WEBVTT - Why US Banks Are Trying to Turn Themselves Into Super Apps 0:00:02.480 --> 0:00:07.040 Bloomberg Audio Studios, Podcasts, Radio News. 0:00:18.040 --> 0:00:21.080 Hello and welcome to another episode of the All Thoughts podcast. 0:00:21.200 --> 0:00:22.560 I'm Tracy Alloway. 0:00:22.280 --> 0:00:23.400 And I'm Joe Wasenthal. 0:00:23.920 --> 0:00:26.479 Joe, if I had said to you a few years 0:00:26.480 --> 0:00:30.680 ago that there's a bank and the bank is taking deposits, 0:00:30.920 --> 0:00:34.280 you know, checking accounts, and it's putting that money into 0:00:34.600 --> 0:00:39.400 US treasuries, and that business model is going to completely fail. 0:00:39.960 --> 0:00:42.480 The bank is going to collapse, what would you have said? 0:00:45.200 --> 0:00:47.560 I said, let's short the stock. That's what I would 0:00:47.560 --> 0:00:49.479 have said. I said, if you told me that and 0:00:49.560 --> 0:00:52.919 you knew the only insight, the only actionable thing there, 0:00:52.960 --> 0:00:54.000 I said, all right, let's short it. 0:00:54.080 --> 0:00:55.360 All right, that's the right answer. 0:00:55.520 --> 0:00:55.960 Clearly. 0:00:56.120 --> 0:00:58.640 If you were a banking regulator, what would you have done? 0:00:59.240 --> 0:01:02.840 Well, I don't know anything about big a banking regular 0:01:03.000 --> 0:01:06.960 It seems really hard. And regulators in general often get 0:01:07.000 --> 0:01:11.360 criticized in various ways, and they're like, oh, you busted 0:01:11.360 --> 0:01:14.240 this really small time tiki tech insider trading ring. It's 0:01:14.280 --> 0:01:16.600 not that big of a deal. Or oh, here's this 0:01:16.880 --> 0:01:18.920 thing that collapsed and why didn't you catch it before? 0:01:18.959 --> 0:01:20.959 They're always going to get upset about that. But I 0:01:21.040 --> 0:01:22.840 have to say, I have a lot of sympathy for 0:01:22.880 --> 0:01:26.120 the regulators because for the most part, my impression is 0:01:26.160 --> 0:01:30.240 that the US has one of the most robust, transparent, 0:01:30.440 --> 0:01:34.119 high depth capital markets and financial systems in the entire world, 0:01:34.360 --> 0:01:37.280 which for the most part does not collapse. And so 0:01:37.360 --> 0:01:39.840 I feel like when it comes to regulatory issues, there's 0:01:39.880 --> 0:01:42.200 a lot of unseen where what we see is like, 0:01:42.520 --> 0:01:44.880 if they're in the news, it's not good. But most 0:01:44.880 --> 0:01:46.200 of the time things aren't the news. 0:01:46.280 --> 0:01:50.000 That should be the tagline for America's financial system most 0:01:50.040 --> 0:01:53.960 of the time does not collapse. Yeah, and ironically, well 0:01:54.360 --> 0:01:57.000 I'm talking of course, or I was talking about Silicon 0:01:57.080 --> 0:01:59.480 Valley Bank. Yeah, and the collapse there, And I think 0:01:59.600 --> 0:02:02.520 it's still very surprising to me. In one sense it 0:02:02.600 --> 0:02:05.280 was an old fashioned bank run, But in another sense, 0:02:05.320 --> 0:02:08.239 it's very surprising that here's a bank that's basically buying 0:02:08.280 --> 0:02:12.480 a bunch of ultra safe assets US treasuries and still 0:02:12.560 --> 0:02:15.680 it ran into trouble. And banks, of course are mandated 0:02:15.680 --> 0:02:18.440 to buy treasuries as well. We've talked about this on 0:02:18.480 --> 0:02:21.959 the show any number of times now, but I want 0:02:21.960 --> 0:02:22.840 to talk more about it. 0:02:23.040 --> 0:02:25.000 Sure, you know. The one thing I'll say too, that 0:02:25.000 --> 0:02:27.679 I've been thinking a lot with SVB is. I think 0:02:27.720 --> 0:02:29.120 in the wake of the two thousand and eight two 0:02:29.120 --> 0:02:33.200 thousand and nine financial crisis, we got very focused on 0:02:33.200 --> 0:02:35.680 the asset side of the balance, right, and so it's like, 0:02:35.800 --> 0:02:37.880 what they hit, what kind of subprime loans do they have, 0:02:38.080 --> 0:02:40.320 and how good are there all of that, et cetera. 0:02:40.680 --> 0:02:42.640 But one of the things, you know, like Josh Younger 0:02:42.800 --> 0:02:45.720 talked about recently in others. Stephen Kelly had a note 0:02:45.720 --> 0:02:47.800 in our newsletter, you know, a lot of it is 0:02:47.840 --> 0:02:52.560 the difficulty in modeling the liability side and the slipperiness 0:02:52.720 --> 0:02:55.360 of the deposit base and how hard that is to 0:02:55.400 --> 0:02:58.000 know because you can have long duration deposits that suddenly 0:02:58.000 --> 0:03:01.560 become overnight deposits. It's really tricky, and I still think 0:03:01.600 --> 0:03:03.480 these are difficult things to understand. 0:03:03.639 --> 0:03:06.480 Yeah, it feels like we're always fighting the last bank 0:03:06.600 --> 0:03:09.799 battle or the last bond battle. Okay, Well, on that note, 0:03:09.840 --> 0:03:12.160 we do, in fact have the perfect guest. We are 0:03:12.200 --> 0:03:14.600 going to be speaking with ro Hit Chopra. He is, 0:03:14.680 --> 0:03:19.080 of course the former director of the Consumer Financial Protection Bureau, 0:03:19.400 --> 0:03:23.280 also a former FTC commissioner, so really the perfect person 0:03:23.360 --> 0:03:25.280 to talk to. If we want to dig into what 0:03:25.360 --> 0:03:28.560 happened to SVB, what it means for bank regulation, and 0:03:28.600 --> 0:03:32.720 then also what banks are doing right now. Hit Thank 0:03:32.760 --> 0:03:33.400 you so much. 0:03:33.200 --> 0:03:35.080 For coming on all thoughts, Thanks for having me. 0:03:35.680 --> 0:03:38.440 Here's my first question. Maybe it's a little pointed, but 0:03:38.600 --> 0:03:41.520 does the CFPB still exist? So we just got the 0:03:41.560 --> 0:03:44.760 one big beautiful bill that's been passed and it looks 0:03:44.840 --> 0:03:47.600 like it slashes funding for the bureau, And of course 0:03:47.920 --> 0:03:51.600 we know that Trump isn't exactly a fan of federal agencies, 0:03:51.760 --> 0:03:53.720 so I'm curious is it still functioning? 0:03:53.760 --> 0:03:54.680 There's already kind of good at it. 0:03:54.800 --> 0:03:58.200 Yeah, anyway, it's a good question, and it seems by 0:03:58.440 --> 0:04:03.160 every single piece of evidence that it's just maybe there 0:04:03.280 --> 0:04:06.600 technically but not doing a damn thing. We are hearing 0:04:07.320 --> 0:04:12.360 nearly every day about another financial institution that is being 0:04:12.440 --> 0:04:16.240 released from obligations. It has been months since there has 0:04:16.360 --> 0:04:20.840 been an enforcement action, and many are estimating that this 0:04:20.960 --> 0:04:24.479 means billions and billions of dollars that consumers are not 0:04:24.560 --> 0:04:28.960 getting back in refunds and frankly a big disadvantage to 0:04:29.680 --> 0:04:32.960 all of those financial companies that follow the rules. 0:04:32.839 --> 0:04:36.120 When it was working, when or when it was operating, 0:04:36.360 --> 0:04:40.240 describe to me what the remit of the CFPB is. 0:04:40.279 --> 0:04:43.200 And one of the criticisms of the people leveled is 0:04:43.200 --> 0:04:45.680 they didn't know what the scope was, etc. What is 0:04:45.760 --> 0:04:47.800 the formal scope of the CFPP. 0:04:47.960 --> 0:04:52.880 Well, essentially, we saw decades ago that there weren't just 0:04:53.120 --> 0:04:57.240 banks in the business of offering consumer loans and products. 0:04:57.640 --> 0:05:02.080 It was all sorts of other companies heyday lenders, auto lenders, 0:05:02.120 --> 0:05:05.600 and in fact now the bulk of mortgages are originated 0:05:05.680 --> 0:05:09.360 outside of banks, the bulk of auto loans, and so 0:05:09.640 --> 0:05:14.560 after the subprime mortgage crisis, there was broad agreement that 0:05:14.600 --> 0:05:19.200 the Federal Reserve Board and other agencies just didn't focus 0:05:19.440 --> 0:05:23.880 and have the attention on making sure that existing consumer 0:05:24.040 --> 0:05:28.720 law was being followed. So the CFPB is responsible for 0:05:28.760 --> 0:05:34.760 inspecting the largest financial institutions and taking them to court 0:05:35.040 --> 0:05:38.520 when they break the law. Of course, also administering all 0:05:38.600 --> 0:05:43.279 sorts of rules that keep the mortgage markets, the credit report, 0:05:43.440 --> 0:05:46.120 credit reporting companies, and so many others in line. 0:05:46.520 --> 0:05:50.440 How does the CFPB interact with all the other bank 0:05:50.560 --> 0:05:54.279 policy stakeholders, because there seems to be quite a few. 0:05:54.320 --> 0:05:58.400 You mean, the other regulators. The CFPB is the only 0:05:59.440 --> 0:06:05.640 regulate that oversees that gigantic non bank consumer lending apparatus, 0:06:06.160 --> 0:06:10.920 and also it has primary and exclusive jurisdiction overall banks 0:06:10.920 --> 0:06:14.800 and credit unions over ten billion in assets. That means 0:06:14.800 --> 0:06:19.440 every credit card company, every big player in the market 0:06:19.920 --> 0:06:24.000 is primarily overseen by the CFPB. So the fact that 0:06:24.400 --> 0:06:28.320 it is now functionally a dead fish is leaving a 0:06:28.480 --> 0:06:32.040 very very big gap that no one can even legally 0:06:32.080 --> 0:06:32.480 fill in. 0:06:33.360 --> 0:06:35.680 Where do you see the biggest gap manifesting right now 0:06:35.720 --> 0:06:40.200 when you look at the consumer financial landscape, What isn't 0:06:40.279 --> 0:06:44.360 being enforced or what isn't being examined that in your 0:06:44.480 --> 0:06:46.680 view merite enforcement or examination. 0:06:46.839 --> 0:06:50.039 Well, I think the top priority is always trying to 0:06:50.160 --> 0:06:55.800 understand the linkage between the biggest markets and the broader economy. 0:06:55.839 --> 0:06:59.200 We saw that that linkage with the mortgage market was 0:06:59.320 --> 0:07:03.640 pretty damn big, and its failure really crashed not just 0:07:03.720 --> 0:07:08.359 the US financial system but the entire global marketplace. So, 0:07:08.440 --> 0:07:12.640 of course, making sure that mortgages are fair and transparent, 0:07:12.760 --> 0:07:16.480 that key rules like the qualified Mortgage Rule, which sets 0:07:16.480 --> 0:07:19.400 some of the core standards to make sure there is 0:07:19.440 --> 0:07:23.480 not predatory mortgage lending, but also the nuts and bolts 0:07:24.200 --> 0:07:27.800 most of the issues that come in are people who 0:07:27.880 --> 0:07:30.560 have errors on their credit report they say, that's not 0:07:30.640 --> 0:07:35.920 even my name, or people whose bank accounts were illegally 0:07:36.000 --> 0:07:40.400 debited or cleaned out due to fraud. There's all sorts 0:07:40.440 --> 0:07:46.880 of issues that protect specific populations, military members, and so 0:07:47.040 --> 0:07:51.440 many other pieces that keep the markets working. So I 0:07:51.440 --> 0:07:54.560 don't want to pinpoint anything other than to say that 0:07:54.640 --> 0:07:58.040 when I took office, it was after another few years 0:07:58.080 --> 0:08:01.480 where there really wasn't much going on there, and we 0:08:01.640 --> 0:08:05.960 saw how financial firms not just push the envelope, but 0:08:06.040 --> 0:08:10.560 sometimes outright took advantage of people without any accountability. 0:08:11.360 --> 0:08:14.960 Well, speaking of accountability, you know, we mentioned SVB at 0:08:14.960 --> 0:08:18.200 the top of the show, and one thing I've heard 0:08:18.200 --> 0:08:20.840 there's a little bit of a chicken and egg situation 0:08:21.200 --> 0:08:24.680 when people are analyzing the root cause of that particular 0:08:24.920 --> 0:08:28.160 bank collapse. So some people say, well, interest rates went 0:08:28.240 --> 0:08:31.960 up and that led to paper losses on the bank's 0:08:32.000 --> 0:08:34.839 bond holdings, and so people got nervous and started pulling 0:08:34.840 --> 0:08:37.960 their money. And then other people say, well, people started 0:08:37.960 --> 0:08:42.360 pulling their money even though the bond losses didn't necessarily 0:08:42.400 --> 0:08:45.839 need to be crystallized anytime soon. So I'm curious, can 0:08:45.880 --> 0:08:51.040 you pinpoint the spark that set off the latest bank crisis. 0:08:51.200 --> 0:08:57.040 Well for me, it really was March eighth, twenty twenty three. 0:08:57.800 --> 0:09:01.720 Two things happened that day. One was the wind down 0:09:01.840 --> 0:09:06.800 of a bank called Silvergate Bank, which was heavily involved 0:09:06.920 --> 0:09:11.360 in banking some of the major crypto trading platforms. There 0:09:11.440 --> 0:09:15.240 was a flight of deposits out of that bank after 0:09:15.640 --> 0:09:19.640 the crypto winter and the collapse of FTX. We had 0:09:19.679 --> 0:09:22.760 been tracking I Serve on the FDIC board and we 0:09:22.760 --> 0:09:26.400 were tracking Silvergate Bank, and on that day they announced 0:09:26.440 --> 0:09:29.200 that they were not going to need to be put 0:09:29.200 --> 0:09:33.680 into receivership, they would be self liquidating. And simultaneously, on 0:09:33.760 --> 0:09:38.559 that same day, we had an announcement by Silicon Valley Bank, 0:09:38.679 --> 0:09:41.640 which was a little bit of a goofy press release 0:09:41.720 --> 0:09:47.080 they issued saying they're experiencing some real losses on their 0:09:47.120 --> 0:09:51.320 securities portfolio and they're going to be looking for capital. 0:09:52.200 --> 0:09:57.280 It raised a lot of red flags and suspicions about 0:09:57.320 --> 0:10:01.200 whether they were viable. And this is something that is 0:10:01.280 --> 0:10:05.800 just so fundamental about banking and deposit taking is that 0:10:06.320 --> 0:10:09.400 it really is based on a belief that your money 0:10:09.480 --> 0:10:12.040 is going to be there. And the truth is is 0:10:12.480 --> 0:10:17.840 with federal deposit insurance and Federal Reserve discount window lending. 0:10:18.600 --> 0:10:22.720 It always is, except when you have a bank that 0:10:22.840 --> 0:10:28.200 is over ninety percent uninsured deposits. This is something that 0:10:28.320 --> 0:10:32.160 is really unusual, and some would argue as not even 0:10:32.200 --> 0:10:36.000 really a bank when you are that dependent on very 0:10:36.120 --> 0:10:41.400 very large depositors that you grew so quickly, and so 0:10:42.120 --> 0:10:44.120 then the run began. 0:10:44.840 --> 0:10:49.079 How much would you ascribe it to the high percentage 0:10:49.320 --> 0:10:55.760 of non insured deposits versus the concentration so in very 0:10:55.760 --> 0:10:59.040 specific industries. So you mentioned the crypto one, but also 0:10:59.120 --> 0:11:01.800 here are all of these startups. It had raised a 0:11:01.840 --> 0:11:04.560 ton of money in twenty twenty and twenty twenty one. 0:11:05.160 --> 0:11:06.920 A bunch of them apparently just put their money on 0:11:07.000 --> 0:11:09.920 a bank, which is kind of weird to me, non insured, 0:11:10.000 --> 0:11:12.640 and then we had the stock market plunge in twenty 0:11:12.679 --> 0:11:16.400 twenty two. Funding dried up. There was no very little 0:11:16.520 --> 0:11:19.400 new VC fundraising, so new dry powder to be put 0:11:19.440 --> 0:11:22.440 into the bank. Startups drawing down their own deposits just 0:11:22.440 --> 0:11:24.800 to make payroll or whatever else. And so you have 0:11:24.840 --> 0:11:27.120 two things going on. One is the high level of 0:11:27.160 --> 0:11:30.320 uninsured deposits, but also the concentration, so that there was 0:11:30.360 --> 0:11:33.760 this one specific sector that was all going through the 0:11:33.800 --> 0:11:34.839 cycle at the same time. 0:11:34.960 --> 0:11:37.679 So let me just push on that because even though 0:11:37.720 --> 0:11:40.400 it is one sector, and I agree with you, the 0:11:40.440 --> 0:11:45.520 concentration was an important factor in this. But let's remember 0:11:45.640 --> 0:11:51.160 that the individual firms that were funded by venture capital, 0:11:51.240 --> 0:11:54.120 many of them were doing fine. There was not necessarily 0:11:54.240 --> 0:12:00.640 something specifically or systemically wrong with those businesses. But I think, 0:12:01.400 --> 0:12:04.160 and I agree with every small and mid sized business 0:12:04.200 --> 0:12:08.520 out there. If I am launching a startup, whether it 0:12:08.600 --> 0:12:13.440 is an AI company or a dry cleaner, it doesn't 0:12:13.520 --> 0:12:16.800 rank in the top twenty reasons of my business failing 0:12:16.880 --> 0:12:19.640 that my bank is going to fail. Sure, And so 0:12:19.760 --> 0:12:23.640 what you start hearing is that these businesses, which are 0:12:23.720 --> 0:12:29.240 highly networked as well as much faster communication, you get 0:12:29.320 --> 0:12:33.720 the advice from your funders and others that you need 0:12:33.760 --> 0:12:37.679 to run. And it was very clear that it was 0:12:37.760 --> 0:12:41.680 not just happening at SVB, it then was happening all 0:12:41.760 --> 0:12:42.600 over the system. 0:12:43.200 --> 0:12:46.240 I was on a train to Connecticut around that time 0:12:46.440 --> 0:12:49.240 and someone was sitting kind of close to me, and 0:12:49.400 --> 0:12:52.160 it turned out they were banking with SVB. Their company was, 0:12:52.440 --> 0:12:54.640 and I could hear the panic and their voice as 0:12:54.679 --> 0:12:57.640 they tried to digest the news of what was happening. 0:12:58.080 --> 0:13:02.079 But on that note, why did corporate treasurers, why did 0:13:02.080 --> 0:13:04.560 they put all their deposits in a single bank when 0:13:04.600 --> 0:13:08.760 presumably they know that there's a cap on FDIC insurance. 0:13:08.880 --> 0:13:11.360 Yeah, it's a good question. I think there are some 0:13:11.559 --> 0:13:15.880 practical issues for some small and mid sized businesses about 0:13:15.920 --> 0:13:18.800 when you're running payroll or when you're getting in a 0:13:18.800 --> 0:13:21.839 lot of receipts. I don't have as much sympathy for 0:13:22.000 --> 0:13:25.320 some of the very large companies that we have learned 0:13:25.400 --> 0:13:29.920 through public reporting put a whole lot of funds in 0:13:29.960 --> 0:13:35.880 that bank, including really their entire cash reserves. So at 0:13:35.920 --> 0:13:38.839 the end of the day, though the regulators had, we 0:13:38.920 --> 0:13:42.920 saw an active run that was occurring, and of course 0:13:43.720 --> 0:13:48.280 those insured depositors, the insured depositors really through the entire crisis, 0:13:48.720 --> 0:13:54.199 did not really run. It was those uninsured started at 0:13:54.240 --> 0:14:00.840 Silicon Valley Bank after that Wednesday release. By fry Day morning, 0:14:01.880 --> 0:14:05.319 they were dead. We had actually voted the night before 0:14:06.000 --> 0:14:08.840 or maybe at the pre dawn hours to accept it 0:14:08.880 --> 0:14:12.200 into receivership, and I believe by the time it was 0:14:12.320 --> 0:14:17.040 closed it had roughly one hundred billion dollars queued up 0:14:17.080 --> 0:14:21.720 of outbound wires. So this was an enormous and fast run. 0:14:22.280 --> 0:14:26.240 And many of those techno libertarians that we often hear 0:14:26.320 --> 0:14:30.640 about who want no regulation, they were actively beating the 0:14:30.760 --> 0:14:33.960 drum online asking for a Baila. 0:14:34.160 --> 0:14:36.720 Well, this is actually interesting point. I was going to 0:14:36.760 --> 0:14:38.240 go there next. And I think again it was a 0:14:38.400 --> 0:14:41.320 thing that Stephen Kelly wrote for us. But one of 0:14:41.360 --> 0:14:44.160 the things about twenty twenty three, I think it said 0:14:44.280 --> 0:14:47.360 it wasn't a crisis of regional banks. It was a 0:14:47.400 --> 0:14:51.520 regional bank crisis, as in specifically the region of California, 0:14:51.560 --> 0:14:53.880 because then there were other parts of there were other 0:14:53.920 --> 0:14:56.240 banks that got into a lot of trouble, and the 0:14:56.280 --> 0:14:59.480 all thing they had in common was that they were 0:14:59.520 --> 0:15:02.040 all sort of in some way connected to California. I 0:15:02.080 --> 0:15:04.080 think I remember like people were going out looking for 0:15:04.080 --> 0:15:06.320 any bank that had California in the title in some 0:15:06.440 --> 0:15:09.640 way and betting against them. But talk to us about 0:15:10.040 --> 0:15:14.440 regulating banks and monitoring runs in the world of these networks, 0:15:14.480 --> 0:15:18.240 whether the the public networks on social media or just 0:15:18.280 --> 0:15:20.760 the sort of networks of like mind individuals who are 0:15:20.800 --> 0:15:21.960 all in the same WhatsApp group. 0:15:22.200 --> 0:15:26.280 Yeah, I'm a believer that we can never fight and 0:15:26.320 --> 0:15:29.840 We shouldn't want to fight the speed of communication. We 0:15:29.960 --> 0:15:34.440 want markets to have live information. I will say this, 0:15:34.640 --> 0:15:39.120 we saw the run start first at Silicon Valley Bank, 0:15:39.680 --> 0:15:42.720 and then I think because of the confluence of factors 0:15:42.720 --> 0:15:47.200 with Silvergate, it wasn't just California as anything that seemed 0:15:47.240 --> 0:15:52.240 to have any crypto or tech adjacency. Of course, the 0:15:52.400 --> 0:15:56.680 second bank that we closed that Sunday was Signature Bank, 0:15:56.720 --> 0:16:00.440 which operated a crypto network but also had a very 0:16:00.600 --> 0:16:03.840 real business. It is a New York City bank that 0:16:04.400 --> 0:16:07.800 was deeply involved in New York City multifamily real estate. 0:16:08.360 --> 0:16:11.280 You at the same time, Joe had people worried about 0:16:11.320 --> 0:16:15.600 commercial real estate. But what we were seeing was that 0:16:15.800 --> 0:16:20.680 the banks with the highest percentage of uninsured deposits, they 0:16:20.720 --> 0:16:24.800 were being badly battered almost immediately. 0:16:41.040 --> 0:16:44.720 So ultimately a decision was made to expand the deposit 0:16:44.840 --> 0:16:49.080 insurance net and basically bail out SVB customers and others. 0:16:50.240 --> 0:16:53.600 What was the decision making process like building up to 0:16:53.640 --> 0:16:55.960 that and how big a deal is that? Is there 0:16:56.040 --> 0:16:57.600 like a legacy from that decision. 0:16:57.840 --> 0:17:00.400 It's a very big deal, and it's one that in 0:17:00.480 --> 0:17:03.360 many ways is still hard to live with the decision, 0:17:03.440 --> 0:17:06.480 even though it was the right decision, I think. Here's 0:17:06.520 --> 0:17:11.800 how it works. The federal law basically directs the Federal 0:17:11.840 --> 0:17:17.200 Deposit Insurance Corporation the FDIC, to resolve a failed bank 0:17:17.320 --> 0:17:21.560 at the least cost to the Deposit Insurance Fund. That's 0:17:21.640 --> 0:17:26.400 the fund that everyone pays into with their bank deposits, 0:17:26.880 --> 0:17:29.320 and it builds up a fund to pay for certain 0:17:29.359 --> 0:17:33.600 bank failures and make sure deposits are made whole. And 0:17:33.680 --> 0:17:37.439 here's what was interesting about Silicon Valley Bank and Signature 0:17:37.520 --> 0:17:41.560 Bank and then later First Republic. It was a super 0:17:41.600 --> 0:17:48.040 majority of uninsured deposits. That means a bank failure is 0:17:48.080 --> 0:17:52.280 not that expensive to resolve. The cost to the Deposit 0:17:52.359 --> 0:17:57.040 Insurance Fund for a bank that is ninety percent plus 0:17:57.240 --> 0:18:02.560 uninsured is going to be pretty low. And if the 0:18:02.680 --> 0:18:06.760 law says resolve it at the least cost, in many ways, 0:18:06.800 --> 0:18:12.200 the best case is sometimes to liquidate it, make as 0:18:12.240 --> 0:18:15.040 many people whole as possible, and top them up with 0:18:15.119 --> 0:18:19.199 the deposit Insurance Fund. But there is a proviso in 0:18:19.280 --> 0:18:24.639 the law which says that if a failure is likely 0:18:24.880 --> 0:18:29.800 to lead to systemic effects or to threaten the viability 0:18:30.440 --> 0:18:34.880 of the US financial system, there's a process of key 0:18:34.960 --> 0:18:39.399 turning that a series of regulators must go through to 0:18:39.600 --> 0:18:43.719 recommend to the Treasury Secretary, who must consult with the 0:18:43.760 --> 0:18:47.920 President to authorize the FDIC to take a different path. 0:18:48.000 --> 0:18:53.840 So over the weekend the Sunday after the failure of 0:18:53.920 --> 0:18:58.639 Silicon Valley Bank, and Sunday morning, roughly Signature Bank was 0:18:58.720 --> 0:19:04.320 taken into receivership. First Republic was a zombie and basically 0:19:04.400 --> 0:19:09.879 dead already. There was a decision where the FDIC board 0:19:09.880 --> 0:19:14.119 we voted to turn that key, and the Federal Reserve 0:19:14.160 --> 0:19:18.399 Board had voted to turn that key, and ultimately the 0:19:18.440 --> 0:19:24.040 Treasury Secretary discussed it with the President and activated that authority. 0:19:24.119 --> 0:19:31.760 The authority essentially led to the backstopping of all uninsured deposits. 0:19:32.400 --> 0:19:36.960 That meant that everyone would be made whole in the 0:19:37.000 --> 0:19:40.600 case of the failure, and it was a tough decision. 0:19:40.720 --> 0:19:45.679 I think there was a question I was arguing and questioning, 0:19:45.760 --> 0:19:50.080 should we be maybe raising the limit dramatically, perhaps to 0:19:50.359 --> 0:19:53.720 twenty five or fifty million dollars. What we were seeing 0:19:53.760 --> 0:19:59.240 in the system was active movement of uninsured deposits everywhere, 0:20:00.280 --> 0:20:06.400 and ultimately the decision to invoke that exception really did 0:20:06.520 --> 0:20:09.800 calm the system for the most part with the big 0:20:09.880 --> 0:20:12.320 exception of First Republic Bank. 0:20:12.800 --> 0:20:15.639 So the other thing that happened other than the expanded 0:20:15.680 --> 0:20:19.680 deposit insurance was the creation of a new FED Lending 0:20:20.240 --> 0:20:24.639 facility another acronym, the BTFP. How big a deal was 0:20:24.720 --> 0:20:26.000 that one? 0:20:26.240 --> 0:20:29.000 That one was weird. All banks have the ability to 0:20:29.080 --> 0:20:33.480 access the discount window through the Federal Reserve, but the 0:20:33.480 --> 0:20:38.240 Federal Reserve used some bailout authorities to launch this bank 0:20:38.320 --> 0:20:43.160 term funding program. This allowed banks to pledge their treasury 0:20:43.240 --> 0:20:48.959 securities at par and draw funds from the Federal Reserve. 0:20:49.359 --> 0:20:51.280 I think there were a lot of us who raised 0:20:51.280 --> 0:20:56.000 our eyebrows at this. If the banks already had access 0:20:56.040 --> 0:21:01.880 to the discount window, why did they need this special program. 0:21:02.160 --> 0:21:05.359 I worried about the precedent setting of this. It was 0:21:06.040 --> 0:21:08.720 justified on the basis that there is stigma of going 0:21:08.760 --> 0:21:14.280 to the discount window. Ultimately, we saw some financial institutions 0:21:14.520 --> 0:21:18.919 game and arbitrage the program by drawing on it but 0:21:19.040 --> 0:21:22.040 then earning interest on reserves. I think we just have 0:21:22.160 --> 0:21:28.200 to be really careful when the Fed engages in lots 0:21:28.280 --> 0:21:32.159 of bailout programs, because it sends a signal to the 0:21:32.200 --> 0:21:35.520 market that they can expect it the next time. 0:21:35.359 --> 0:21:39.199 Around as a regulator. There are many people who say this, 0:21:39.320 --> 0:21:42.720 and you had a high level of scrutiny towards companies 0:21:42.720 --> 0:21:45.879 that banked crypto companies, and many of them claimed that 0:21:45.920 --> 0:21:48.399 they were treated unfairly. What is it just from a 0:21:48.480 --> 0:21:51.040 high level, let's start there. From a high level, what 0:21:51.280 --> 0:21:55.679 issues emerge when, if any issues emerge from a bank 0:21:55.760 --> 0:21:58.560 that tries to build up a business among crypto companies. 0:21:58.640 --> 0:22:01.680 I think this is a bit of a conspiracy theory. Yeah. 0:22:01.800 --> 0:22:04.600 No, look, I'm but I'm just from a regulatory person. 0:22:04.600 --> 0:22:06.800 Okay, go on, because because the truth is is that 0:22:07.800 --> 0:22:11.119 the issues with Silicon Valley Bank, as you know and 0:22:11.680 --> 0:22:16.320 described earlier, was really about being so deeply underwater on 0:22:16.400 --> 0:22:17.960 their treasure securities. 0:22:18.000 --> 0:22:20.400 But there's sure whether we're talking about Signature Bank, which 0:22:20.400 --> 0:22:23.720 did have a pretty big crypto book. But also you 0:22:23.800 --> 0:22:25.960 just get all these crypto companies like, oh, we don't 0:22:26.000 --> 0:22:29.080 have it's so difficult for us to find a bank account. 0:22:29.119 --> 0:22:31.080 Is it difficult for them to do banking? 0:22:31.240 --> 0:22:34.440 Yeah, so let's see what we mean about banking for 0:22:34.680 --> 0:22:39.440 crypto lending. Certainly there are going to be some banks 0:22:39.480 --> 0:22:43.400 who feel they have no expertise in this, I think 0:22:43.400 --> 0:22:46.840 the really interesting question is about deposit taking. 0:22:46.920 --> 0:22:49.119 Yes, definitely, I'm not talking about crypto. I'm talking about 0:22:49.160 --> 0:22:53.040 the deposit taking from crypto, native com cryptic company deposit taking. 0:22:53.640 --> 0:22:56.560 There are a set of issues that banks always are 0:22:56.600 --> 0:22:59.199 going to want to look at when it comes to 0:22:59.280 --> 0:23:02.399 taking very very large deposits with a lot of in 0:23:02.480 --> 0:23:06.119 and out activity, and much of that is related to 0:23:06.240 --> 0:23:10.879 their own obligations for money laundering as well as what 0:23:11.080 --> 0:23:15.479 was mentioned before, deposit concentration. So when you are a 0:23:15.520 --> 0:23:19.159 bank that has a couple of depositors who are the 0:23:19.359 --> 0:23:23.720 super majority of your deposit base, you're obviously going to 0:23:23.760 --> 0:23:26.760 take some steps to be careful around that. And I 0:23:26.800 --> 0:23:31.080 would say that the crypto issues in this run were 0:23:31.080 --> 0:23:36.080 fairly muted. It was really the perception about the potential 0:23:36.240 --> 0:23:40.000 exposures that we saw through the market, though I feel 0:23:40.080 --> 0:23:44.720 that within a few days the fixation again was on 0:23:45.359 --> 0:23:46.640 uninsured deposits. 0:23:47.520 --> 0:23:50.159 When it comes to the bond losses, it strikes me 0:23:50.440 --> 0:23:53.520 that the FED is kind of in a difficult position because, 0:23:53.560 --> 0:23:56.960 on the one hand, it has to conduct monetary policy. 0:23:57.040 --> 0:23:59.919 If inflation is high, it has to raise benchmark rates, 0:24:00.200 --> 0:24:02.680 But on the other hand, it also has a financial 0:24:02.680 --> 0:24:05.720 stability mandate. It's not part of the dual mandate, but 0:24:06.000 --> 0:24:09.399 it is a regulator, and raising interest rates in this 0:24:09.520 --> 0:24:13.280 case sparked a bank run. It seems how is the 0:24:13.320 --> 0:24:16.200 Fed supposed to balance these two goals. 0:24:16.480 --> 0:24:18.840 I don't see that as a balance at all. Okay, 0:24:18.960 --> 0:24:22.400 I think there is a lot that the Federal Reserve 0:24:23.240 --> 0:24:29.840 has really missed in many of the situations involving financial 0:24:29.880 --> 0:24:36.880 stability around Lehman Brothers, as well as even including COVID, 0:24:37.320 --> 0:24:42.119 But certainly this one was a more clear linkage where 0:24:42.400 --> 0:24:48.159 when you have high concentrations of bond portfolios that are underwater, 0:24:48.880 --> 0:24:52.560 you need to be extra careful to not make sure 0:24:52.680 --> 0:24:57.640 that they are under capitalized, that they lack liquidity, and frankly, 0:24:58.200 --> 0:25:02.000 that you are not turning upnd I when you are 0:25:02.040 --> 0:25:07.080 supervising that institution. The warning signs with Silicon Valley Bank 0:25:07.359 --> 0:25:10.760 were there for months, and I do think there was 0:25:10.880 --> 0:25:15.120 a bit of a culture at the Federal Reserve of 0:25:15.200 --> 0:25:19.239 really taking a light touch in the years leading up 0:25:19.280 --> 0:25:23.720 to the crisis that I think has proven to be costing. 0:25:38.680 --> 0:25:40.280 I want to go back to crypto because I want 0:25:40.280 --> 0:25:44.240 to talk, not just I understand the obligations that a 0:25:44.280 --> 0:25:48.280 bank has in terms of money laundering, in terms of 0:25:48.480 --> 0:25:51.920