WEBVTT - Economic Heavyweights On the Banking Crisis 0:00:03.400 --> 0:00:06.680 Life from the Bloomberg Interacting Burgers Studios. This is Bloomberg 0:00:06.760 --> 0:00:09.680 day Break for Friday, March twenty fourth. Coming up today, 0:00:10.119 --> 0:00:13.200 Janet Yellen says the government stands ready to protect the 0:00:13.200 --> 0:00:16.040 banking system. The chorus grows louder for the Fed to 0:00:16.160 --> 0:00:19.119 cut rates this year. China rolls out the welcome that 0:00:19.280 --> 0:00:23.120 for Tin Cook and other top corporate executives and TikTok testimony. 0:00:23.200 --> 0:00:26.520 False flash on Capitol Hill. What made hundreds of students 0:00:26.560 --> 0:00:29.240 sick at a high school on Long Island? Plus? North 0:00:29.320 --> 0:00:32.840 Korea says it has an underwater drone with a nuclear warhead. 0:00:33.240 --> 0:00:36.200 I'm Michael Block. More ahead, I'm John Stash, Aaron's wards. 0:00:36.200 --> 0:00:39.080 The Knicks and Nets lost, the Rangers won. Four teams 0:00:39.080 --> 0:00:43.920 advanced to the Elite A to the NCAA tournament. That's 0:00:43.920 --> 0:00:47.479 always straight ahead on Bloomberg day Break, The Business News 0:00:47.520 --> 0:00:50.199 you need to sturn your day, and just one fifteen 0:00:50.200 --> 0:00:54.640 minute podcast each pointing on Apples, Spotify, The Bloomberg Business 0:00:54.680 --> 0:01:01.000 Appen everywhere you get your podcasts. Good morning, I'm Nathan 0:01:01.080 --> 0:01:04.000 Hagar and I'm Karon Moscow. Here are the stories we're 0:01:04.040 --> 0:01:06.840 following today, Karen. We began with the latest on the 0:01:06.840 --> 0:01:10.520 turmoil in the banking industry, Treasury Secretary Janet Yellen says 0:01:10.560 --> 0:01:13.640 regulators are prepared to take more steps if needed, to 0:01:13.640 --> 0:01:17.880 protect the banking system. Yellen spoke before a House Appropriation subcommittee. 0:01:18.160 --> 0:01:23.080 The strong actions we've taken ensure that Americans deposits are safe. 0:01:23.440 --> 0:01:28.119 Certainly we would be prepared to take additional actions if warranted. 0:01:28.800 --> 0:01:31.760 Treasury Secretary Yellen's comments came a day after she said 0:01:31.760 --> 0:01:36.760 officials had not considered temporarily expanding insurance to all US deposits. Well. 0:01:36.840 --> 0:01:40.559 The con former economic policymakers are criticizing the fed's bank 0:01:40.720 --> 0:01:43.440 stress tests in twenty twenty two for failing to pro 0:01:43.520 --> 0:01:46.840 potential vulnerabilities in the banking system. Be got up with 0:01:47.000 --> 0:01:51.360 former FED Governor Dan Tarullo, but I think in the 0:01:51.400 --> 0:01:57.160 most immediate sense this is clearly a supervisory failure. Other 0:01:57.280 --> 0:02:02.040 factors may be uncovered as the own investigation proceeds, and 0:02:02.160 --> 0:02:05.680 Dan Trullo, oversaw financial regulation and supervision at the FED, 0:02:05.760 --> 0:02:08.440 may be cooments in a special Bloomberg round table, along 0:02:08.480 --> 0:02:12.000 with former Treasury Secretary Larry Summers and Bloomberg News Head 0:02:12.040 --> 0:02:15.360 of Economics Stephanie Flanders, hear more of that conversation a 0:02:15.360 --> 0:02:18.440 little later in the program. Well Karen, one top banking executive, 0:02:18.480 --> 0:02:21.160 says the worst of the crisis may be behind us. 0:02:21.160 --> 0:02:24.320 We spoke exclusively this morning with Standard Chartered CEO Bill 0:02:24.360 --> 0:02:26.760 Winters in Hong Kong. I hope we're through the worst, 0:02:27.200 --> 0:02:31.000 and I think there's still some questions around business models 0:02:31.240 --> 0:02:34.240 around the world, or have there been weaknesses that have 0:02:34.240 --> 0:02:36.760 been exposed in the business models of any of the 0:02:36.760 --> 0:02:39.040 companies that have had trouble that need to be addressed 0:02:39.040 --> 0:02:42.000 at this point, But it certainly seems that the acute 0:02:42.000 --> 0:02:44.960 phase of the crisis has done. Standard Chartered CEO Bill 0:02:45.000 --> 0:02:47.360 Winter says he'd be open to looking into credit suite 0:02:47.440 --> 0:02:50.280 as assets if they were made available. Well, Nathan, there 0:02:50.320 --> 0:02:53.000 may be more trouble for a credit suite and ubs, 0:02:53.080 --> 0:02:55.760 and it's related to the war in Ukraine. The banks 0:02:55.760 --> 0:02:59.440 are among several facing a Justice Department investigation into Russian 0:02:59.480 --> 0:03:03.400 only guard finding help avoiding sanctions. Amy Morris says more 0:03:03.440 --> 0:03:06.200 from our Bloomberg in ninety nine one newsroom in Washington, 0:03:06.840 --> 0:03:09.840 sources tell Bloomberg News the Swiss banks were included in 0:03:09.880 --> 0:03:11.840 a wave of subpoenas that were sent out by the 0:03:11.919 --> 0:03:15.560 US government before the crisis that resulted in UBS's takeover 0:03:15.639 --> 0:03:19.600 of Credit Suees. DJ is focusing on identifying which bank 0:03:19.639 --> 0:03:23.280 employees dealt with sanctioned clients and how those clients were 0:03:23.360 --> 0:03:27.080 vetted over the past several years. US Deputy Attorney General 0:03:27.120 --> 0:03:30.079 Lisa Monaco says the Justice Department is beefing up its 0:03:30.160 --> 0:03:34.720 National Security Division, saying, quote, corporate crime and national security 0:03:34.760 --> 0:03:38.480 are overlapping to a degree never seen before. Credit Suis 0:03:38.520 --> 0:03:41.800 and UBS declined to comment in Washington. I'm Amy Morris, 0:03:41.840 --> 0:03:44.160 Bloomberg Day Break. All right, Amy, thank you. Now, let's 0:03:44.160 --> 0:03:47.120 turn to the economy. The chorus is growing on the 0:03:47.160 --> 0:03:51.160 Fed not to raise rates this year, but to cut them. 0:03:51.320 --> 0:03:54.040 Let's get the latest live from Bloomberg's John Tucker, John 0:03:54.200 --> 0:03:57.680 and A Double Line Capital's Jeff Gundlock is adding his voice. 0:03:58.080 --> 0:04:00.080 He took to Twitter saying the Fed's going to be 0:04:00.200 --> 0:04:03.960 cutting interest rates substantially, and they should be doing it soon. Well, 0:04:03.960 --> 0:04:06.720 he sees the same data as everybody else, an adverted 0:04:06.800 --> 0:04:10.720 yield curve that Gunlack calls a red alert recession signal. 0:04:11.160 --> 0:04:13.520 He's at odds with the Fed. Share Jpale, who said 0:04:13.560 --> 0:04:17.159 this week that officials don't anticipate cutting rates, the market 0:04:17.240 --> 0:04:19.400 is pricing for easing before the end of the year. 0:04:19.680 --> 0:04:22.240 Live in New York, I'm John Tucker, Bloomberg day Break. 0:04:22.360 --> 0:04:24.520 All right, John, Thanks World. China is hoping to show 0:04:24.560 --> 0:04:27.479 the world it's back in business. It's hosting a high 0:04:27.560 --> 0:04:31.479 profile corporate summit this weekend, and some top American executives 0:04:31.480 --> 0:04:33.839 will be there. We get the latest live with Bloomberg 0:04:33.880 --> 0:04:36.800 Steve Rappaboord's Steve, Good Morning, Good Morning, Karen and Nathan. 0:04:36.960 --> 0:04:40.039 Organizers of the China Development Forum say hundreds of foreign 0:04:40.120 --> 0:04:43.679 representatives from various industries registered to attend the three day event. 0:04:43.839 --> 0:04:46.840 Corporate a listers like Apple CEO Tim Cook and Fiser 0:04:46.880 --> 0:04:49.599 boss Albert Borla plan to show up, but many American 0:04:49.640 --> 0:04:52.360 companies are sitting this one out. Sources tell us that's 0:04:52.400 --> 0:04:54.760 because they want to avoid scrutiny from a newly formed 0:04:54.800 --> 0:04:58.400 House committee investigating China's Communist Party. The conference will be 0:04:58.440 --> 0:05:00.360 held fully in person this year for the first time 0:05:00.400 --> 0:05:03.880 since twenty nineteen, before the pandemic upended business for Beijing. 0:05:04.120 --> 0:05:07.080 Live in New York. I'm Steve Rappaport, Bloomberg Daybreak. Thanks 0:05:07.080 --> 0:05:09.280 Steve While, the CEO of TikTok, had a long day 0:05:09.320 --> 0:05:11.480 on Capitol Hill, but it might not have gotten him 0:05:11.480 --> 0:05:14.840 any closer to assuring House lawmakers that the wildly popular 0:05:14.880 --> 0:05:18.400 app is safe for national security. Show Chow was asked 0:05:18.400 --> 0:05:22.080 repeatedly whether the Chinese Communist Party can access Americans data. 0:05:22.320 --> 0:05:25.160 I have seen no evidence that the Chinese government has 0:05:25.240 --> 0:05:27.440 access to that data. They have never asked us. We 0:05:27.480 --> 0:05:29.760 have no provided in a way I've asked it. I 0:05:29.800 --> 0:05:33.800 find that actually preposterous. I looked in. I have seen 0:05:33.800 --> 0:05:36.279 no evidence of this happening. Man. We got reaction to 0:05:36.279 --> 0:05:40.160 show choose testimony from Senate Intelligence Chairman Mark Warner, and 0:05:40.200 --> 0:05:42.760 I kind of feel for the CEO because he doesn't 0:05:42.800 --> 0:05:46.440 have an answer end of the day. TikTok is owned 0:05:46.600 --> 0:05:50.480 by Bye Dance. Bye Dance is a Chinese company. Chinese 0:05:50.520 --> 0:05:54.320 law as of twenty seventeen says every Chinese company the 0:05:54.440 --> 0:05:58.400 first obligation is not shareholders or customers. Their first obligation 0:05:58.520 --> 0:06:02.479 is they got to turn over any information or any 0:06:02.560 --> 0:06:05.640 kind of belity to manipulate content to the Commonest Party 0:06:05.640 --> 0:06:09.200 of China. Democratic Senator Mark Warner spoke on Bloomberg Sound 0:06:09.240 --> 0:06:11.600 On with Joe Math. You can catch the show weekdays 0:06:11.640 --> 0:06:15.040 one pm Eastern on Bloomberg Radio, or listen on demand 0:06:15.120 --> 0:06:18.840 wherever you get your podcasts. Right now, SMP futures are 0:06:18.920 --> 0:06:21.599 lower by two point Stown futures are down sixty one, 0:06:21.720 --> 0:06:25.040 and Nastack futures are higher by eighteen points. The ten 0:06:25.080 --> 0:06:27.800 year treasury is up twenty three thirty seconds now for 0:06:27.839 --> 0:06:30.039 a yield of three point three to four percent. The 0:06:30.120 --> 0:06:32.640 yield on the two year is at three point seven 0:06:32.760 --> 0:06:35.640 one percent. Straight ahead your latest local headlines and a 0:06:35.760 --> 0:06:43.320 check of sports. This is Bloomberg. It is forty nine 0:06:43.360 --> 0:06:45.560 degrees in New York. We got a chance for some 0:06:45.600 --> 0:06:48.120 showers tonight. We'll head up to the year fifty. So 0:06:48.279 --> 0:06:50.080 pretty much where we are now. Let's take a look 0:06:50.080 --> 0:06:51.680 at some of the other stories making news in New 0:06:51.720 --> 0:06:55.320 York and around the world. Good morning, Michael Barr, Good morning, Nathan. 0:06:55.440 --> 0:06:58.559 Students became ill at a Long Island high school. About 0:06:58.600 --> 0:07:02.440 two hundred and fifty students classes at Babylon High School 0:07:02.520 --> 0:07:06.039 on Monday. Absences were down to one hundred ten yesterday. 0:07:06.160 --> 0:07:09.200 About seven hundred students go to the school. The Suffolk 0:07:09.240 --> 0:07:12.520 County Health Commissioner believes the likely cause is no ravirus. 0:07:13.120 --> 0:07:15.680 There's a push in some New England states to help 0:07:15.720 --> 0:07:17.920 the police know how to deal with the drivers who 0:07:17.960 --> 0:07:22.440 have autism. Connecticut launched a Blue Envelope program for artistic 0:07:22.520 --> 0:07:25.800 drivers three years ago. Now Rhode Island is considering the 0:07:25.840 --> 0:07:28.960 same type of marker. Joanne Quinn has a twenty seven 0:07:29.040 --> 0:07:32.160 year old son with autism. She says those police sirens 0:07:32.160 --> 0:07:34.760 and lights will likely be a trigger and maybe even 0:07:34.840 --> 0:07:37.080 take off if he says, hey, let's get out of 0:07:37.080 --> 0:07:38.280 the car, and he'll get out of the car and 0:07:38.320 --> 0:07:40.600 then he'll start talking at him, and with the lights 0:07:40.600 --> 0:07:42.560 and noise going, Pat's going to turn and walk away. 0:07:42.600 --> 0:07:44.280 I can't be here. I need to go somewhere else. 0:07:44.280 --> 0:07:46.000 This is a century overload. How's that going to go 0:07:46.080 --> 0:07:49.320 over with a police officer? Meanwhile, opponents fear this kind 0:07:49.360 --> 0:07:53.080 of designation could lead to a breach of confidentiality. The 0:07:53.120 --> 0:07:56.320 Pentagon says a US contractor was killed and five US 0:07:56.400 --> 0:08:00.240 service members and another US contractor were wounded when a 0:08:00.320 --> 0:08:04.160 suspected Iranian drone struck a facility on a coalition base 0:08:04.200 --> 0:08:08.280 in northeast Syria. Defense Secretary Lloyd Austin says US Central 0:08:08.320 --> 0:08:13.000 Command Forces retaliated with precision airstrikes. North Korea says it 0:08:13.040 --> 0:08:16.840 has tested an underwater attack drone in its latest warning 0:08:16.880 --> 0:08:20.120 to South Korea and the US to stop their current 0:08:20.160 --> 0:08:23.720 military drones. According to state media, the weapon, fitted with 0:08:23.720 --> 0:08:28.080 a nuclear warhead would destroy enemies with a large radioactive wave. 0:08:28.440 --> 0:08:32.600 Analysts are skeptical. Secretary of State Antony Blincoln says funding 0:08:32.640 --> 0:08:35.559 for Ukraine should last for much of the year. Bloomberg 0:08:35.600 --> 0:08:38.840 said Baxter as the story. Blincoln before the House Appropriation 0:08:38.960 --> 0:08:42.880 Subcommittee says the billions already being approved as being closely watched, 0:08:42.880 --> 0:08:45.640 and the embassy in Ukraine, he says forty five people 0:08:45.640 --> 0:08:48.680 they're overseeing. This is a series of hearings focused on 0:08:48.720 --> 0:08:52.479 the budget request for an eleven percent increase. Some lawmakers 0:08:52.480 --> 0:08:55.040 have worried money is being lost to corruption and that 0:08:55.080 --> 0:08:57.840 other nations are not doing enough. B Lincoln telling the 0:08:57.840 --> 0:09:00.560 committee the US does have real burden, but notes the 0:09:00.600 --> 0:09:03.640 other nations are doing other jobs, like taking in refugees 0:09:04.280 --> 0:09:07.320 in San Francisco. I'm at Baxter Bloomberg. Day Break Global 0:09:07.320 --> 0:09:09.839 news twenty four hours a day, powered by more than 0:09:09.920 --> 0:09:12.640 twenty seven hundred journalists and analysts in over one hundred 0:09:12.640 --> 0:09:15.560 and twenty countries. I'm Michael Barr. This is Bloomberg Nathan. 0:09:15.720 --> 0:09:22.439 Thanks Michael, time for the Bloomberg Sports Update, brought to 0:09:22.480 --> 0:09:24.719 you by Tri State Auty. Good morning, John stash hour 0:09:24.800 --> 0:09:26.960 yead morning, Nathan. Not a good trip to Florida for 0:09:27.000 --> 0:09:29.800 the next they lost in Miami, followed a night later 0:09:29.880 --> 0:09:32.960 by a lost in Orlando. Knicks were without Jalen Brunson. 0:09:33.000 --> 0:09:35.600 They fell behind by nineteen. They did rally, but the 0:09:35.720 --> 0:09:39.360 Magic hit four late three pointers and one one eleven 0:09:39.440 --> 0:09:41.480 one oh six oh chance for the Nets to get 0:09:41.520 --> 0:09:43.160 to within a game of the Knicks for fifth of 0:09:43.200 --> 0:09:45.920 the East. At Barkley's Nets Buckley, they had a victory 0:09:46.000 --> 0:09:49.200 until three turnovers of the final minute. Cleveland, on a 0:09:49.280 --> 0:09:52.440 three pointer with less than a second ago, pulled out 0:09:52.440 --> 0:09:55.880 the win one sixteen one fourteen, sweeping the home and home. 0:09:55.960 --> 0:09:58.600 Rangers and Hurricanes played at home at home, each winning 0:09:58.640 --> 0:10:01.120 on the road. Rangers in Allie won two to one 0:10:01.400 --> 0:10:04.480 on an out of Bucks Bowl NCUBAA tournament in overtime 0:10:04.600 --> 0:10:07.680 at the Garden, Kansas State pulled out a ninety eight 0:10:07.880 --> 0:10:11.280 ninety three win over Michigan State. The Wildcats Marquis Snowel 0:10:11.400 --> 0:10:15.560 had nineteen assists. That's the most in any tournament game ever. 0:10:15.760 --> 0:10:17.880 He's a New York City native. This is probably my 0:10:17.920 --> 0:10:19.680 career high an assists. You know. Ever, I had a 0:10:19.679 --> 0:10:21.480 couple of games of fourteen, a couple of games of 0:10:21.520 --> 0:10:24.000 seventeen back in high school. But you know this one 0:10:24.080 --> 0:10:26.200 was special. In front of my hometown, in front of 0:10:26.480 --> 0:10:29.080 you know, the city, you know that loves me. I 0:10:29.160 --> 0:10:31.200 came here playing some worries. You know how blessed and 0:10:31.200 --> 0:10:35.720 grateful I am. Tomorrow at MSG Kansas State versus Florida Atlantic, 0:10:35.760 --> 0:10:39.400 a surprising East Regional final the owl small school from 0:10:39.440 --> 0:10:41.760 Boca Raton, Florida, but they've got a thirty four and 0:10:41.840 --> 0:10:45.280 three record. They upset Tennessee sixty two fifty five a route, 0:10:45.280 --> 0:10:48.480 then a thriller West Regional in Vegas, Yukon a third 0:10:48.520 --> 0:10:51.640 straight blowout victory for the Huskies eighty eight sixty five 0:10:51.679 --> 0:10:55.920 over Arkansas and Gonzaga, then top UCLA seventy six seventy 0:10:55.920 --> 0:10:58.000 three on a late three point shot. Four more games tonight, 0:10:58.000 --> 0:11:02.640 including Princeton seated fifteenth, taking on freighting that game in Louisville. 0:11:02.880 --> 0:11:09.320 John Dashaw Bloomberg Sports Live from coast to coast from 0:11:09.320 --> 0:11:13.600 New York to San Francisco, Boston to Washington, DC, nationwide 0:11:13.600 --> 0:11:17.520 on Sirius xamp, the Bloomberg Business App, and Bloomberg dot Com. 0:11:17.600 --> 0:11:23.040 This is Bloomberg Daybreak. Good morning. I'm Nathan Hagar. Markets 0:11:23.040 --> 0:11:25.839 are searching for calm on this Friday as we close 0:11:25.920 --> 0:11:28.679 out the most tumultuous two week stretch for the US 0:11:28.760 --> 0:11:32.160 and global financial systems in recent memory. A weekend of 0:11:32.240 --> 0:11:35.000 US regional bank runs was followed by a weekend that 0:11:35.120 --> 0:11:38.120 saw the collapse of Credit Suie capped off by yet 0:11:38.160 --> 0:11:41.760 another Federal Reserve rate hike this week. It's all left 0:11:41.800 --> 0:11:44.920 many asking what went wrong, where did it go from here? 0:11:45.160 --> 0:11:48.240 And should the FED shift its priorities from inflation to 0:11:48.320 --> 0:11:51.360 financial stability. Not to mention, many are left wondering if 0:11:51.400 --> 0:11:54.720 the Fed can achieve that soft landing amid all this turmoil, 0:11:55.000 --> 0:11:58.080 When we explored the bank failures and financial stress tests 0:11:58.080 --> 0:12:00.640 with some of the top voices in economic on a 0:12:00.679 --> 0:12:04.280 special episode of Bloomberg's Wall Street week Our, David Weston 0:12:04.360 --> 0:12:08.360 hosted that roundtable with former Treasury Secretary Larry Summers, former 0:12:08.400 --> 0:12:11.080 FED Governor Dan to Rulo, and head of Economics at 0:12:11.080 --> 0:12:14.599 Bloomberg News. Stephanie Flanders, let's bring you part of that discussion. 0:12:14.920 --> 0:12:17.040 I want to start with you, Dan. You were a 0:12:17.040 --> 0:12:20.160 colleague for several years of j. Powell. During the time 0:12:20.200 --> 0:12:23.280 you were on the FED, you had responsibility for banks supervision. 0:12:23.640 --> 0:12:25.800 We've been told the banks were so strong we didn't 0:12:25.840 --> 0:12:28.160 have to worry about it what happened here. We didn't 0:12:28.160 --> 0:12:32.080 think we still had banking problems. I trust that the 0:12:32.200 --> 0:12:35.960 largest banks truly are in the much better capital and 0:12:36.000 --> 0:12:39.400 liquidity position that Jay Powell referred to yesterday during the 0:12:39.440 --> 0:12:42.120 press conference. But I think there are some things that 0:12:42.200 --> 0:12:45.720 we do know. We know first that there was a 0:12:45.920 --> 0:12:51.800 significant supervisory failure somewhere along the way. Was that failure 0:12:51.960 --> 0:12:57.600 in the San Francisco Fed's inability to identify problems of 0:12:57.720 --> 0:13:01.400 growth and maturity mismatches? Is in the like early on? 0:13:01.960 --> 0:13:05.200 Was it a supervisory failure because of the light touch 0:13:05.240 --> 0:13:09.200 approach to supervision that the Federal Reserve Board had put 0:13:09.200 --> 0:13:12.280 in place over the last four or five years, Or 0:13:12.679 --> 0:13:17.600 was it a supervisory failure because the supervisors generally had 0:13:17.640 --> 0:13:22.880 not adjusted their method of assessing liquidity to take account 0:13:23.160 --> 0:13:28.959 of very high uninsured deposit concentrations. Coexisting with the capacity 0:13:29.160 --> 0:13:33.480 of big depositors to run at warp speed rather than 0:13:33.640 --> 0:13:36.240 the way they used to run. I also would not 0:13:36.480 --> 0:13:40.960 rule out a contributing factor being the twenty eighteen legislation 0:13:41.040 --> 0:13:46.160 in twenty nineteen FED regulation, both of which deregulated banks 0:13:46.200 --> 0:13:50.200 of under seven hundred or the regulation banks of under 0:13:50.240 --> 0:13:53.760 seven hundred billion dollars in assets the legislation banks of 0:13:53.840 --> 0:13:56.920 under two hundred and fifty. But I think in the 0:13:57.000 --> 0:14:02.800 most immediate sense this is clearly a supervisory failure. Other 0:14:02.920 --> 0:14:07.520 factors may be uncovered as the FED Zone investigation proceeds. 0:14:07.760 --> 0:14:10.000 So Larry, let's put you back at the Treasury or 0:14:10.000 --> 0:14:11.960 for them, or at the White House. If you were 0:14:12.000 --> 0:14:14.959 looking at this situation, what questions would you be asking 0:14:15.080 --> 0:14:18.200 to make sure you understood the possible ramifications of what 0:14:18.240 --> 0:14:21.640 we've seen so far in a broader financial context. Before 0:14:21.680 --> 0:14:25.520 I answered, Before I answer that hypothetical, let me put 0:14:25.520 --> 0:14:30.480 a question to my friend Dan, who I'll just say 0:14:30.520 --> 0:14:34.840 I think did an enormous amount to strengthen our financial 0:14:34.880 --> 0:14:40.000 system during his time at the FED. Dan, I've heard 0:14:40.040 --> 0:14:44.520 it said, and I don't know that. Even in twenty 0:14:44.600 --> 0:14:50.360 twenty two, the FED stress tests that were applied to 0:14:50.400 --> 0:14:55.640 the largest banks did not include an analysis of the 0:14:55.840 --> 0:15:02.160 stress from a major interstrate hike. If that's true, that 0:15:02.320 --> 0:15:05.320 seems kind of bizarre from the point of view of 0:15:05.360 --> 0:15:10.680 the world of early twenty twenty two, when it certainly 0:15:10.720 --> 0:15:18.480 many people, certainly me on David's show, were emphasizing that 0:15:18.520 --> 0:15:22.119 there was likely to need to be very substantial increases 0:15:22.160 --> 0:15:25.840 in interest rates. Can you say something and if the 0:15:26.000 --> 0:15:32.040 stress tests weren't considering increases in interest rates, then perhaps 0:15:32.040 --> 0:15:36.120 the exempting of Silicon Valley Bank from the stress tests 0:15:36.760 --> 0:15:41.040 was not central to understanding the problem. Can you say 0:15:41.080 --> 0:15:47.440 something about interest rate hikes and FED stress tests? Sure? So, 0:15:47.680 --> 0:15:52.640 First off, I think Larry, I agree with the statement 0:15:52.680 --> 0:15:55.840 you made towards the end of your question, which is actually, 0:15:55.960 --> 0:15:59.200 if Silicon Valley had been in last year's stress test 0:15:59.640 --> 0:16:03.280 FOREL rather than its stress rehearsal, I don't think it 0:16:03.320 --> 0:16:06.000 would have made much difference, for precisely the reason you 0:16:06.080 --> 0:16:08.920 say that they weren't stressing the things that were the 0:16:09.400 --> 0:16:14.280 SVB vulnerabilities with respect to stress testing. Generally, over again, 0:16:14.320 --> 0:16:17.720 over the last five or six years, the stress test 0:16:17.760 --> 0:16:22.800 has become eminently predictable. The scenario that's used is now 0:16:22.840 --> 0:16:26.320 a single scenario, which is essentially a variant on the 0:16:26.400 --> 0:16:28.960 very first one we put in some years ago. That 0:16:29.120 --> 0:16:34.320 is a severe, quite severe recession, but it follows the 0:16:34.360 --> 0:16:37.600 basic pattern of the scenario that was developed when we 0:16:37.640 --> 0:16:44.200 began doing the annual stress test. The scenario, of course 0:16:44.280 --> 0:16:49.000 includes a reduction in interest rates because of the hypothesis 0:16:49.080 --> 0:16:53.560 of a recession and the Fed's reaction. When I was 0:16:53.600 --> 0:16:57.280 at the FED, we were using also an alternative scenario. 0:16:57.560 --> 0:17:01.520 It's called the adverse rather than severe, adverse scenario, and 0:17:01.640 --> 0:17:06.119 we use that scenario to test things other than the 0:17:06.240 --> 0:17:09.960 prototype of the severe recession, And indeed we used it 0:17:10.040 --> 0:17:12.480 at least one year, and I think a couple of years, 0:17:12.600 --> 0:17:16.280 to test what would happen with unusual changes and interest 0:17:16.359 --> 0:17:20.399 rates which were not then anticipated. So to some degree, 0:17:20.440 --> 0:17:24.879 the answer to your question is like supervision. Generally, the 0:17:25.240 --> 0:17:30.040 stress test has become less rigorous over time, and I 0:17:30.080 --> 0:17:34.480 think more importantly, it's become too predictable. And the whole 0:17:34.520 --> 0:17:37.040 purpose of a stress test is that you're trying to 0:17:37.080 --> 0:17:41.480 stress against the unanticipated, not the anticipated. At the risk 0:17:41.560 --> 0:17:45.040 of preps being too tough on your former colleagues at 0:17:46.560 --> 0:17:50.960 the fair, you talk about predictable versus unpredictable. I would 0:17:51.080 --> 0:17:55.320 argue that at a very minimum, the stress tests ought 0:17:55.320 --> 0:17:59.560 to consider what is the major risk of their moment 0:18:00.320 --> 0:18:03.720 When you were at the fed DAN in that period, 0:18:03.760 --> 0:18:06.919 I think it was reasonable to think that the major 0:18:07.080 --> 0:18:12.040 risk was a tilt towards recession and deflation. But I 0:18:12.080 --> 0:18:16.439 don't see how anybody last spring could have thought that 0:18:16.520 --> 0:18:21.240 the major risk was anything other than a spike in 0:18:21.240 --> 0:18:26.119 interest rates. So a process that didn't consider as a 0:18:26.240 --> 0:18:35.040 risk seems to me to be a profoundly problematic process. 0:18:35.480 --> 0:18:38.719 It seems almost like the supervisors were mailing it in. 0:18:39.640 --> 0:18:43.840 Is there a defense? I would say, first, this is 0:18:43.920 --> 0:18:47.440 not by way of defense, or certainly not an apologia, 0:18:47.600 --> 0:18:52.080 but just a bit of explanation. It's quite likely that 0:18:52.480 --> 0:18:57.080 the scenario development was taking place in the latter part 0:18:57.119 --> 0:19:01.359 of twenty twenty one if it was going to be 0:19:01.520 --> 0:19:04.720 the twenty twenty two stress test, And of course this 0:19:04.800 --> 0:19:08.240 is the period in which the FOMC was still figuring 0:19:08.280 --> 0:19:12.600 out that the inflation problem was not transitory. But I 0:19:12.600 --> 0:19:15.600 don't want to use that as a kind of exculpation 0:19:15.880 --> 0:19:20.920 of the supervisors. Second thing to say is it's not 0:19:21.560 --> 0:19:25.720 the supervisors meeting the staff who are making the policy 0:19:25.800 --> 0:19:28.720 decisions as to what kind of stress tests to have, 0:19:28.800 --> 0:19:31.919 whether they have multiple scenarios, that's a decision of the 0:19:31.920 --> 0:19:37.320 Board of Governors, and so it rests with them. But 0:19:37.400 --> 0:19:41.920 I agree with the gravenment of your remarks, which is 0:19:42.880 --> 0:19:46.560 not to have tried to think about something other than 0:19:46.680 --> 0:19:50.760 the same scenario is a failure of supervision in and 0:19:50.800 --> 0:19:53.560 of itself. Stephane, you've worked at the Treasure United States. 0:19:53.760 --> 0:19:56.880 You also have covered financial markets and other business issues 0:19:56.920 --> 0:19:58.560 over in Europe for a good long time. One thing 0:19:58.600 --> 0:20:01.080 we're hearing from both Larry and and is rates were 0:20:01.119 --> 0:20:03.280 going up and there weren't just going up here, They're 0:20:03.320 --> 0:20:05.960 going up over in Europe as well. Was what we're 0:20:05.960 --> 0:20:07.919 seeing around now in the banking system. Maybe not the 0:20:07.960 --> 0:20:10.720 specifics of Silicon Value Bank, but was something like that 0:20:10.800 --> 0:20:14.080 almost inevitable. After we've pumped so much money in the system, 0:20:14.119 --> 0:20:16.240 we start taking it out, there's going to be stress, 0:20:16.359 --> 0:20:18.520 real stress, and there's going to be some failure. Yeah, 0:20:18.520 --> 0:20:20.680 And I wish I was I was closer to you guys, 0:20:20.680 --> 0:20:22.120 because I knew I was going to struggle to get 0:20:22.119 --> 0:20:24.680 a word in with you too. But I think in 0:20:25.000 --> 0:20:27.840 this conversation, I think it is important when we're thinking 0:20:27.840 --> 0:20:29.800 about what the implications are. You know, you have to 0:20:29.840 --> 0:20:33.440 distinguish what is an outlier about not to Silicon Valley Bank, 0:20:33.480 --> 0:20:36.199 but others that have got into trouble in this episode. 0:20:36.640 --> 0:20:42.480 What is fundamentally a regulatory stupidity, you know, a very 0:20:42.480 --> 0:20:45.959 traditional problem the interest rate risk that was just hiding 0:20:46.000 --> 0:20:49.399 in plain sight, and what is a genuinely new issue 0:20:49.520 --> 0:20:52.800 which was not being fully taken into account by anyone 0:20:52.840 --> 0:20:55.280 looking at the risks. And I think when you look 0:20:55.320 --> 0:20:57.000 at something like Silicon Valley Bank, you know clearly it 0:20:57.080 --> 0:20:59.720 was an outlier in the speed with which deposits have 0:20:59.800 --> 0:21:04.720 been built up, in its massive exposure to uninsured deposits 0:21:04.720 --> 0:21:08.240 and reliance on that for funding. I hope it was 0:21:08.280 --> 0:21:10.800 an outlier in not having a chief risk officer for 0:21:10.920 --> 0:21:14.960 nine months, which was an extraordinary state of affairs. But 0:21:15.080 --> 0:21:17.920 what was very traditional about this, and as the discussion 0:21:17.960 --> 0:21:20.639 with Larry and Dan is suggesting, was that you know, 0:21:20.760 --> 0:21:24.199 right here was a massive interest rate risk that was 0:21:24.520 --> 0:21:26.439 whether or not it was in the stress test was 0:21:26.480 --> 0:21:29.439 something that central banks should have been thinking very hard about. 0:21:29.720 --> 0:21:31.159 And I think it was sort of striking that. We 0:21:31.200 --> 0:21:33.399 had a lot of the debate around this, what are 0:21:33.400 --> 0:21:35.520 the hidden risk You know, all the conversations that you 0:21:35.560 --> 0:21:38.280 will have had, David, when you ask regulators what's keeping 0:21:38.320 --> 0:21:40.600 you up at night, they would always talk about private equity. 0:21:40.640 --> 0:21:43.639 They'd talk about non bank shadow banking. Has been the 0:21:43.680 --> 0:21:46.919 thing that people were you know, was this worry for 0:21:46.960 --> 0:21:49.160 all these years, and in fact it was the most 0:21:49.280 --> 0:21:54.359 obvious problem sitting on bank balance sheets as a direct 0:21:54.400 --> 0:21:57.160 result of monetary policy actions by central banks that has 0:21:57.160 --> 0:21:59.479 actually caused this issue. I would just say, though one 0:21:59.520 --> 0:22:02.160 of the reasons maybe they weren't looking at that so closely, 0:22:02.240 --> 0:22:04.720 or that'd be interested to know what Dan and Larry 0:22:04.720 --> 0:22:06.359 think about this. You know, there is an element of 0:22:06.400 --> 0:22:08.960 this which is new, and we see in the speed 0:22:09.080 --> 0:22:14.040 with which deposits left these institutions, and that's the non 0:22:14.160 --> 0:22:17.320 stickiness of those deposits. And I think, you know, one 0:22:17.320 --> 0:22:19.679 of the things that regulators were thinking when they looked 0:22:19.840 --> 0:22:23.000 considered interest rate risk potentially was that there was a 0:22:23.080 --> 0:22:28.359 sort of self hedging mechanism in a bank of the 0:22:28.400 --> 0:22:30.840 fact that deposits would be slow to move if they 0:22:30.840 --> 0:22:33.280 weren't being paid the higher interest rates. That is no 0:22:33.359 --> 0:22:36.040 longer the case, and I think that probably does have 0:22:36.680 --> 0:22:41.240 longer term implications for regulation and potentially longer term implications 0:22:41.240 --> 0:22:43.960 for how much we ensure deposits. We had a decision 0:22:44.000 --> 0:22:46.440 from the Fed this week to raise another twenty five 0:22:46.480 --> 0:22:49.239 basis points. Some people had been urging that actually they 0:22:49.280 --> 0:22:52.160 just hold given the difficults with banking. At the same time, 0:22:52.160 --> 0:22:55.320 he Jap admitted that there's more uncertainty about the extent 0:22:55.359 --> 0:22:57.879 of which what's already happened with financial conditions may have 0:22:58.200 --> 0:23:01.720 essentially imposed or the rate hike already. Did they get 0:23:01.720 --> 0:23:03.440 it right? Dan, from your point of view, did j 0:23:03.560 --> 0:23:07.399 Pal get it right? Market expectations helped him. They had 0:23:07.400 --> 0:23:10.840 sort of converged around twenty five basis points, and so 0:23:10.880 --> 0:23:14.480 then it became a communication issue. He said, quite explicitly, 0:23:14.480 --> 0:23:18.520 it's too soon to tell how monetary policy should respond 0:23:18.640 --> 0:23:23.440