We now have had another week of turmoil, continued turmoil in the banking sector.
What are you looking for going forward from our policy leaders in Washington?
I think policy may leaders need to be clear and decisive that depositors are
not going to lose their money in large banks, in medium sized banks or in small
banks. They can do that within their existing
authorities simply by being clear that in the event of failures.
Given the highly fevered environment with respect to contagion right now,
they are prepared to use systematic or systemic risk exemptions to allow the
FDIC to pay off depositors with assurance
that those funds will come from the banking industry.
I think by doing that, they can contain a significant amount of the pressures
that we're facing to provide confidence. I think they also need to increase the
confidence they are providing in regulation.
While it is true that the repeat the 2018 Trump era legal changes
were passed by the Congress were in almost every respect ill advised and in
important respects were driven by special interest pressure.
It is also, I think, clear that they are not the reason why we have had the
problems we have had the problems we have had reflect the problems of
management and a number of financial institutions and reflect major failures
of the supervisory and regulatory paradigm as implemented by the Federal
Reserve. In particular, the failure to do a
stress test in 2022 when interest rate increase interest rates were clearly on
the upwards path. The failure to do any kind of stress
test about interest rate increases manifests a misunderstanding of what a
major source of risk in the system was. And they need to signal an awareness of
duration risk. They need to signal an awareness of
solvency as well as liquidity issues in the regulatory paradigm going
forward. Larry, we heard, of course, from the
Federal Reserve in particular, particularly Jay Paul Allen news
conference this week in which they did raise the rates.
Again, 25 basis points were a little more vague on where they go from here.
At the same time, the chair said that this was an outlier.
Silicon Valley Bank was an outlier. I guess my question to you is how
confident are we actually the Fed has our arms around the problem now.
Now we know there is the problem of interest rate risk when it comes to SBB.
How confident are you that we know that there aren't other SB BS out there?
I think it's pretty clear looking at a variety of ratios that SVP and perhaps a
couple of other banks worried, important respects, outliers, but extreme examples
tend often in life to point up paradigmatic issues.
And as I've been pointing out, is a world of high interest rates with
digital banking. Click of a finger ability both to move
accounts out and to open new accounts is going to be a different kind of world in
terms of risk, and it's going to be a different kind of world.
In terms of what banks can rely on, in terms of the stickiness of deposits and
to what extent that's true is something we're likely to learn
in the next year or two. That's why I think it's appropriate
ahead of the curve to be sending clear signals of assurance with respect to
bank deposits because it is better to err on the side of overdoing it when
you're talking about protecting against bank.
Than it is to erred on the side of under doing it.
There are profound issues raised about the banking supervision here in the
United States, in particular with the stress test.
There are also questions being raised over in Europe right now.
They had the approach of those 81 bonds or Cocos that did not hold up so well
for Credit Suisse, certainly. And now as the week has progressed here,
we've seen Deutsche Bank come under siege.
What questions are being raised about the European approach to protecting the
bank's? It's important to recognize that, as
Christine Lagarde said, there are very important differences, both between the
way the terms of the Swiss banks are written, a key ones are written and the
way the terms are written in other parts of Europe.
And also to recognize that the ECB made clear that they're operating in a
different paradigm than the Swiss authorities were.
But I think it's also clear that there's going to need to be some fairly
systematic rethinking of these contingent capital instruments and how
they work and on what occasions they are going to be bailed in and on what
occasions they're not. Despite many years of legal discussion,
it's clear that there were not sharp and shared understandings in the
marketplace. I suspect and hope that European
authorities, with the support of the United States and Secretary Yellen and
Chair Powell, will send strong signals of support over the
weekend for the European banking system, because given the scale of European
institutions, there are potentially global consequences if problems spread
from them. Larry, we have been understandably
really focused on the banking situation where the United States or in Europe.
In the meantime, the war in Ukraine proceed.
You had an op ed piece in The Washington Post specifically on Russian assets.
Take us through what you think would be a good step forward on the economic
front as opposed the military front in Ukraine.
I've been working with former World Bank President Robert Zoellick on this and
with a noted policy academic, Philip Zelikow, who's a real legal expert.
We are going to have to put billions of dollars, probably ultimately over 100
billion dollars into Ukraine to win the war and then to win the peace.
And the question is how that's going to be financed.
And we believe there is both precedent, moral right and appropriateness to the
financing coming from the Russian reserve assets that we have frozen.
And right now, those assets are frozen, but there is not yet a willingness to
deploy them to finance the ongoing support for the economy and the ongoing
compensation for damage that Russia has caused to the Ukrainian economy.
And we believe that there needs to be appropriate and creative lawyering,
along with strong political leadership to get past that and to be able to
deploy those Russian reserves for that purpose at a time when we are declaring
that President Putin is a war criminal. It seems to me almost inconceivable that
we should be stopping short of using what are the currently immobilized
assets of his state to deal with the damage that he and the Russians are
causing.