GEOFF BENNETT: Days after the collapse of Silicon Valley Bank and Signature Bank, there are plenty of questions being asked about the health of our banks, whether it's in the industry, on Wall Street, among lawmakers, or everyday Americans who want to know about the security of their banking accounts.
Sheila Bair is focused on these issues as the former chair of the FDIC.
She led the agency from 2006 to 2011, working to keep the system stable during the Great Recession.
Sheila Bair, thanks for being with us.
The collapse of Silicon Valley Bank, of Signature Bank, it's raising questions about how the banking system is regulated and how it's supervised.
And there are those who say that, rather than tightening the screws on the Wall Street giants even more, that regulators should really focus their attention on smaller firms who have not really faced the same level of scrutiny.
What's your view?
SHEILA BAIR, Former Chair, Federal Deposit Insurance Corporation: Well, first of all, I think those -- the smaller firms, the regionals and the larger community banks, I think most of them are just fine.
They did actually very well, during the financial crisis.
They remained stable and solid.
The traditional ones, the ones that have been around for a long time, have diversified deposit bases, good risk management and good asset quality.
So I think that we had some unusual situations, especially with Silicon Valley Bank, that should not be extrapolated to the entire midsize segment of banks.
That's not to say that we can't do some things better, but I don't think there are any widespread problems with regional banks.
So I think we need to be thoughtful about it.
And I think most of them are just fine.
GEOFF BENNETT: Was it the right call for government agencies to announce what amounts to a bailout for customers of those collapsed banks... SHEILA BAIR: Right.
GEOFF BENNETT: ... ensuring the deposits well beyond the $250,000 threshold?
SHEILA BAIR: Yes.
Well, no, I don't think so.
So, Silicon Valley was a $200 billion bank.
We have a $23 trillion banking system.
It was not systemic by any imagination.
And most of its uninsured depositors were very wealthy venture capitalist and the portfolio companies that they invest in.
So they made the argument that we had -- they had some start-ups that needed to access their uninsured deposits for payroll.
I think that was kind of probably a very small subset of the uninsured depositors who were rescued in this.
I think most of them are quite, quite able to withstand some haircut on their uninsured deposits.
GEOFF BENNETT: The administration makes the argument that that extraordinary rescue action was necessary to avoid a run on the banks that could have collapsed the banking sector and tanked the overall economy.
Do you buy that?
SHEILA BAIR: No, I don't, because they just made the determination for two banks.
I mean, this is an extraordinary procedure.
You need supermajorities of the FDIC board, the Fed, the Treasury Department, the president.
So each time one of these banks gets in trouble, these smaller banks, you are going to do this, go through this process?
I really don't see that happening.
I think the Fed's lending facility did do a lot to calm the market.
Now, that is immediately available.
It's available to everybody.
So, they're not giving favored attention to one or two banks.
So that will provide a lot of liquidity to banks that have not -- like Silicon Valley Bank, did not -- have not managed their interest rate risk very well, have a lot of securities that have lost market value.
They will be able to get a loan with using them as collateral at the full face value.
GEOFF BENNETT: A question about how we got here, because lots of people are pointing to the rollback of the consumer protections in the Dodd-Frank Act back in 2018... SHEILA BAIR: Right.
GEOFF BENNETT: ... under former President Donald Trump as playing a role in the collapse of Silicon Valley Bank.
Do you see it that way?
SHEILA BAIR: There are so many different narratives going on.
I think there were some things in -- some things that happen into 2018 with the law you're referring to, as well as some of the things that Fed did on its own, the so-called tiering, so having different regulatory regimes for different size institutions.
And some of that's OK.
But a couple of things, I think, were not OK. One is, I think banks need at least an annual stress just, I think they just do.
Now, you can have a simpler stress test for the smaller institutions, but they need it.
They need to be -- right now, they need to be stressing the securities, the securities that they hold that have lost market value and, if they had to sell them, how much trouble they would be in.
So I think that was a mistake.
I also think the revised regulations let these midsized banks, the smaller banks, even if they had the securities we have been talking about that are -- that they intend to sell, they don't have to recognize the market loss.
So, in other words, they don't have to deduct from their capital market losses on those securities.
That was a mistake.
At least for those that they think they might sell, they absolutely should be deducting them from capital now to make sure that they have enough capital to absorb the losses if and when they do sell.
So those are two mistakes that I think should be corrected.
But, there again, I don't think we need a big, broad overhaul for regional banks.
Again, I think most of them are just fine.
It's a teachable moment maybe, perhaps, reminding people how banks work, how deposit insurance works.
GEOFF BENNETT: The Federal Reserve meets next week to consider what would be another in a series of interest rate hikes.
How do the collapse of these banks, combined with the latest data showing inflation cooling only slightly?
How does that affect their decision-making?
What do you think they should do?
SHEILA BAIR: The reason these securities lost value is because the Fed is raising rates.
Now, the Fed needs to raise rates to fight inflation.
But they can only go so far, so fast.
And so if I were -- I would hope that they would hit pause and assess the stability of the banking system in its ability to absorb these rapid, very rapid, very big interest rate increases.
I think it would be good to measure the impact on the real economy too.
I'm very worried about the labor market.
GEOFF BENNETT: Sheila Bair is the former chair of the FDIC.
Thanks for being with us.
SHEILA BAIR: Thanks for having me.