WEBVTT - Wall Street Week Special: Banking Breakdown 0:00:00.800 --> 0:00:04.800 This is Bloomberg Wall Street Week with David Weston from 0:00:04.960 --> 0:00:08.800 Bloomberg Radio. This is a Bloomberg Wall Street Week roundtable 0:00:08.840 --> 0:00:11.880 discussion of what happened to our banks. I'm David Weston, 0:00:12.080 --> 0:00:14.080 and I'm delighted to say I am joined our special 0:00:14.080 --> 0:00:17.360 Wall Street Week contributor and former treasure Secretary Larry Summers, 0:00:17.400 --> 0:00:22.080 also of former Fed Governor Dan Trulo, and Stephanie Flanders, 0:00:22.079 --> 0:00:26.040 our very own senior executive editor for Economics and Government. 0:00:26.120 --> 0:00:28.520 So thank you all for joining us. Really appreciate it. 0:00:28.880 --> 0:00:30.240 There's a lot that's gone on in the banks in 0:00:30.240 --> 0:00:31.920 the last two weeks. We heard it from j Powe, 0:00:31.960 --> 0:00:34.880 the Sheriff FED yesterday, So let's talk about exactly what happened. 0:00:34.880 --> 0:00:36.879 I want to start with you, Dan. You were a 0:00:36.880 --> 0:00:40.000 colleague for several years of J. Powell. During the time 0:00:40.040 --> 0:00:43.120 you were on the Fed, you had responsibility for banks supervision. 0:00:43.479 --> 0:00:45.680 We've been told the banks were so strong we didn't 0:00:45.680 --> 0:00:48.680 have to worry about it. Were we misled what happened here? 0:00:48.720 --> 0:00:51.560 We didn't think we still had banking problems. Well, I 0:00:52.320 --> 0:00:56.840 trust that the largest banks truly are in the much 0:00:56.880 --> 0:01:00.120 better capital and liquidity position that Jay Powell referred or 0:01:00.120 --> 0:01:04.480 two yesterday during the press conference. We don't, David obviously 0:01:04.600 --> 0:01:07.000 know yet the whole story, but I think there are 0:01:07.000 --> 0:01:09.920 some things that we do know. We know first that 0:01:09.959 --> 0:01:15.440 there was a significant supervisory failure somewhere along the way. 0:01:16.160 --> 0:01:21.440 Was that failure in the San Francisco Fed's inability to 0:01:21.560 --> 0:01:25.959 identify problems of growth and maturity mismatches and the like 0:01:26.280 --> 0:01:29.880 early on. Was it the failure of the second San 0:01:29.880 --> 0:01:33.720 Francisco FED team, to which did identify some problems to 0:01:33.840 --> 0:01:37.399 follow up in a sufficiently robust way. Was it a 0:01:37.440 --> 0:01:41.280 supervisory failure because of the light touch approach to supervision 0:01:41.400 --> 0:01:44.640 that the Federal Reserve Board had put in place over 0:01:44.680 --> 0:01:47.720 the last four or five years. Or was it a 0:01:47.760 --> 0:01:53.560 supervisory failure because the supervisors generally had not adjusted their 0:01:53.680 --> 0:01:59.000 method of assessing liquidity to take account of very high 0:01:59.240 --> 0:02:05.680 uninsured concentrations coexisting with the capacity of big depositors to 0:02:05.880 --> 0:02:09.200 run at warp speed rather than the way they used 0:02:09.240 --> 0:02:13.680 to run. Those are not mutually exclusive explanations, and I 0:02:13.760 --> 0:02:17.560 also would not rule out a contributing factor being the 0:02:17.680 --> 0:02:21.840 twenty eighteen legislation in twenty nineteen FED regulation, both of 0:02:21.880 --> 0:02:27.519 which deregulated banks of under seven hundred or the regulation 0:02:27.720 --> 0:02:30.720 banks of under seven hundred billion dollars in assets, the 0:02:30.880 --> 0:02:33.920 legislation banks of under two hundred and fifty. But I 0:02:33.960 --> 0:02:38.640 think in the most immediate sense this is clearly a 0:02:38.680 --> 0:02:43.839 supervisory failure. Other factors may be uncovered as the FED 0:02:43.919 --> 0:02:46.880 Zone investigation proceeds. Dan, do we have a sense of 0:02:46.919 --> 0:02:48.560 how big the breadbox is? If I can put it 0:02:48.600 --> 0:02:51.760 that way? What is the likelihood disc could spread to 0:02:51.840 --> 0:02:54.240 other parts of the financial system. We heard a chair 0:02:54.320 --> 0:02:57.320 Pile yesterday saying that silicon value back was an outlier. Dan, 0:02:57.360 --> 0:03:00.400 how do we know it's an outlier? I owed, that's 0:03:00.440 --> 0:03:04.359 a good question, David, And you know your correspond and 0:03:04.400 --> 0:03:08.240 Bloomberg correspond and Katarina Sareva asked a really good question. 0:03:08.280 --> 0:03:10.960 In the press conference yesterday. She looked back at the 0:03:11.000 --> 0:03:15.480 notes from the January thirty, first February first FOMC meeting 0:03:15.840 --> 0:03:18.960 and noted that there had been a discussion of the 0:03:19.000 --> 0:03:23.160 potential financial stability implications of the rapid rise and interest 0:03:23.240 --> 0:03:25.880 rates which the FED is engineered over the last year, 0:03:26.360 --> 0:03:30.360 and she pointed to some specific areas of concern which 0:03:30.400 --> 0:03:35.160 the FOEMC had identified, one being runs on non bank 0:03:35.200 --> 0:03:39.240 institutions a little bit ironic in retrospect, but also the 0:03:39.280 --> 0:03:44.080 position of banks with large portfolios of treasuries that had 0:03:44.160 --> 0:03:47.400 not been marked to market but had lost value obviously 0:03:47.440 --> 0:03:51.280 because of the interest rate increases. And she asked the 0:03:51.400 --> 0:03:53.680 chair for a little bit of an explanation of what 0:03:53.720 --> 0:03:56.400 that discussion had been, and he was unable to give 0:03:56.440 --> 0:03:59.200 it to her. For me, it raises the question of 0:03:59.360 --> 0:04:04.600 whether they were monitoring just those kinds of issues throughout 0:04:04.680 --> 0:04:08.160 last year as they were increasing rates. I mean, you 0:04:08.200 --> 0:04:11.520 would think that interest rate risk would have jumped to 0:04:11.560 --> 0:04:15.720 the top of the supervisory heap, and that the FOMC 0:04:15.920 --> 0:04:19.960 would have been getting reports on the impact of the 0:04:20.000 --> 0:04:24.640 interest rate increases on deposits, deposit flows, holdings of securities, 0:04:24.760 --> 0:04:27.560 especially those that are not marked to market. So I 0:04:27.560 --> 0:04:30.400 think as a backward looking matter, it will be interesting 0:04:30.400 --> 0:04:34.520 to find that out. As a forward looking matter, has 0:04:34.600 --> 0:04:38.760 the FED in since a week ago Friday, done the 0:04:38.880 --> 0:04:42.440 kind of assessment to be able to tell Jay Powell 0:04:42.839 --> 0:04:45.400 you can go out and say that it's an outlier 0:04:45.440 --> 0:04:48.320 in the banking system is safe. He didn't indicate that 0:04:48.360 --> 0:04:51.479 any such assessment had been done. Perhaps it has, Perhaps 0:04:51.480 --> 0:04:54.080 it hasn't. Maybe Vice Chair bar we'll talk about it 0:04:54.160 --> 0:04:58.359 next week for Congress, But right now our basis for 0:05:00.000 --> 0:05:03.600 evaluating his statement is kind of limited. So Larry, let's 0:05:03.640 --> 0:05:05.440 put you back at the Treasury, or for that matter, 0:05:05.560 --> 0:05:08.080 at the White House. If you were looking at this situation, 0:05:08.200 --> 0:05:10.880 what questions would you be asking to make sure you 0:05:11.000 --> 0:05:14.080 understood the possible ramifications of what we've seen so far 0:05:14.320 --> 0:05:17.919 in a broader financial context. Before I answered, Before I 0:05:17.960 --> 0:05:22.640 answer that hypothetical, let me put a question to my 0:05:22.760 --> 0:05:26.360 friend Dan, who I'll just say I think did an 0:05:26.480 --> 0:05:31.360 enormous amount to strengthen our financial system during his time 0:05:31.560 --> 0:05:36.600 at the FED. Dan, I've heard it said, and I 0:05:36.640 --> 0:05:42.000 don't know that. Even in twenty twenty two, the FED 0:05:42.240 --> 0:05:47.920 stress tests that were applied to the largest banks did 0:05:47.960 --> 0:05:53.120 not include an analysis of the stress from a major 0:05:53.120 --> 0:05:58.159 interst rate height. If that's true, that seems kind of 0:05:58.240 --> 0:06:01.240 bizarre from the point of view of the world of 0:06:01.320 --> 0:06:07.000 early twenty twenty two, when it certainly many people, certainly 0:06:07.040 --> 0:06:14.440 me on David's show, were emphasizing that there was likely 0:06:14.520 --> 0:06:18.080 to need to be very substantial increases in interest rates. 0:06:18.720 --> 0:06:22.320 Can you say something and if the stress tests weren't 0:06:22.360 --> 0:06:28.200 considering increases in interest rates, then perhaps the exempting of 0:06:28.440 --> 0:06:32.800 Silicon Valley Bank from the stress tests was not central 0:06:32.960 --> 0:06:37.440 to understanding the problem. Can you say something about interest 0:06:37.560 --> 0:06:43.359 rate hikes and FED stress tests? Sure? So? First off, 0:06:43.839 --> 0:06:48.000 I think Larry, I agree with the statement you made 0:06:48.000 --> 0:06:51.440 toward the end of your question, which is, actually, if 0:06:51.480 --> 0:06:54.839 Silicon Valley had been in last year's stress test for 0:06:54.960 --> 0:06:58.320 real rather than its stress rehearsal, I don't think it 0:06:58.360 --> 0:07:01.400 would have made much difference sisily the reason you say 0:07:01.440 --> 0:07:04.760 that they weren't stressing the things that were the SVB 0:07:04.960 --> 0:07:09.560 vulnerabilities with respect to stress testing generally, over again, over 0:07:09.600 --> 0:07:13.000 the last five or six years, the stress test has 0:07:13.040 --> 0:07:17.960 become eminently predictable. The scenario that's used is now a 0:07:18.040 --> 0:07:21.640 single scenario, which is essentially a variant on the very 0:07:21.680 --> 0:07:24.240 first one we put in some years ago. That is 0:07:24.280 --> 0:07:29.800 a severe, quite severe recession, but it follows the basic 0:07:29.880 --> 0:07:33.040 pattern of the scenario that was developed when we began 0:07:33.240 --> 0:07:39.800 doing the annual stress test. The scenario, of course includes 0:07:39.840 --> 0:07:44.200 a reduction in interest rates because of the hypothesis of 0:07:44.240 --> 0:07:48.800 a recession and the Fed's reaction. When I was at 0:07:48.800 --> 0:07:52.760 the FED, we were using also an alternative scenario. It's 0:07:52.840 --> 0:07:56.760 called the adverse rather than severely adverse scenario, and we 0:07:56.960 --> 0:08:02.080 use that scenario to test things than the prototype of 0:08:02.120 --> 0:08:05.520 the severe recession. And indeed we used it at least 0:08:05.520 --> 0:08:07.880 one year, and I think a couple of years, to 0:08:07.920 --> 0:08:11.720 test what would happen with unusual changes and interest rates 0:08:11.960 --> 0:08:15.560 which were not then anticipated. So to some degree, the 0:08:15.600 --> 0:08:20.760 answer to your question is like supervision. Generally, the stress 0:08:20.800 --> 0:08:25.440 test has become less rigorous over time, and I think 0:08:25.680 --> 0:08:29.920 more importantly, it's become too predictable. And the whole purpose 0:08:29.920 --> 0:08:32.480 of a stress test is that you're trying to stress 0:08:32.520 --> 0:08:36.680 against the unanticipated, not the anticipated. At the risk of 0:08:36.800 --> 0:08:42.040 preps being too tough on your former colleagues at the FED, 0:08:42.200 --> 0:08:46.560 you talk about predictable versus unpredictable. I would argue that 0:08:46.600 --> 0:08:51.200 at a very minimum, the stress tests ought to consider 0:08:52.040 --> 0:08:55.720 what is the major risk of their moment. When you 0:08:55.760 --> 0:08:59.079 were at the FED DAN in that period, I think 0:08:59.120 --> 0:09:02.959 it was reasonable to think that the major risk was 0:09:03.600 --> 0:09:07.560 a tilt towards recession and deflation. But I don't see 0:09:07.559 --> 0:09:12.120 how anybody last spring could have thought that the major 0:09:12.200 --> 0:09:17.640 risk was anything other than a spike in interest rates. 0:09:17.720 --> 0:09:22.920 So a process that didn't consider as a risk seems 0:09:22.920 --> 0:09:31.160 to me to be a profoundly problematic process. Even if 0:09:31.200 --> 0:09:34.280 you were to accept that you were only going to 0:09:34.400 --> 0:09:40.280 look at one scenario and all of that, it seems 0:09:40.280 --> 0:09:44.520 almost like the supervisors were mailing it in if they 0:09:44.559 --> 0:09:49.280 weren't thinking about at a moment when monetary policy was 0:09:49.559 --> 0:09:53.120 turning in a dramatic way towards tightening, and at a 0:09:53.200 --> 0:09:56.760 moment where the FED had just retired the word transitory, 0:09:57.360 --> 0:10:02.040 we're not looking at interest rate. Is there a reasonable 0:10:02.120 --> 0:10:08.120 is there a defense? Well, I would say first, this 0:10:08.240 --> 0:10:11.960 is not by way of defense or certainly not an apologia, 0:10:12.120 --> 0:10:16.559 but just a bit of explanation. It's quite likely that 0:10:16.960 --> 0:10:21.560 the scenario development was taking place in the latter part 0:10:21.600 --> 0:10:25.840 of twenty twenty one if it was going to be 0:10:26.040 --> 0:10:29.240 the twenty twenty two stress test, And of course this 0:10:29.320 --> 0:10:32.720 is the period in which the FOMC was still figuring 0:10:32.760 --> 0:10:37.080 out that the inflation problem was not transitory. But I 0:10:37.120 --> 0:10:40.080 don't want to use that as a kind of exculpation 0:10:40.400 --> 0:10:45.400 of the supervisors. Second thing to say is it's not 0:10:46.040 --> 0:10:50.199 the supervisors, meaning the staff who are making the policy 0:10:50.320 --> 0:10:53.160 decisions as to what kind of stress tests to have 0:10:53.320 --> 0:10:56.400 whether to have multiple scenarios, that's a decision of the 0:10:56.440 --> 0:11:01.840 Board of Governors, and so it rests with them. But 0:11:01.920 --> 0:11:06.400 I agree with the graviment of your remarks, which is 0:11:07.360 --> 0:11:11.040 not to have tried to think about something other than 0:11:11.160 --> 0:11:15.280 the same scenario is a failure of supervision in and 0:11:15.320 --> 0:11:17.360 of itself. Stephane, you've worked at the Treasury in the 0:11:17.400 --> 0:11:20.200 United States. You also have covered financial markets and other 0:11:20.520 --> 0:11:22.719 business issues over in Europe for a good long time. 0:11:22.840 --> 0:11:24.840 One thing we're hearing from both Larry and Dan is 0:11:25.160 --> 0:11:27.600 rates were going up, and there weren't just going up here, 0:11:27.600 --> 0:11:30.240 They're going up over in Europe as well. Was what 0:11:30.280 --> 0:11:32.240 we're seeing aroun now in the banking system. Maybe not 0:11:32.280 --> 0:11:34.960 the specifics of Silicon Valley Bank, but was something like 0:11:35.080 --> 0:11:38.160 that almost inevitable. After we've pumped so much money in 0:11:38.240 --> 0:11:40.240 the system, we start taking it out, there's going to 0:11:40.280 --> 0:11:43.000 be stress, real stress, and there's going to be some failure. Yeah, 0:11:43.000 --> 0:11:45.160 And I wish I was I was closer to you guys, 0:11:45.200 --> 0:11:46.600 because I knew I was going to struggle to get 0:11:46.600 --> 0:11:49.160 a word in with you too. But I think in 0:11:49.480 --> 0:11:52.319 this conversation, I think it is important when we're thinking 0:11:52.320 --> 0:11:54.320 about what the implications are. You know, you have to 0:11:54.320 --> 0:11:57.960 distinguish what is an outlier about not the Silicon Valley Bank, 0:11:57.960 --> 0:12:00.719 but others that have got into trouble in this episode. 0:12:01.120 --> 0:12:06.959 What is fundamentally a regulatory stupidity, you know, a very 0:12:07.000 --> 0:12:10.480 traditional problem the interest rate risk that was just hiding 0:12:10.480 --> 0:12:13.920 in plain sight, and what is a genuinely new issue 0:12:14.040 --> 0:12:17.280 which was not being fully taken into account by anyone 0:12:17.320 --> 0:12:19.800 looking at the risks. And I think when you look 0:12:19.840 --> 0:12:21.480 at something like Silicon Valley Bank, you know clearly it 0:12:21.559 --> 0:12:24.360 was an outlier in the speed with which deposits had 0:12:24.360 --> 0:12:29.199 been built up, in its massive exposure to uninsured deposits 0:12:29.200 --> 0:12:32.719 and reliance on that for funding. I hope it was 0:12:32.760 --> 0:12:35.320 an outlier in not having a chief risk officer for 0:12:35.400 --> 0:12:39.200 nine months, which was an extraordinary state of affairs. Was 0:12:39.360 --> 0:12:41.880 but what was very traditional about this, and as the 0:12:41.960 --> 0:12:45.120 discussion with Larry and Dan is suggesting, was that you know, 0:12:45.240 --> 0:12:48.680 right here was a massive interest rate risk that was 0:12:49.000 --> 0:12:50.960 whether or not it was in the stress test was 0:12:51.000 --> 0:12:53.920 something that central banks should have been thinking very hard about. 0:12:54.240 --> 0:12:55.640 And I think it was sort of striking that we 0:12:55.679 --> 0:12:57.880 had a lot of the debate around this, What are 0:12:57.920 --> 0:13:00.080 the hidden risk. You know, all the conversations that you 0:13:00.080 --> 0:13:02.800 will have had, David, when you ask regulators what's keeping 0:13:02.800 --> 0:13:05.080 you up at night, they would always talk about private equity. 0:13:05.120 --> 0:13:08.160 They'd talk about non bank shadow banking. Has been the 0:13:08.160 --> 0:13:11.440 thing that people were you know, was this worry for 0:13:11.480 --> 0:13:13.720 all these years, and in fact it was the most 0:13:13.800 --> 0:13:18.840 obvious problem sitting on bank balance sheets as a direct 0:13:18.880 --> 0:13:21.640 result of monetary policy actions by central banks that has 0:13:21.679 --> 0:13:24.000 actually caused this issue. I would just say, though one 0:13:24.040 --> 0:13:26.600 of the reasons maybe they weren't looking at that so closely, 0:13:26.720 --> 0:13:28.599 or that I'd be interested to know what Dan and 0:13:28.880 --> 0:13:30.760 Larry think about this. You know, there is an element 0:13:30.760 --> 0:13:32.920 of this which is new, and we see in the 0:13:33.040 --> 0:13:37.880 speed with which deposits left these institutions, and that's the 0:13:38.280 --> 0:13:41.600 non stickiness of those deposits. And I think, you know, 0:13:41.640 --> 0:13:43.839 one of the things that regulators were thinking when they 0:13:43.880 --> 0:13:47.400 looked considered interest rate risk potentially was that there was 0:13:47.440 --> 0:13:52.720 a sort of self hedging mechanism in a bank of 0:13:52.800 --> 0:13:55.160 the fact that deposits would be slow to move if 0:13:55.200 --> 0:13:57.680 they weren't being paid the higher interest rates. That is 0:13:57.720 --> 0:14:00.240 no longer the case, and I think that probably does 0:14:00.320 --> 0:14:05.160 have longer term implications for regulation and potentially longer term 0:14:05.160 --> 0:14:08.200 implications for how much we insure deposits. Yeah, I think 0:14:08.240 --> 0:14:11.120 that's a question for either Larry or Dan. Does our 0:14:11.360 --> 0:14:14.080 entire approach to deposits change given what we've seen in 0:14:14.080 --> 0:14:15.640 the fact is they're not as stick as we thought 0:14:15.679 --> 0:14:18.439 they were. That's what I was alluding to earlier. I'd 0:14:18.480 --> 0:14:21.960 like to have a sense of exactly what the deposit 0:14:22.040 --> 0:14:25.800 profiles of this group of banks is as a whole, 0:14:26.240 --> 0:14:31.040 because in theory, at least, the supervisor should already have 0:14:31.120 --> 0:14:36.040 been distinguishing among different kinds of uninsured deposits, some of 0:14:36.080 --> 0:14:40.800 which I've always been understood to be eminently runnable, others 0:14:40.840 --> 0:14:43.640 of which have thought to were thought to be at 0:14:43.720 --> 0:14:49.480 least somewhat stickier than insured retail deposits. If it turns 0:14:49.560 --> 0:14:52.360 out that those and this is what Stephanie I think 0:14:52.480 --> 0:14:58.600 was suggesting that those middle categories have changed, then you're 0:14:58.600 --> 0:15:00.720 going to need a change in regular lesion, and not 0:15:00.760 --> 0:15:06.040 just in supervision. Larry, let me let mean sort of 0:15:06.080 --> 0:15:10.120 widen the frame a little bit without I agree with 0:15:10.160 --> 0:15:15.280 what Dan said, but I would put it this way. 0:15:16.360 --> 0:15:19.880 We know that the FED staff has a problem with 0:15:20.000 --> 0:15:26.200 discontinuous change. They basically entirely missed the discontinuous change in 0:15:26.200 --> 0:15:31.239 inflation because they stuck with their model and its traditions. 0:15:31.960 --> 0:15:35.640 And I think the broad concern that someone has to 0:15:35.680 --> 0:15:40.200 put is that for the first time ever, we are 0:15:40.280 --> 0:15:45.120 now in a world of highly digital banking, with the 0:15:45.160 --> 0:15:49.280 ability to withdraw funds extremely quickly and with the ability 0:15:49.320 --> 0:15:53.280 to put them somewhere else extremely quickly and easily because 0:15:53.320 --> 0:15:58.040 of digital account opening. So we're in this super digital world, 0:15:58.720 --> 0:16:03.120 and we're in a super digital world with five percent 0:16:03.160 --> 0:16:06.800 interest rates, and we've never been in a high interest rate, 0:16:07.000 --> 0:16:12.760 super digital world before, and large amounts of the economics 0:16:12.840 --> 0:16:20.360 of the banking industry rest on earning substantial interest premiums 0:16:20.480 --> 0:16:27.520 on deposits and whatever the traditional models are of what's 0:16:27.640 --> 0:16:31.040 sticky and what's not. The fact that we've had the 0:16:31.080 --> 0:16:36.040 world's fastest run and the world's biggest run at one 0:16:36.080 --> 0:16:39.480 of at the sixteenth largest bank in the country managed 0:16:39.520 --> 0:16:42.800 to have the biggest bank run in history has to 0:16:42.840 --> 0:16:47.640 teach us that there's a lot of reason to be 0:16:47.840 --> 0:16:52.240 open to a much wider range of possibilities about the 0:16:52.360 --> 0:17:00.680 risks associated with deposits. Then we thought previously, and so 0:17:00.760 --> 0:17:03.720 it seems to me that you asked me earlier what 0:17:03.840 --> 0:17:06.600 I would be thinking about if I was in the 0:17:06.680 --> 0:17:10.160 Treasury Department, and I guess I would be feeling my 0:17:10.760 --> 0:17:15.840 responsibility as the Chair of the Financial Stability Oversight Council 0:17:16.600 --> 0:17:20.560 very strongly at a moment like this, and I'd be 0:17:20.600 --> 0:17:25.320 thinking about making sure that whatever I was saying and doing, 0:17:25.880 --> 0:17:34.400 I was adding to confidence rather than subtracting from confidence 0:17:34.440 --> 0:17:37.720 in the very short run, that if you're in an 0:17:37.720 --> 0:17:42.800 institution and that institution fails, it's gonna be okay for 0:17:42.840 --> 0:17:46.080 you if that happens right now, because if you're not 0:17:46.240 --> 0:17:49.800 sending that signal in a reasonably clear way, you'd ever 0:17:49.880 --> 0:17:53.560 know where the runs are going to start next. I'd 0:17:53.600 --> 0:17:59.280 be thinking about this issue that I just raised of 0:18:00.359 --> 0:18:04.119 the new high interest rate digital world, and I'd be 0:18:04.200 --> 0:18:11.639 thinking about making sure that there was some broader discussion 0:18:11.720 --> 0:18:16.960 of the whole official financial community about these questions of 0:18:18.160 --> 0:18:22.960 stress testing, because I must say, doing stress testing four 0:18:23.160 --> 0:18:27.359 twenty twenty two, even if it was started in twenty 0:18:27.480 --> 0:18:34.680 twenty one, without considering unusual increases in interest rates as 0:18:34.720 --> 0:18:40.720 a stressor, is really very problematic. So I want to 0:18:40.720 --> 0:18:43.200 pick about this speed of digital just for a moment. 0:18:43.600 --> 0:18:46.280 It's been talked about by others as well. Digital's not 0:18:46.320 --> 0:18:48.360 going away, at least not that I can see. It's 0:18:48.359 --> 0:18:51.320 not gonna We can't. We can't regulate digital out of existence. 0:18:51.640 --> 0:18:54.720 Are there other possible rautary responses that I mean, we 0:18:54.840 --> 0:18:56.959 have circuit breakers when it comes to the stock market, right, 0:18:57.040 --> 0:18:59.320 there's too much move too quickly, Stephan, I'll ask you 0:18:59.359 --> 0:19:01.640 the question, is there a prospect of having something that's 0:19:01.640 --> 0:19:04.520 an equivalent of a circuit breaker for deposits? I think, 0:19:04.560 --> 0:19:06.040 I mean, I think there's a whole range of things 0:19:06.040 --> 0:19:08.720 we could get into. I think one could also think about, 0:19:08.800 --> 0:19:11.120 you know, the degree of you know, how we look 0:19:11.160 --> 0:19:15.080 at liquidity ratios and liquidity buffers might have to change 0:19:15.200 --> 0:19:17.920 if you know, there is that lack of there's lack 0:19:17.960 --> 0:19:20.720 of stickiness. If we think that those deposits could go 0:19:20.800 --> 0:19:22.840 much faster, you may even get I mean, a number 0:19:22.840 --> 0:19:25.440 of people have drawn the conclusion, that's quite a leak 0:19:25.520 --> 0:19:28.360 from here, that this is one of the biggest arguments 0:19:28.400 --> 0:19:33.560 for having a central bank digital currency, because then you 0:19:33.600 --> 0:19:38.280 can automatically have a claim on the central bank for 0:19:38.280 --> 0:19:41.320 your deposits and your your you don't face any of 0:19:41.359 --> 0:19:43.239 these issues. It's a big leak from where we are now, 0:19:43.240 --> 0:19:46.040 and it means a fundamental change to to the model 0:19:46.080 --> 0:19:47.760 of banking that we've had. But I think you know 0:19:47.880 --> 0:19:49.239 Larry is right, and that was one of the things 0:19:49.359 --> 0:19:51.639 I was alluding to that it is it's a threat 0:19:51.680 --> 0:19:54.280 to the basic business model of model of banking and 0:19:54.320 --> 0:19:57.600 also to the way we have thought about safety nets 0:19:57.720 --> 0:20:01.000 in this area and how one provides comm David, I 0:20:01.040 --> 0:20:05.480 would just add two things. One, I think we need 0:20:05.520 --> 0:20:09.960 to be careful about the time scale of things. It 0:20:10.000 --> 0:20:14.080 may be that it will be appropriate to fundamentally rethink 0:20:14.119 --> 0:20:17.760 the structure of our financial system, but the worst time 0:20:17.840 --> 0:20:20.960 to do that would be in a six week period 0:20:21.440 --> 0:20:24.320 while the fires were burning, And so we need to 0:20:24.400 --> 0:20:27.600 separate the what are we going to do now tactically 0:20:28.200 --> 0:20:32.480 from the longer run strategic questions. The other thing I'd 0:20:32.480 --> 0:20:36.080 say is that I agree with Stephanie about strengthening liquidity. 0:20:36.520 --> 0:20:40.080 Dan will be very knowledgeable about exactly how you would 0:20:40.119 --> 0:20:46.240 do that, But I would dissent massively from the idea 0:20:46.280 --> 0:20:50.080 of circuit breakers on deposits. If you start saying that 0:20:50.119 --> 0:20:53.280 when certain things happen, then you're no longer going to 0:20:53.320 --> 0:20:54.840 be able to get your money out of the bank. 0:20:55.280 --> 0:20:58.479 What that's going to do is accelerate the run because 0:20:58.520 --> 0:21:00.720 people are gonna want to make sure that they get 0:21:00.720 --> 0:21:05.920 their money out before the circuit breaker comes down. So 0:21:06.200 --> 0:21:08.800 I don't think there's likely to be a circuit breaker 0:21:08.960 --> 0:21:12.800 mechanism that works. And I think there's a lot of 0:21:12.840 --> 0:21:17.159 debate about the merits of the circuit breakers we have 0:21:17.560 --> 0:21:20.680 in equity markets, So that would not be the direction 0:21:20.760 --> 0:21:24.719 I would build. So Dan, let me accept Larry's very 0:21:24.760 --> 0:21:26.879 strong descent from circuit breakers and turn it all the 0:21:26.880 --> 0:21:29.399 way around the other way, and that's guaranteeing deposits across 0:21:29.440 --> 0:21:31.920 the board. We had the Secretary of Treasury, Janet Yell 0:21:31.960 --> 0:21:34.040 And go up to Congress this week and say, you 0:21:34.040 --> 0:21:36.600 know what, we're not really considering seriously just taking all 0:21:36.640 --> 0:21:38.680 the limits off the guarantees. And then she came back 0:21:38.680 --> 0:21:40.240 the next day and say, I have to demand my 0:21:40.320 --> 0:21:42.040 remarks a little bit here, because we're going to do 0:21:42.040 --> 0:21:44.239 what we need to do to back deposits. Are we 0:21:44.240 --> 0:21:48.040 getting a clear message about exactly the security of deposits 0:21:47.880 --> 0:21:50.600 its secured by the federal government. Well, I mean, I 0:21:50.880 --> 0:21:53.440 let people judge for themselves whether the message is clear. 0:21:53.480 --> 0:21:56.919 Here's what I drew from what both Janet Yellen and 0:21:57.000 --> 0:21:59.520 Jay Powell have said over the last forty eight hours. 0:22:00.760 --> 0:22:05.680 They do not have the authority without congressional action to 0:22:05.840 --> 0:22:09.720 ensure the deposits and open banks. What I think they 0:22:09.760 --> 0:22:13.600 have done is effectively to say the following, We do 0:22:13.720 --> 0:22:18.560 have the authority, along with the FDIC to ensure previously 0:22:18.640 --> 0:22:22.440 uninsured deposits in failed banks. And so what we are 0:22:22.520 --> 0:22:27.160 basically telling you is, if a bank fails, we will 0:22:27.280 --> 0:22:32.320 ensure the uninsured deposits. And I take it that that's 0:22:32.359 --> 0:22:35.520 what Jay Powell was really saying yesterday when he said 0:22:35.960 --> 0:22:39.040 all deposits are safe, and when he was asked to 0:22:39.080 --> 0:22:42.080 elaborate on that, he just repeated the talking point. And 0:22:42.200 --> 0:22:45.040 that's when I inferred that this was the message that 0:22:45.040 --> 0:22:47.479 he was trying to give. And if you think about it, 0:22:47.520 --> 0:22:51.359 if that is indeed their position. If you think about it, 0:22:51.080 --> 0:22:55.560 it's essentially the same as ensuring uninsured deposits, because even 0:22:55.600 --> 0:22:59.000 if you said x anti, all these big deposits are insured, 0:22:59.400 --> 0:23:02.400 no one will actually drawn that insurance until the bank 0:23:02.400 --> 0:23:05.919 had failed. So in that sense, it may be the 0:23:06.000 --> 0:23:12.359 equivalent of the ensuring of all deposits in the system, 0:23:12.520 --> 0:23:15.840 except for the fact, of course that it's presumably a 0:23:16.359 --> 0:23:19.280 policy that will not last forever, and when are they 0:23:19.320 --> 0:23:23.400 going to kind of back off of it? Is obviously 0:23:23.400 --> 0:23:26.440 a pretty important point. The second thing one might say, 0:23:26.440 --> 0:23:28.760 and I can already I can feel Larry maybe having 0:23:28.760 --> 0:23:32.080 this reaction, is if that's what you mean, why don't 0:23:32.119 --> 0:23:35.840 you say it more clearly so that you will maximize 0:23:36.240 --> 0:23:39.000 the calming effect of whatever tool it is that you're 0:23:39.000 --> 0:23:43.359 prepared to use. And I don't know why they didn't 0:23:43.400 --> 0:23:46.800 say it more explicitly, except perhaps that they didn't want 0:23:46.800 --> 0:23:50.240 to intimate that somehow they were using the authority they 0:23:50.280 --> 0:23:53.520 do have to achieve an end that supposedly they can't 0:23:53.560 --> 0:23:57.320 achieve without congressional approval. Dan, I think there's one other 0:23:57.400 --> 0:24:01.560 I think there's one other point, certainly, and you may 0:24:01.600 --> 0:24:05.200 have parsed the statements more closely than I did. But 0:24:05.640 --> 0:24:09.280 some of the statements, particularly I think from the Treasury side, 0:24:09.760 --> 0:24:14.639 have talked about contagion as well, So I'm not sure 0:24:14.680 --> 0:24:18.119 the authorities have been quite as clear as you suggest 0:24:18.840 --> 0:24:21.200 in saying that if you've got money in a bank 0:24:21.280 --> 0:24:25.160 and that bank fails and it's not a source of contagion, 0:24:25.920 --> 0:24:32.719 you will nonetheless have your deposit ensured, and as I 0:24:32.840 --> 0:24:39.280 understand it, in order to payoff uninsured deposits, there need 0:24:39.320 --> 0:24:42.359 to be some set of claims made by the government 0:24:42.880 --> 0:24:48.080 about the systemic seriousness of the moment. So I think 0:24:48.160 --> 0:24:52.359 that is also a place where there's some play. But 0:24:52.480 --> 0:24:55.200 I think I would share what I think as your 0:24:55.400 --> 0:25:00.639 instinct to be erring on the side of projecting confidence 0:25:01.080 --> 0:25:03.800 as ones choosing the way in which one talks about this. 0:25:04.160 --> 0:25:08.320 I mean the contagion of reference. Contagion sends the message 0:25:08.720 --> 0:25:10.840 that is exactly what a lot of depositors are quite 0:25:10.840 --> 0:25:12.600 reasonably doing, which is why, okay, I need to get 0:25:12.600 --> 0:25:15.000 into a bigger bank. So just to spell out why 0:25:15.040 --> 0:25:17.760 that matters. If you make it all part of a 0:25:17.760 --> 0:25:21.280