Transcript: The Path Forward: Banking with Sheila Bair

[Laughter]

MS. LONG: Welcome back to Post Live, Ms. Bair.

MS. BAIR: Thanks, Heather. Happy to be here.

MS. LONG: So let’s get right to the heart of it. In your view, is the banking system in the United States safe now?

MS. BAIR: Yes. Yes, the vast majority of banks are quite safe and stable, particularly regional banks and community banks, I might add. So we do have some individual institutions that have not managed their risk well, and they’re–you know, have been and are now suffering the consequences. But overall, the banking system is very safe, and if you’re below the insured deposit limits, really, people, you know, Main Street households don’t need to worry about this at all. The FDIC has a perfect record of protecting insured deposits, and the deposit cap is quite high, $250,000. And through different account restructures, it actually can get a lot more than $250,000 per bank. There’s a lot of information on the FDIC’S website about that.

So–and if you’re uninsured–and that’s where we’ve seen the stress right now with runs on uninsured deposits–you know, you’re still fine too, so long as you know the bank you’re doing business with. We want the larger depositors to have some market discipline, understand the bank, understand its financial stability, but again, if you’ve been dealing with a regional bank or a smaller bank for a long time, you know them. You know their condition. There should be no problem whatsoever. Uninsured deposits are important to the banking system as well. So I think overall the system is fine. As I said in the quote that you flashed before we started, the main thing we have to fear now is fear itself, making people–incentivizing people to make irrational withdrawals of deposits when it’s just not necessary.

MS. LONG: You’re really focused on this issue of deposits and what’s insured, as you were pointing out, the current system–

MS. BAIR: Right.

MS. LONG: –insures people up to $250,000. That’s a lot of comfort for most of us and in the middle class–

MS. BAIR: Exactly.

MS. LONG: –and working-class families. But as you know, one of the big debates here is should we ensure as a nation all deposits. There’s been calls–

MS. BAIR: Right.

MS. LONG: –from that across the political spectrum. The Mid-Size Bank Coalition sent a letter to the FDIC–

MS. BAIR: Right.

MS. LONG: –asking for it. What do you think? Is that a good idea?

MS. BAIR: Yeah. Well, I think that would also be an overreaction, so no. Look, I think we need some market discipline to complement the supervisory process. Examiners can’t do it all on their own, and the theory is–which I think is accurate is that those, you know, more financially sophisticated, large depositors can understand a bank’s financial condition, can review their deposit base, their loan quality, their asset quality, and make, you know, informed decisions about which banks are safe and reward the banks that are being better managed. And again, that is the vast majority of banks. So you would lose that.

I fear unlimited insurance would–you know, really that would be very expensive to do. It would be assessed on the banking system, backstopped by taxpayers, and would primarily help very, very wealthy people.

One area where I do think unlimited coverage is warranted, at least for–in times of stress–and we did this during the great financial crisis–is with transaction accounts, basically checking accounts that are used by businesses and other organizations to pay for their operational expenses, their payroll. Those kinds of accounts almost always have to go significantly above the $250,000 cap, and they all need to be in one bank because you have, you know, constant cash flows going in and out. To provide unlimited coverage for those transaction accounts, I think, would make some sense, at least on a temporary basis. We did it during the great financial crisis when we saw, again, uninsured deposit flows from otherwise very healthy smaller banks going into the large institutions, not because the large institutions were better managed or run–they weren’t actually. Most of them were in trouble too, but they were being bailed out. But because they had this too-big-to-fail status, uninsured depositors were moving in that direction, which was really not what you want to do. We’ve got enough domination of our banking system already with very, very large banks.

So we did it during the great financial crisis. I think we should do it again now. Congress under Dodd-Frank–Congress decided they didn’t want the FDIC doing it on its own with a systemic risk exception. So they wanted Congress to approve it, but there’s a fast-track procedure, and I hope Congress will institute that and let the FDIC guarantee these transaction accounts, because they are very important to real economy.

We want people to make payroll. We want people to be able to pay their businesses and others to pay their bills. So I think that is one area where unlimited coverage, at least on a temporary basis, makes a lot of sense.

MS. LONG: Yeah. That’s interesting that you really encourage us to focus on the transaction accounts as opposed to that number.

MS. BAIR: Right.

MS. LONG: I’ve heard a lot of numbers thrown out–3 million, 5 million, 10 million.

MS. BAIR: Yeah. Yeah, yeah. I don’t– you know, somebody who’s got $10 million and just, you know, keeping their $10 million in a bank, they can figure out whether the bank is safe or not. I think, you know, that’s–and again, there’s a–the more you expand it, the more expensive it’s going to be to cover, and then we assess this on all banks, large banks and small banks. And again, the benefits, I think, primarily would be to very wealthy individuals or very large companies. Again, with this exception of the transaction accounts, I think there’s a very valid reason to provide unlimited coverage, at least temporarily.

MS. LONG: Yeah, that makes sense.

MS. BAIR: Yeah.

MS. LONG: I wanted to get your take on this word “bailout.” There’s no formal definition.

MS. BAIR: Yeah.

[Laughter]

MS. LONG: But, you know, you sat in that FDIC chair, and obviously, the White House, the Biden administration has been careful saying what happened with the Silicon Valley Bank and Signature Bank is not a bailout. They were using that FDIC deposit insurance funds to backstop those banks and any losses. You know, is “bailout” a fair word here or not?

MS. BAIR: Yeah, yeah. Well, it was certainly a bailout of uninsured depositors. They did, unlike the last crisis–and I was fighting this battle constantly. They did wipe out the unsecured debt. So–and the equity. So that–so that is all at risk of loss. They’re not bailing out the debt or the equity.

But the uninsured deposits, they are covering in full, and actually, the cost of that will not–that will be borne by a special assessment that applies to all banks. Any additional costs associated with it will be covered by a special assessment that applies to all banks, community banks as well as the very biggest guys, and, you know, that you got to do what you got to do, but it penalizes for SVBs. And both these banks, especially Silicon Valley, was dramatically mismanaged. You’re protecting their uninsured depositors by assessing, you know, the other–vast majority of healthy banks, large and small, have to pay for it now.

So there’s a–yeah, I’m not wild about that. I thought that was an overreaction. I thought the regular FDIC resolution process would have worked just fine with this bank, and that’s where they started, but they ended up over the weekend deciding to bail out all the uninsured.

So, yes, it was a bailout. I call a bailout any special breaks, you know, special benefits that you give to certain stakeholders in the banking system that are not being given to every–that aren’t, you know, provided for everybody else. You’re breaking the rules. The rules are supposed to be $250,000. You’re breaking the rules to help these uninsured. So, yes, I do call that a bailout. I recognized that by haircutting the debt, putting the debt at risk, that is something different from what we did in a lot of these other failures during the great financial crisis, but really uninsured depositors need to be at risk as well.

MS. LONG: Yeah. You mentioned that some–of course, the bank executives of these two banks lost their jobs, but sometimes when you sit here as the general public, that doesn’t feel like enough, and obviously–

[Laughter]

MS. LONG: –the president–

MS. BAIR: Yeah.

MS. LONG: –has this idea, you know, is there a possibility to claw back some of their bonuses or pay–

MS. BAIR: Right.

MS. LONG: –or have the FDIC put some sort of ban, that these people can’t come back and work in the financial sector again. Does any of that have merit to you?

MS. BAIR: Yeah, yeah. Well, it doesn’t really deal, as you say, with the immediate problem, and it’s not really responsive to what’s foremost on people’s minds right now is–you know, are my bank deposits safe? I think that’s the communication and the measures we need to be focusing on now.

But, yeah, I mean, I think they’re–the FDIC has a lot of authority already. So, ironically, the very largest banks, if they go through something called “orderly liquidation,” which is a special procedure provided for in Dodd-Frank, there is–there’s a lot of like automatic clawback authority, and, you know, it’s mandated. You got to fire the boards. You got to fire the top management, claw back a couple years of compensation.

For those that are not systemic, the FDIC absolutely can fire people now. We do almost always routinely. When a bank failed, the management was gone. Clawing back compensation is a little more onerous. You got to–you have to sue on this, you know, litigation involved. You got to prove your case of negligence. So having some type of automatic clawback, I think, does make some sense.

But again, that–and personal accountability is important here. There’s no doubt. Management, there were a lot of opportunities for improvement, shall we tactfully say, with the regulation and supervision as well, and, you know, the auditors maybe should have been catching some things. So we know that will all be as sorted out as these things are investigated. But first and foremost, it’s management’s responsibility. They’re on the front line to keep these banks safe and sound, and when they don’t, yes, there should be very strong repercussions for them.

MS. LONG: I want to get your views on what else should change coming out of this–let’s call it “turmoil.” I don’t think it quite rose to a crisis.

MS. BAIR: Right, right, right.

MS. LONG: Although I’d be curious if you disagree.

MS. BAIR: Yeah. Well, “turmoil” is a good word. Yeah.

MS. LONG: All right. You know, what else–obviously, something went wrong here. A lot of things went wrong, and with these two banks in particular, it wasn’t just poor management. And, you know, I’m wondering in your view, where should Congress, where should people be focused, Federal Reserve or others, on trying to fix and improve the system?

MS. BAIR: Yeah. So I think this was a bit more human error than any fundamental fault with regulation. Look, I do think there were some mistakes made in this 2018 law that people are pointing to. One thing is that if a bank says that they’re–that they are holding securities available for sale, saying that they think they might sell them, then they should–right now they can decide whether they want to mark those to market. Even if they’ve lost market value, they had to sell them today. They would have a reduced value from the par value that’s being carried on the books. They don’t have to mark that, though. They don’t have to deduct it from capital. That needs to be changed. If it’s in the–if you’re saying you think you might want to sell these securities, you need to mark them down, and that needs to be reflected in your capital.

There also needs to be a tightening of what you can put in what’s called a “hold-to-maturity portfolio.” So that’s a scary-sounding thing that simply means banks will put securities that they have, both the intent and the ability to hold until they mature. You can put them in that portfolio. That means if they can wait until maturity, there will be no market losses because they can redeem at full face value. That’s how a bond works. If you hold to maturity, you can get your money back. If you have to sell it before maturity, if interest rates are now higher than what that bond is providing, you’re going to take a market loss.

And that was the problem with Silicon Valley. It had, you know, a lot of these, millions and billions of these securities that had lost a lot of value. They had put it in the hold-to-maturity market and had not needed to reflect that on their books and mark it down against their capital. They clearly did not have the ability. The auditors should have caught this. They did not have the ability to hold those to maturity. Well over 90 percent of their deposits were uninsured, frankly, hot money institutions. They were very high-interest paying money. It was kind of a close-knit group of Silicon Valley, you know, venture capitalists and the portfolio companies that they fund. Word spread very fast when they decided to run. So it was in a very–what we called, the FDIC, an unstable, an unstable deposit franchise, very high run risk. They should have known that they could very well have had to sold these securities before the maturity. So that should be changed, and that was a mistake.

Again, that’s just a problem with all banks. That had nothing to do with the 2018 law. So that needs to be tightened up.

I think more–there’s a lot of, you know, focus on the frequency of stress test. So this 2018 law allowed for, you know, either elimination of stress test or making them every other year for the smaller and mid-tier banks, where the big banks have to go through it every year.

I’d all be for that, but I think people need to understand the stress test they’re talking about really focused on credit risk. This is, again, regulators typically fight the last war. So during the great financial crisis, mortgages that were not going to be repaid, credit risk, default risk, that was the issue. Now we have liquidity risk, which these–you know, regrettably, regulators still focus, these stress tests still focus on capital and credit risk. So I think that doesn’t need legislation. That’s really not reflective of legislation. That just means that regulators need to be alert, don’t fight the last war. Interest rates are going up. That means the market value of financial assets are going down.

Most of your viewers, I’m sure, they understand if interest rates go up, bond values go down. This is a simple rule.

So with that, people need to be alert that these securities have been appropriately marked, and that the deposit bases are stable. They’re not at high risk for deposit run. That’s called “liquidity and interest rate risk.” It can transition into a capital problem. If you end up with a bank having to do fire sales of securities because they have got a deposit run, that’s a problem, and then that can eventually create insolvency problems.

MS. LONG: Yeah.

MS. BAIR: But right now, this–we need to focus on liquidity, interest rate risk, and that’s really not something that the stress test that were eased–focused on, and we need more focus on that, frankly.

MS. LONG: Thank you for explaining that. One of our viewers–

MS. BAIR: Yep.

MS. LONG: –Evelyn Moore from Florida had actually written in and just asked how this crisis was intertwined–or turmoil with the–

MS. BAIR: Right.

MS. LONG: –elevation of interest rates, and I think you just gave a really nice summary of what exactly was going on here.

I want to ask you specifically. You know, you talk about regulators and auditors missing a lot here or certainly–

MS. BAIR: Right.

MS. LONG: –weren’t as vocal as they should have been. Are you–was this really the Federal Reserve that dropped the ball–

MS. BAIR: Yeah. Well–

MS. LONG: –on the regulatory side?

MS. BAIR: –you know, it is, so yes. So we have multiple bank regulators. So this was a state-chartered bank. Both were state-chartered banks, but they were members of the Federal Reserve. So the Federal Reserve was the lead federal regulator, and then the state–the states that chartered them also shared supervisory responsibilities with the Fed.

And so–and the federal–the Fed–the regional banks and the Fed take the lead on–they are the ones that hire the examiners and take the lead on supervision.

So, yeah, I mean, I do think–look, I feel bad for supervisors and regulators. I mean, the regulated process is the process of writing rules. The supervisors enforce the rules. So they kind of use them interchangeably.

I feel bad for both because their–people are quick to blame them, push back. They try to tighten the regulations. They try to question a bank. You know, they get a lot of pushback, and boy, you know, the top of the house at all these regulatory agencies, whether it’s the Fed, the OCC, the FDIC, they need to support their examiners. And then, you know–but then when something goes wrong, there’s a lot of finger-pointing and blame, but they were not really supported always as much as they should be when they tried to be more scrutinizing. So I do think of the Fed, in particular, your–the monetary policy–these dramatic, very rapid increases in interest rates–and I–you know, I’m an inflation hawk. I want fight inflation. I wanted to get rid of easy money back in 2010. I think it went on way too long. But you can only do so much so fast, and it is creating instability in the financial system.

But the Fed typically, in my experience, working with them over the years, they segment this. They think monetary policy is over here and supervision is over here, and that’s kind of something else we do, but our main thing is monetary policy. And the regulation and supervision does not always get the attention it deserves, nor do I think that the Fed really acknowledges that this lax money, cheap money creates financial fragility. It creates instability.

This was something Paul Volcker wrote a lot about, who was a dear friend and mentor. For people listening to this, a great book, “Keeping At It.” He wrote late in his life, and he talks about the financial instability that’s created by this, these inflation targets and keeping money so low for so long, just because somehow you get the idea you need to generate inflation. And it just–it’s not worth it. It hasn’t worked. It created a lot of wealth inequality, you know, a lot of rich people getting richer, and financial assets exploding, stock bonds, and now that’s all correcting. And that’s why we’re seeing some turmoil now.

MS. LONG: Yeah.

MS. BAIR: So the Fed needs to recognize the impact of its monetary policies on supervision, and it needs to take that calculus into its decision-making.

MS. LONG: Well, they’ve got a big decision to make tomorrow.

MS. BAIR: No kidding.

MS. LONG: They’ll be announcing–

MS. BAIR: No kidding.

MS. LONG: –at 2:00 p.m., and as you say, it’s tricky. There’s still an inflation, stubborn inflation problem, but on the other hand, there’s still a lot of tremors in the financial system.

MS. BAIR: Right. Yeah.

MS. LONG: What would you do. What would your advice be tomorrow? Do you think they should raise the interest rates again or go on pause?

MS. BAIR: I think they should hit pause. I think they should just–look, they’ve gone–you know, I wrote–last December, I said they should hit pause. I just did some back-of-the-envelope math. When they started raising rates, they were at–nominal rates rate were at 0.08 percent. They’re well–you know, north of 4.5. That’s over a 6,000 percent increase. That’s a huge increase. 4.5 doesn’t sound like really high historically, but if you compare it to where it was, you know, less than a year when they started raising, it is a lot for the system to absorb. It’s a lot for the economy to absorb. I’m also worried about labor market, and it’s a lot for the financial system to absorb.

And if they want a soft landing, if they want a soft landing, they will not get it if we have another financial crisis. Every single deep recession we have had in our history has been caused by financial crisis, by the banking system becoming unstable and a tremendous contraction of credit. That’s what drives the economy into the ditch. If they want a soft landing, they will not be able to achieve it if there’s a financial crisis, and I do think that needs to take a much higher priority now, I think.

MS. LONG: And you heard in the intro, there’s obviously some, like Senator Warren, who have not been happy with Fed Chair Powell for a while, who are now calling a bit for heads to roll, maybe he should step down, or these sorts of things. Do you think the blame on Fed Chair Powell here is at all valid?

MS. BAIR: Yeah, yeah. Well, no. I–look, I’ve had my issues on monetary policy. I’ve had my issues over the years with the Fed too on supervision and regulation. But that perhaps would just even add more to the uncertainty. Whether you like Jay Powell or not, he’s there. He’s in charge. He’s, you know–having a potential change in leadership right now might be even more disquieting. So, boy, Senator Warren is somebody I’ve known for years and really have a lot of respect for, and I’ve shared some of her concerns and criticisms over the years of the Fed. But I’m–you know, forcing a change in leadership, I don’t think that would be the right move right now.

MS. LONG: Yeah.

MS. BAIR: And we do need to respect the independence of the Fed, whether you agree with them or not, and I think we should all be vocal in our concerns, right? So they need to listen to everybody on this, but at the end of the day, it’s their decision to make. And they’re–I think they are all good people. They’re making the best decisions they can make, even if I don’t frequently agree with them, and–

MS. LONG: It’s difficult in real time.

MS. BAIR: –I think that forcing them out would be–yeah, exactly. It’s easy to–

MS. LONG: Yeah.

MS. BAIR: That’s for sure.

MS. LONG: And let me ask you one more. I am curious to get your take on the future of regional banks. I think one of the concerns you hear–obviously, there’s the Silicon Valley Bank and the Signature Bank and, you know, somebody is eventually going to buy them.

MS. BAIR: Right.

MS. LONG: But, you know, the regional banks survive. There’s kind of this–

MS. BAIR: Yeah.

MS. LONG: –theory that they’re just going to get acquired, gobbled up by bigger banks, or that they’re going to merge–

MS. BAIR: Yeah.

MS. LONG: –and basically, we’re going to end up with even more really big banks, and does that put us in–

MS. BAIR: Yeah, yeah.

MS. LONG: –a worse place as a nation and as an economy?

MS. BAIR: Yeah. Well, I think, again, the fear I have is fear driving uninsured deposit withdrawals, all you know, fleeing from otherwise healthy banks, forcing them to be in distress, and going to the very biggest guys, not because the biggest guys are that much safer or that better managed but because everybody sees they’re too big to fail and the government will never let them go down. So I do worry about that, which is one of the reasons why I hope the administration will ask Congress to invoke as fast-track authority to protect these uninsured accounts and these transaction accounts that are really the life bread of a lot of the business that the regional banks and smaller banks do.

I will tell you, if we hadn’t had the regional banks during the great financial crisis, we really would have been in the soup, because for the most part, the thrifts, they were–the mortgage owners, they were a separate category. They were complicit in the problems. B But the traditional commercial bank, regional banks, you just look at how they performed during the crisis. Their share prices stayed–held up. Both they and community banks were lending when the big banks were retrenching. They are really the backbone, an unappreciated backbone of our financial system, and we do need to preserve and protect that. And again, the vast majority of them are quite safe, quite well managed, and very stable deposits, good asset quality.

And I would hate it for that sector, that important sector of our banking system, to be weakened or undermined just because of this irrational fear that somehow there’s a big problem with the midsize bank. There’s not.

MS. LONG: Thank you. And I have to ask you one more. As the author of these children’s books, you know, are we doing enough financial education in this country?

MS. BAIR: No.

MS. LONG: Do we need to mandate it for school children?

MS. BAIR: No. Yeah, yeah.

MS. LONG: You’ve got them in the books behind you.

MS. BAIR: Yeah, yeah, yeah. Well, no, we don’t do enough. I think, you know, we need–I write kids’ books starting at grade school because I think kids get money at a very early age, and I think you need to make it fun for them. You need to make it basic and simple for them. There’s a lot of good content out there for financial education for children that the parents should find.

I will have to say there’s some content out there that’s not so great. It’s more promoting financial products, promoting debt, promoting spending. I think we need, you know, better filters around that. There’s a lot of new financial literacy mandates in schools. That’s been a positive trend, but I do think we need to help school administrators and educators to review these curricula to make sure they’re really giving children the right message.

And there’s an organization called “FoolProof,” which I think Walter Cronkite started it, and it–and I work with them and others because they try to teach children to be a little skeptical. But you worry, you know. Somebody–your money is important. You want to hold onto your money. Don’t squander your money. Don’t spend it on impulse buys. Don’t borrow when you don’t–you know, for things that are just frivolous. Those are the kinds of things that will lose money, lose will, and we need more of that kind.

You see a lot of books out there about how to invest in the stock market and how to make a million dollars, and that’s all fine too, but I’m more about here’s how you don’t lose money, right, because, boy, people lose by unnecessary borrowing, running credit card balances, late fees when they can’t afford to repay their debt. There’s just so many ways that–and the financial system profits when people do that. So I do think, hey, I love banks, love financial system. We need financial services. But kids need to learn how to be wary. All people need to learn how to be wary and be very careful with their money.

MS. LONG: Well said.

MS. BAIR: Good.

MS. LONG: We just reported nearly 25 million Americans are currently behind on personal loans, credit cards, or auto loans.

MS. BAIR: I hate that. I just–

MS. LONG: And, you know, right–we’re seeing it right now.

MS. BAIR: Yeah.

MS. LONG: Sheila Bair, always so informative to speak with you. Thank you for joining us today on Washington Post Live.

MS. BAIR: Thanks. I enjoyed it.

MS. LONG: That’s all the time we have now, but there’s a lot more great interviews coming up. Check it out at WashingtonPostLive.com. Thank you.