WASHINGTON, DC — A sweeping package aimed at containing damage
to the financial system in the wake of high-profile failures has prompted
questions about whether the federal government is again bailing out Wall
Street.
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And while many economists and analysts agreed that the
government’s response should not be considered a “bailout” in key ways —
investors in the banks’ stock will lose their money, and the banks have been
closed — many said it should lead to scrutiny of how the banking system is
regulated and supervised.
The reckoning came after the Federal Reserve, Treasury, and
Federal Deposit Insurance Corp. announced Sunday that they would make sure that
all depositors in two large failed banks, Silicon Valley Bank and Signature
Bank, were repaid in full. The Fed also announced that it would offer banks
loans against their Treasuries and many other asset holdings, treating the
securities as though they were worth their original value — even though higher
interest rates have eroded the market price of such bonds.
The actions were meant to send a message to America: There is no
reason to pull your money out of the banking system, because your deposits are
safe and funding is plentiful. The point was to avert a bank run that could
tank the financial system and broader economy.
It was unclear Monday whether the plan would succeed. Regional
bank stocks tumbled, and nervous investors snapped up safe assets. But even
before the verdict was in, lawmakers, policy researchers and academics had
begun debating whether the government had made the correct move, whether it
would encourage future risk-taking in the financial system and why it was
necessary in the first place.
The actions were meant to send a message to America: There is no reason to pull your money out of the banking system, because your deposits are safe and funding is plentiful. The point was to avert a bank run that could tank the financial system and broader economy.
“The Fed has basically just written insurance on interest-rate
risk for the whole banking system,” said Steven Kelly, senior research
associate at Yale’s program on financial stability. And that, he said, could
stoke future risk-taking by implying that the Fed will step in if things go
awry.
“I’ll call it a bailout of the system,” Kelly said. “It lowers
the threshold for the expectation of where emergency steps kick in.”
While the definition of “bailout” is ill-defined, it is
typically applied when an institution or investor is saved by government
intervention from the consequences of reckless risk-taking. The term became a
swear word in the wake of the 2008 financial crisis, after the government
engineered a rescue of big banks and other financial firms using taxpayer
money, with little to no consequences for the executives who made bad bets that
brought the financial system close to the abyss.
President Joe Biden, speaking from the White House on Monday,
tried to make clear that he did not consider what the government was doing to
be a bailout in the traditional sense, given that investors would lose their money
and taxpayers would not be on the hook for any losses.
“Investors in the banks will not be protected,” Biden said.
“They knowingly took a risk, and when the risk didn’t pay off, investors lose
their money. That’s how capitalism works.”
He added, “No losses will be borne by the taxpayers. Let me
repeat that: No losses will be borne by the taxpayers.”
But some Republican lawmakers were unconvinced.
Sen. Josh Hawley of Missouri said Monday that he was introducing
legislation to protect customers and community banks from new “special
assessment fees” that the Fed said would be imposed to cover any losses to the
FDIC’s Deposit Insurance Fund, which is being used to protect depositors from
losses.
“What’s basically happened with these ‘special assessments’ to
cover SVB is the Biden administration has found a way to make taxpayers pay for
a bailout without taking a vote,” Hawley said in a statement.
Monday’s action by the government was a clear rescue of a range
of financial players. Banks that took on interest-rate risk, and potentially
their big depositors, were being protected against losses — which some
observers said constituted a bailout.
“No losses will be borne by the taxpayers. Let me repeat that: No losses will be borne by the taxpayers.”
“It’s hard to say that isn’t a bailout,” said Dennis Kelleher, a
co-founder of Better Markets, a prominent financial reform advocacy group.
“Merely because taxpayers aren’t on the hook so far doesn’t mean something
isn’t a bailout.”
But many academics agreed that the plan was more about
preventing a broad and destabilizing bank run than saving any one business or
group of depositors.
“Big picture, this was the right thing to do,” said Christina
Parajon Skinner, an expert on central banking and financial regulation at the
University of Pennsylvania. But she added that it could still encourage
financial betting by reinforcing the idea that the government would step in to
clean up the mess if the financial system faced trouble.
“There are questions about moral hazard,” she said.
One of the signals the rescue sent was to depositors: If you
hold a large bank account, the moves suggested that the government would step
in to protect you in a crisis. That might be desirable — several experts Monday
said it might be smart to revise deposit insurance to cover accounts bigger
than $250,000.
But it could give big depositors less incentive to pull their
money out if their banks take big risks, which could in turn give the financial
institutions a green light to be less careful.
That could merit new safeguards to guard against future danger,
said William English, a former director of the monetary affairs division at the
Fed who is now at Yale. He thinks that bank runs in 2008 and recent days have
illustrated that a system of partial deposit insurance doesn’t really work, he
said.
“Market discipline doesn’t really happen until it’s too late,
and then it’s too sharp,” he said. “But if you don’t have that, what is
limiting the risk-taking of banks?”
It was not just the side effects of the rescue stoking concern
Monday: Many onlookers suggested that the failure of the banks, and
particularly of Silicon Valley Bank, indicated that bank supervisors might not
have been monitoring vulnerabilities closely enough. The bank had grown very
quickly. It had a lot of clients in one volatile industry — technology — and
did not appear to have managed its exposure to rising interest rates carefully.
“The Silicon Valley Bank situation is a massive failure of
regulation and supervision,” said Simon Johnson, an economist at the
Massachusetts Institute of Technology.
The Fed responded to that concern Monday, announcing that it
would conduct a review of Silicon Valley Bank’s oversight. The Federal Reserve
Bank of San Francisco was responsible for supervising the failed bank. The
results will be released publicly May 1, the central bank said.
“The events surrounding Silicon Valley Bank demand a thorough,
transparent and swift review,” Jerome Powell, the Fed chair, said in a
statement.
Kelleher said the Department of Justice and the Securities and
Exchange Commission should be looking into potential wrongdoing by Silicon
Valley Bank’s executives.
“Crises don’t just happen — they’re not like the Immaculate
Conception,” Kelleher said. “People take actions that range from stupid to
reckless to illegal to criminal that cause banks to fail and cause financial
crises, and they should be held accountable whether they are bank executives,
board directors, venture capitalists or anyone else.”
One big looming question is whether the federal government will
prevent bank executives from getting big compensation packages, often known as
“golden parachutes,” which tend to be written into contracts.
Treasury and the FDIC had no comment on whether those payouts
would be restricted.
“The Silicon Valley Bank situation is a massive failure of regulation and supervision.”
Many experts said the reality that problems at Silicon Valley
Bank could imperil the financial system — and require such a big response —
suggested a need for more stringent regulation.
While the regional banks that are now struggling are not large
enough to face the most intense level of regulatory scrutiny, they were deemed
important enough to the financial system to warrant an aggressive government
intervention.
“At the end of the day, what has been shown is that the explicit
guarantee extended to the globally systemic banks is now extended to everyone,”
said Renita Marcellin, legislative and advocacy director at Americans for
Financial Reform. “We have this implicit guarantee for everyone, but not the
rules and regulations that should be paired with these guarantees.”
Daniel Tarullo, a former Fed governor who was instrumental in
setting up and carrying out financial regulation after the 2008 crisis, said
the situation meant that “concerns about moral hazard, and concerns about who
the system is protecting, are front and center again.”
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