Talking With Gensler; Yellen Exudes Confidence; Bank Lobby Preps SVB Counter-narrative; Washington's Too-Big-To-Fail Nightmare Returns
There’s little that financial regulators fear more than bank runs, so you know it was a nail-biting (and busy) week. Treasury Secretary Janet Yellen stressed confidence in the system before a Senate panel, but even as she testified Wall Street firms were working frantically to provide a $30 billion lifeline to the beleaguered First Republic. Also on Capitol Hill, lawmakers commenced the blame game over who was responsible for the failures of Silicon Valley and Signature banks. Hardly a surprise, but Elizabeth Warren and other progressives identified the 2018 bill that rolled back parts of Dodd-Frank as a leading culprit (along with the Fed chairman’s “flamethrower”). Meanwhile, lots of Republicans (and a leading banking lobby group) pointed their fingers at the San Francisco Fed, which supervised SVB. Others took issue with the bank’s “wokeness,” revealing that the GOP war on ESG isn’t abating. Our Friday Q&A was especially noteworthy this week: we spoke with Gary Gensler, a regulator who needs no introduction to our readers. The SEC chair discussed his far-reaching rules agenda and how it will make the financial system safer — something the recent turmoil shows is an extremely important objective, he argues.
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Friday Q&A: Gensler was ensconced in his office at the agency’s Washington headquarters when we met Thursday via a video call. Since neither of us had all day, we didn’t get to talk about each of the 50 or so rules on his to-do list. But, as you will see below, we tried to hit on most of the big ones: market structure, climate change, activist investors, crypto. We also raised our favorite topic: the SEC’s union and the latest back-to-the-office requirements for employees.
More broadly, we tried to gain some insight on the philosophy, for lack of a better word, that drives Gensler and his regulatory agenda. Much of it, he told us, boils down making markets more competitive, resilient and efficient. And a bulk of his efforts can be viewed through that lens – reforms directed at Treasury trading, the equity markets, money market funds, mutual funds, PE firms, hedge funds. Differing from predecessors in the chair’s office, Gensler also feels strongly that the SEC has a role to play in combating systemic risk. That is an important focus for him. (We wrote an admittedly snarky piece about this earlier in the week in connection with the agency’s new cyber security proposals; suffice it to say he has a different view.)
What follows is our (lightly edited and condensed) discussion.
Capitol Account: We wrote a lot about you when you ran the CFTC and passed dozens of new rules for swaps. One takeaway, at least for us, was that you tend to put out the toughest plan possible and then push, push, push. At the end, you compromise and sometimes make significant changes to a proposal. Is that your m.o.?
GG: I think of it a little differently than you're articulating…We put things out to public comment, and they're well crafted. They're well within the law, the economics, they're well considered. We get feedback, we benefit from that public feedback, and the staff then considers it…I would note that we've now finalized, I think, 14 rules...It's a process that's well understood, and we're going to follow that process and make adjustments where appropriate.
CA: Your stock trading overhaul has been hugely controversial. Many on Wall Street see it as essentially playing 52-card pickup with the equity markets, which they note, work very well. They’re thought to be the best in the world. How do you respond?
GG: I think it's a critical piece of our responsibilities that Congress gave us – to promote efficiency, as well as orderliness…of our markets, standing between investors on one side and the issuers on the other…The issuers in the equity markets are thousands of companies that are trying to innovate, hire people and build factories and the like. And the investors on the other side get a better return if the middle is more efficient, less costly. That's what's really driving a lot of this equity market reform…And to drive greater resiliency. Then there's less chance that risk in the financial system spills out to the broader economy and households across America.
CA: The SEC has estimated that its proposal to send retail trades to auctions will save small investors some $2 billion annually. But some analysts have said that is pennies, or less, when divided out per person. Is that worth the potential upheaval the plan could unleash?
GG: Our equity market today, depending upon the day and depending upon the security, could readily be between 30 and 50 percent [of orders] moving, not to the lit markets, not to the fully transparent markets, but to what's called the dark market. And if you put a retail market order into a brokerage app or online, 90 plus percent are moving to the dark market. I think we can bring greater competition. And look, I don't know, when I grew up in Baltimore, $2 billion a year? To the American public — that’s real money.
CA: In light of the problems with Silicon Valley Bank, should FASB reconsider any of its accounting rules for lenders? In particular, banks don’t have to write down securities that are held to maturity. But if SVB had been required to do that, investors probably would have had a better view of some of its problems.
GG: I think we learn from market events, and it's always good to look and consider the various rules – whether they be regulatory rules or accounting rules.
CA: You recently told a Council of Institutional Investors conference that reporting on scope 3 emissions, from a company’s supply chain, isn’t as well developed as scopes 1 and 2. Many took that as a sign that the SEC is backing away from a scope 3 requirement. Is that what you were indicating?
GG: When we made the proposal in March, we recognized these so-called scope 3 disclosures were not as developed – the market for information gathering, procedures and protocols, to estimate for frameworks. And thus, even when we made that proposal, we took a tiered approach, where fewer companies were called upon to make those disclosures.
CA: So maybe people were reading too much into your remarks?
GG: To step back, receiving nearly 15,000 comments of which I think 5,000 are unique – it's a deep comment file. And while we received a lot of support, particularly from the investor side, for many of the aspects of the proposal, commenters have raised issues for us to consider.
CA: Under a recent agreement, the agency’s union workers will start coming back to the office two days out of ten. Are you happy with that?
GG: Across America, many companies and government institutions are all finding how to best serve their public…and how to serve their clients and their customers – and find a balance. We negotiated with the bargaining unit and I'm glad that we now have an agreement. I'm glad to be here in the office.
CA: On crypto, what do you think about the argument that tough regulation and oversight will force digital asset firms to take their business overseas, putting U.S. innovation at a disadvantage.
GG: I would note this: our securities laws have been pro-economic growth for 90 years…I really believe it is part of our economic success for 90 years that you have to have full, fair and truthful disclosure to the public when you raise money from the public. In 1934, Congress came together and said that national exchanges and broker dealers had to have rules of the road. And comply around anti-fraud, anti manipulation, and protecting the public. Guess what? It lowers the cost of capital…The securities law is pro innovation.
CA: We’re not sure crypto currency firms see it that way.
GG: The crypto community and their lawyers and their accountants – they know how to comply. Come into compliance. Unbundle these conflicted, bundled-up storefronts that are operating as exchanges and broker dealers and clearing houses and trading against their customers. And disclose to them – full, fair and truthful disclosures. This field will not survive worldwide if they don't come into the public policy norms that are laid out in Europe and in Asia, in North America, South America, Australia, Africa. But it is a field that has been deeply built on a set of assumptions around non-compliance. I've only got one goal, to help bring them into compliance…(Friday)
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Yellen’s Reassuring Words: While the markets seesawed and a number of regional lenders teetered, the Washington focus on the ferment plaguing the banking industry shifted to Capitol Hill on Thursday. Appearing before the Senate Finance Committee (ostensibly to discuss the Biden administration’s 2024 budget) Yellen declared that the financial system is “sound” and stressed that deposits are safe. And in the face of pointed questions from Republicans and Democrats, she defended the government’s extraordinary actions last weekend in the wake of the failures at Silicon Valley and Signature banks. “We felt there was a serious risk of contagion that could have brought down and triggered runs on many banks,” Yellen said. She was much more circumspect, however, when it came to regulators’ supervision of the firms.
Even as Yellen was asserting confidence, officials from Treasury and other agencies were racing to pull off the rescue of another lender with a high number of uninsured deposits: California’s First Republic. By the end of the day, JPMorgan, Citigroup, Bank of America and eight other large firms had agreed to plug the hole by moving $30 billion of deposits into the struggling bank.
In her testimony, the Treasury chief fielded questions on the budget, the debt ceiling, taxes and inflation. But much of her three-hour appearance was dedicated to SVB fallout. That’s partly because the finance panel’s membership has a decent amount of overlap with the Senate Banking Committee.
The main political storyline that has been emerging – was this debacle caused by poor supervision (Republicans) or regulatory rollbacks (Democrats) – was hotly debated. But a host of other interesting policy questions and topics came up, ranging from bank nationalization to reinstituting Glass-Steagall, to, naturally, weed…(Thursday)
Banks Plot Counternarrative: A nascent banking crisis? An idiosyncratic episode in an otherwise healthy financial system? It is still way too early to know for sure the consequences of the run on Silicon Valley Bank. But that’s not stopping the legions of banking industry lawyers, lobbyists and trade group executives from sorting out their story – and getting a jump on setting the Washington narrative before the dust settles.
Many have been on back-to-back phone calls and Zoom meetings, plotting strategy and taking incoming from congressional offices and the Biden administration. The D.C. representatives are also keeping in close touch with regulators. That includes offering up-to-the-minute market insights and helping explain to their member firms the details of the rescue and the Fed’s new lending facility.
The industry’s initial public response is coming together. Monday night, the Bank Policy Institute, which has large and regional bank members, issued a first (carefully worded) assessment. It offered “initial and partial thoughts on a diagnosis,” but noted that “a prescription is still to come.” The group came down equally hard on SVB’s management and its supervisors from the San Francisco Federal Reserve Bank.
Meanwhile the American Bankers Association, which represents a broader swath of lenders, held a government affairs call Tuesday where the main message was industry unity. Or as its president, Rob Nichols, has been preaching, banks need to follow the four C’s: communication, collaboration, cooperation and consultation.
The ABA meeting, participants told us, was a regularly scheduled call but focused (no shock) on the SVB debacle. The banking advocates say they are working to hone a message that will be based as much as possible on facts and data, especially since they need to knock down knee-jerk reactions from both sides of the aisle. That includes Republicans arguing that the Biden regulators bailed out a “woke” firm that cared more about its ESG score than risk management. And Democrats pinning the blame on a 2018 rollback of the Dodd-Frank Act that they say left a big hole in federal oversight.
(One lawmaker singled out for praise on the ABA call was House Financial Services Committee Chairman Patrick McHenry, who was referred to as an “adult in the room.” He was especially praised for a CNBC interview where he noted that the Fed and FDIC were “working in accordance with the law and with regulation.” He added: “That should send a clear sign to the American people that they should have confidence in the nation’s banking system.”)
At a broad level, the ABA stressed that Silicon Valley Bank was an anomaly, and the overall sector is strong. Lobbyists were urged to elevate that story. But that may only get the industry so far – it has a pretty fine line to walk politically, and details are important. (Toward that end, there was some talk at the meeting about not overemphasizing the Fed’s supervisory failures, people told us.)…(Tuesday)
Revisiting Too-Big-To-Fail: It’s the beginning of the beginning. No matter how the Silicon Valley Bank collapse plays out – and it’s still early in what will be a fast moving story – the ramifications in the financial regulatory world are likely to be vast. The biggest bank failure since 2008 sent the government’s financial overseers into overdrive. The effort was eerily familiar for financial crisis veterans: a weekend rescue package, reassuring remarks by the president as the stock market opened and cries of “bailout” (or “not a bailout”) once again flying across Washington.
And even though few think the fallout will be anything close to what happened in the financial crisis, there is widespread agreement that the Fed’s move to backstop all of SVB’s deposits (and those of Signature Bank, which also was taken over this weekend) will prompt a reckoning in the bank policy world. Rewind a week and nobody would have called SVB – even with roughly $210 billion in assets – systemically important. But after its rescue, a new question has emerged: is any bank not too big to fail? And what does that mean exactly to the industry? The government’s intervention is a pretty hard bell to unring.
Those issues, of course, will be debated. But even before the facts are in, the Washington blame game is in full swing. Democrats have been quick to tie the current banking catastrophe to an easing of the Dodd-Frank Act that a Republican-led Congress passed (with some Democratic votes) and President Trump signed in 2018. Republicans instead homed in on SVB’s Federal Reserve supervisors, wondering how they could have missed what now seems obvious – huge amounts of uninsured deposits and massive long-term Treasury holdings on its balance sheet that wouldn't fare well in a time of interest rate increases.
Expect to see the dueling theories fleshed out at congressional hearings in the coming weeks. Perhaps in preparation for what it knows is coming, the central bank announced late Monday afternoon that it would conduct an investigation of its “supervision and regulation” of SVB. "The events surrounding Silicon Valley Bank demand a thorough, transparent and swift review by the Federal Reserve," Chair Jerome Powell, said in a statement…(Monday)
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