take aggressive action. The supervisors had all the legal basis but they were not its the hesitation of the supervisors that need fixing. They did see many of the problems but they hesitated to act. When you think about about the regulation there are three pillarthere is a regulation and there were issues to regulation were happy to talk about that. There is supervision the issue supervision was the hesitancy and then theres the market discipline. I would argue all three had issues supervision was the hesitation as opposed to the legal power at the time the mayor other things which are often times the issue. Whats the solution to addressing supervisory hesitation . Is that bad incentives is that what help them back and how do we change that . What isbi interesting when you look at the supervision federal Banking Institutions in the u. S. After the 2008 crisis there was a massive reervision focusing very much on the details. Mobley systemic. This is an ae. I did not realize. Their own language that we speak. Really scaled up the seniority of supervisors engaging with ensenior management in a much more forward leaning using as a key tool to get out forwardlooking liquidity mismatches as a capitol issue is a quality at the Regional Banks were not being banned. In fact the u. S. Introduced its regulatory scold regulatory tailoring but regulation and supervision that was tailored so the smaller Regional Banks between these Regional Banks were not subject to the same regulation. The regulation we do think needs fixing but the supervision is really about the culture of the supervisors how supervision is managed. D. Many of t there. Thefor. The lender of last resort function at Central Banks is historically 130 years more back like walter badgett and the notion is banks have very quid assets and loans to mortgages and Business Loans very liquid liabilities. And just like in that mary poppins movie you can have a bank run where everybody wants to get their money out and the bank has assets that are still good but they dont have the cash to pay out. We learned during the Great Depression you can have a bank runs that can screw up the whole economy so we set up a system of deposit insurance to discourage runs. Thats not a bailout of the banks on the central and the fed or thef bank of england says if you have good assets give us your assets as collateral we will lend youou money so you can make your depositors whole and theyve talked about the synergy between liquidity insolvency. If everyone believes your soul and they wont take the money out and in order to assure them they can get their money out the central bank. You have had a lot of experience lender of last resort function the window and its analogues. Theres been some concern it d have. Suut absolutely. Your description is wonderful last resort is right. It is really designed to provide confidencece a solvent banks ability it has value from spreading to other banks as well. Until it is mainly centered on supervisory reforms and that is understandable. Theres been a pretty limited discussion of lender of last resort as a discount window because youre out your matter eight asked the discussion of the discount window has things. Encouraging banks to be ready to use the window in times of stress and requiring banks to preposition collateral in some some proportion to the runnable liabilities. I think what is missing from the debate is the is issues of stigma that accompanies the discount window. Back in the 1920s reasons we can talk about later if we have time but basically theres a lot of segment that accompanies the use of the discount window so banks are reluctant to use the window when they initially have liquidity needs that areematicic because banks are ready but theyre not willing to use the tool the tool can do its job on contagion risk. I see a disconnect between current messaging from officials discount window when they needed on the way the discount window Borrowing Capacity is treated and how we supervise things with Risk Management theres a lot of opportunities here which i will talk about in a minute to make the two tool supervision and the lenderd of great last resort Work Together and march of the same direction to enhance Financial Stability. Why stigma problem . As i noted banks are ready but not willing to use the window. Then the discount window cannot do its job. In mitigating Systemic Risk. And importantly stigma undermines the cause o readiness. Im a bank i know my management does not want me too use this from going get criticized by my supervisor for using it, i do not use it and probably not going to be preparing too use it. And then when i needed its going to be very challenging. In fact we saw this last year so would not test of the discount window their ability to borrow for the past year before their demise. Most was parked at the federal homefederalHome Loan Bank. So when the time came to move that to their Federal Reserve nkbank there werent arrangements in place to do that. There is a lack of understanding but the operational cut off time they had to observed to be able to move collateral that sameim day. Obviously by the time theyy wanted to hit the discount window is too late. Signature perhapsvenore egregious case they did not even have discount window as part of their contingency funding plan. That not tested the discount window their ability to borrow from it for about five years before their demise. And when it came d time to try to borrow from the discount window they were not familiar with the collateral eligible to w guidelines of the fed they spent some time in their final days trying to pledge ineligible collateral which was not helpful to them. So, i think both discount window bar it would not have saved either were expensing solvency issue its really clear tonc say it could have slowed down the run on those banks and it could also have float or sto the contagion of the runs to other Regional Banks what they are more characteristic. The window can all be effective if banks are actually willing to use it when they need it. How to reduce stigma . This is a complicated problem stigma is a multifacetedte went Public Sector entity can solve it on their owni to think there things about the central bank and Bank Liquidity regulators can do to reduce stigma. Several thing the fed can do develop and execute a clear gy longterm communication strategy to the publican. To make clear primary credit is a legitimate source of funding for solvent banks against good collateral when they need it. I think theres a lot of confusion on this point we have a long checkeredry again since the 1920s whether the discount window tool is something that should be used bwhen needed or is not okay to use. Second it could explorepl a way to administer secondary credit which is really akin to reco resolution funding. Its kind ofthis kind of separately from administration primary credit at the discountw. Window. This could help to reduce the embodying the waters ive having solvent and weak banking programs lending programs. Its so secondary banks and in trouble . The official language is for banks not eligible for primary credit. [laughter] yes. Essentially its akin to recovering resolution funding and practice. Y have drawn a much brighter line between lending and solvent banks and weaker bank for Central Banks have tended to more success having a stigmatized than a solvent institution. But there thing the fed could do is improve its operationalprocess to make collateral easier to access against banks. I am sure you have much to say about this but illborrowing from the window is a manual process obey calls as a period of time the staff are checking to make sure its okay to approve the loan. I think that pause for a solid month with good collateral decision collateral is unencumbered it almost seems to signal. It is kind of a legacy of ambiguity that started in the s20s. Why not automate the check for collateral borrowers make it more restrictive process . That would be another way toss is a legitimate tool to use. Finally the fed could read visit is for a good revisit to better balance thef tradeoff creating stigma if its efforts to hide the discount was it 100 basis points as it was before the gse . Is zero basis points as we have today . That would be a really useful effort to look at that. I think also think about how its priced relative to credit extended by federal Home Loan Banks. Might be a useful exercise as well. Trucks bank regulars have a role in reducing stigma. Bank regulators can bes the requirements and guidance to align more with the idea the fed is pushing legitimate source of shortterm funding. For example if requiring banks to preposition why not consider counting some portion of the assets. High quality. Thats a violation non highquality liquid assets pledge and liquidity coverage ratio. Theres a lot of talk in a fed right nowow very good message of encouraging banks to use the discount window and t it in its contingency plan and to test regularly. Why not require that . Though be a really important requirement rather than letting banks decide whether the going to be right lets just lessers require they be ready. And if we ever target discount window to part of the contingency Funding Agency plan dity and banks with liquidy stress test and resolution fundingan plans . The bottom line is we can reduce stigma at the discount windows been with us for long time is not going to be easy. It will require a concerted effort across central bank and Bank Liquidity regulators. But it is something we should do to ensure weto have an effective lender of last resort. Think it might pick up on two points. One is it would not have saved Silicon Valley bank because they were a mess