Treasury Secretary Janet Yellen is trying to project calm after recent regional bank failures in New York and California. Yellen says additional bank rescue arrangements “could be warranted” if any new failures at smaller institutions threaten financial stability. Earlier this month, Silicon Valley Bank and Signature Bank – so-called regional banks – failed.
Worries over the banking system come as the Federal Reserve meets this week to decide whether to continue raising interest rates.
WAMC's Jim Levulis spoke with Professor Kevin Bronner of the University at Albany Rockefeller College of Public Affairs & Policy on Monday about the status of the banking industry.
Bronner: So a couple weeks ago, there was a deposit run on the Silicon Valley Bank. And what that means is that the depositors want their money back. And it looks like the problem was that a lot of the deposits were put in longer term U.S. Treasury notes. And what happened was, last year, about a year ago this week, the Federal Reserve started to increase interest rates. So when they increase interest rates, that means the value of an older bond, a bond you might have purchased a year ago, it means it falls. So what that meant was that there was a shortage of cash to provide to the depositors who wanted their money back. That's basically what's happening with all these banks. So what happens is, then there's a run on the banks. And then the regulators and the Treasury Department, and other banks try to solve the crisis. And they've been working through that over the last couple of weeks, trying to put up money to support the banks, trying to have the banks get purchased by somebody else. So those types of strategies, that's what we've been looking at the last few weeks. Now, last week, the situation got really complicated. When the Credit Suisse bank, its stock really fell. And over the weekend, UBS, that's a big bank in Switzerland, agreed to take over the Credit Suisse bank. So that adds the idea, now we have an international banking crisis as well. And I'd say by late last week, people were looking at individual banks and over the weekend, you're starting to hear all this talk about a banking crisis. So that's what could happen. The good news is today, right now, the regional banks and the large banks, their stocks are doing pretty good today. So that's some good news for today. Over the weekend, the Federal Reserve and other international banks like the Swiss Bank, Bank of Japan, they announced the program that dollars can be more available to banks overseas. This is as of Monday morning, the situation looks like it's normalizing a little bit, I'll just say a little bit because you never know what's going to happen in the next hour.
Levulis: Yeah, Treasury Secretary Janet Yellen told Congress last week that the U.S. banking system remains sound and that Americans can feel confident their deposits will be there when they need them. You mentioned obviously, though, this is seeming to be an international event. So how much stock I guess do you place on the Treasury Secretary sell saying the U.S. banking system is sound?
Bronner: Well, you know, they have a lot of information so I am assuming they're using it to make that judgment. Now, I was watching the situation really closely over the weekend. And particularly, I was looking at the stock prices. You can get pre-market opening prices and some stocks, banking stocks, and they seem to be holding up pretty well. Most of them, not every one of them. But most of them seem to be holding up pretty well over the weekend. And this morning, they look pretty good. So that's telling us that at least over the weekend and today, the banking stocks are going up a little bit. So that's a good sign. You know the weekends in this type of scenario can be really tricky. That's when a lot of actions happen. And then the Monday morning opening, if the news over the weekend was really bad, then the stocks are going to be down sharply, but they're up pretty good. Some of our local regional banks around here, I was just looking at them. They were up 5% today. So that's some good news.
Levulis: And to help folks understand some of those regional banks, it's kind of a tricky term in a sense, because they can be the region can be pretty wide, it could even be across the nation. So in the Northeast here, if I understand it correctly, some of those regional banks would be say M& TBank, Berkshire bank, is that right?
Bronner: Yeah. If you're driving around the Capital Districts locally, you're gonna see Key Bank signs and Citizens Bank signs. So they're in many areas all over the country, but they're not considered the top real tier banks like Morgan Stanley or Citi Corp. So there's the regional banks, like Pioneer Bank is kind of a local bank, but Key Bank and Citizens Bank, they have a lot of operations in different parts of the country, but the term for them is still a regional bank.
Levulis: How might this all impact the Federal Reserve's decision on whether to raise interest rates at its meeting this week? You mentioned those rates earlier in our conversation.
Bronner: Yeah, well, that's the big question, we'll find the answer out Wednesday afternoon. Now, two weeks ago, the Fed would say ‘well there's a high inflation problem, and we're going to increase interest rates by about half a point.’ Now, this financial crisis hits, and then they have to consider bank stability. Now, when the Federal Reserve increases interest rates, there's an effect all over the world from this change. So they have to balance’ is the inflation problem, the biggest problem this week? Or is the bank financial stability, the biggest problem this week?’ And last week, the Central Bank in Europe did increase interest rates by about half a point. So they went into the inflation problem as being the big issue. But this week, the Federal Reserve has a really tricky decision to make.
Levulis: Does any of this have anything in common with the financial crisis of 2007-2008?
Bronner: A little bit, but does that crisis was much, much deeper than this. I mean, back in that crisis, you might get up and see that the Dow Jones Industrial Average is off like 1,200 points or 1,500 points. So the crisis in 2008 was much larger. And of course, Lehman Brothers, the big banking firm, national firm, went underwater and had to be bailed out and Bear Stearns. And there was a crash in the municipal bond market for insurance firms. So there's all sorts of big firms that went under. And so far in our country, now, there's been a few banks that have gone under, it's not a good sign, and they're large, relatively large banks. But the really big banks, like JP Morgan and Chase, they're strong right now.
Levulis: And so if I have money sitting in a so-called regional bank, and I'm watching all this, is there anything I can, should do?
Bronner: Well, it's typically insured by the Federal Deposit Insurance Corporation up to $250,000. The banks that had trouble like Silicon Valley, the regulators decided to ensure all the deposits. So the deposits, it looks like they're going to be relatively safe. But there still is some risk there because we don't know exactly what's going to happen here. As I've been going through this crisis, I've been talking to people and I say, ‘I hope this ends today.’ And I could say that again, right now I say, ‘the banks are looking pretty good today. The stock market's doing relatively well. And I hope it's over.’ But you never know what's going to happen tonight or tomorrow, so you just got to keep an eye on it.
