‘This is a danger confronting all banks,’ ex-FDIC chief Sheila Bair tells MarketWatch

Regional banks shouldn’t be the one supply of fear for potential fallout from the Federal Reserve’s speedy tempo of interest-rate hikes up to now yr, mentioned a former high banking regulator.

“I don’t see regional banks as having any particular problem,” mentioned Sheila Bair, who ran the Federal Deposit Insurance Corp. from 2006 to 2011, in an interview with MarketWatch on Thursday. “We need to be mindful of all unmarked securities at banks — small, medium and large.”

Bair known as the hyperfocus on regional banks and interest-rate dangers “counter productive” within the wake of the collapse earlier in March of Silicon Valley Bank and Signature Bank
of New York.

“This is a risk confronting all banks,” she mentioned. “All examiners need to be on alert for how interest-rate risk is being managed. If there is a run, they will need to sell these securities. Those are the kinds of things all-size banks, and all examiners should be worried about.”

A run on deposits at Silicon Valley Bank snowballed after it disclosed a $1.8 billion loss on a sudden sale of $21 billion value of high-quality, rate-sensitive mortgage and Treasury securities. It was the most important U.S. financial institution failure since Washington Mutual’s collapse in 2008.

The FDIC estimated that U.S. banks had some $620 billion of unrealized losses from securities on their books as of the top of 2022, together with longer-duration Treasurys and mortgage securities which have change into value lower than their face worth.

“Unrealized losses on securities have meaningfully reduced the reported equity capital of the banking industry,” FDIC Chairman Martin Gruenberg mentioned on March 6, in a speech on the Institute of International Bankers.

Days after that gathering, Silicon Valley Bank and Signature Bank each collapsed, prompting regulators to roll out a brand new emergency financial institution funding program to assist head off any liquidity strains at different U.S. lenders. Regulators additionally backstopped all deposits on the two failed lenders.

Bair earlier this month argued that if U.S. banking authorities see systemic dangers they need to go to Congress and ask for a backstop towards uninsured deposits, past the normal $250,000 cap per depositor, at a single financial institution. Specifically, she needs zero-interest accounts, or these used for payroll and different operational bills, to be totally coated, as was the case for a number of years within the wake of the worldwide monetary disaster to cease runs on group banks.

Treasury Secretary Janet Yellen mentioned Wednesday that blanket deposit insurance coverage safety isn’t one thing her division is contemplating, however added that the suitable degree of safety could possibly be debated sooner or later.

Fed Chairman Jerome Powell on Wednesday mentioned the U.S. banking system “is sound and resilient, with strong capital and liquidity,” after mountain climbing charges by one other 25 foundation factors to a spread of 4.75% to five%, up from virtually zero a yr in the past.

See: Fed hikes rates of interest once more, pencils in only one extra charge rise this yr

Bair has been calling for a pause on Fed charge hikes since December. She mentioned that as an alternative of elevating charges by one other 25 foundation factors on Wednesday, Fed Chair Powell ought to have hit pause and mentioned the central financial institution wants time to evaluate.

“If we have a financial crisis, we won’t have a soft landing,” Bair mentioned. “We have to avoid that at all costs.”

Read: Bank failures like SVB are a reminder that ‘risk-free’ belongings can nonetheless wreck portfolios

Stocks closed modestly greater Thursday in uneven commerce, with the Dow Jones Industrial Average
up 0.2% and S&P 500 index
advancing 0.3%, whereas the Nasdaq Composite Index
gained 1%.

Source web site: www.marketwatch.com

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