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Was it a bailout? Skeptics descend on Silicon Valley Bank’s response.


WASHINGTON — A package of measures to contain damage to the financial system from high-profile bankruptcies has raised questions about whether the federal government is bailing out Wall Street again.

And although many economists and analysts agreed that the government’s response should not be seen as a “bailout” in any essential way – investors in bank stocks will lose their money and banks have been closed – many said that ‘it should lead to a careful examination of how the banking system is regulated and supervised.

The calculation came after the Federal Reserve, the Treasury and the Federal Deposit Insurance Corporation announced on Sunday that they would ensure that all depositors of two major banks in bankruptcy, Silicon Valley Bank and Signature Bank, are reimbursed in full. . The Fed also announced that it would offer banks loans against their Treasuries and many other assets, treating the securities as if they were worth their original value – even as rising interest rates eroded the market price of these bonds.

These actions were meant to send a message to America: there is no reason to take your money out of the banking system, because your deposits are safe and funding is plentiful. This was to avoid a run on the banks that could cripple the financial system and the economy in general.

It was unclear on Monday whether the plan would succeed. Shares of regional banks fell and nervous investors snapped up safe assets. But even before the verdict was delivered, lawmakers, policy researchers and academics had begun to debate whether the government had made the right decision, whether it would encourage future risk taking in the financial system and why. it was necessary in the first place.

“The Fed has basically just taken out interest rate risk insurance for the entire banking system,” said Steven Kelly, senior research associate in Yale’s Financial Stability Program. And that, he said, could fuel future risk-taking by implying that the Fed will step in if things go wrong.

“I’m going to call it a bailout of the system,” Kelly said. “It lowers the waiting threshold of where emergency measures come into play.”

Although the definition of “bailout” is ill-defined, it is generally applied when an institution or investor is rescued by government intervention from the consequences of reckless risk-taking. The term became a swear word in the wake of the 2008 financial crisis, after the government staged a bailout of big banks and other financial firms using taxpayers’ money, with little or no consequences for executives. who made bad bets that shut down the financial system. to the abyss.

President Biden, speaking from the White House on Monday, tried to clarify that he did not consider what the government was doing a bailout in the traditional sense, given that investors would lose their money and taxpayers would not be responsible for all losses.

“Investors in banks will not be protected,” Mr Biden said. “They knowingly took a risk, and when the risk didn’t pay off, investors lose their money. This is how capitalism works.

He added: “No loss will be borne by taxpayers. Let me say it again: no loss will be borne by taxpayers. »

But some Republican lawmakers weren’t convinced.

Sen. Josh Hawley of Missouri said Monday he was introducing legislation to protect customers and community banks from new “special assessment fees” the Fed said would be imposed to cover any losses incurred by the Fund. deposit insurance from the Federal Deposit Insurance Corporation, which is used to protect depositors against losses.

“What basically happened with these ‘special assessments’ to cover SVB is that the Biden administration found a way to make taxpayers pay for a bailout without a vote,” Hawley said in a statement. .

Monday’s action by the government was a clear rescue of a range of financial players. The banks that bore the interest rate risk, and potentially their large depositors, were protected against losses – what some observers said was a bailout.

“It’s hard to say this isn’t a bailout,” said Dennis Kelleher, co-founder of Better Markets, a leading financial reform advocacy group. “Just because taxpayers aren’t responsible so far doesn’t mean something isn’t a bailout.”

But many academics agreed the plan was more about preventing a broad and destabilizing bank run than saving a company or a group of depositors.

“Overall, it was the right thing to do,” said Christina Parajon Skinner, an expert in central banking and financial regulation at the University of Pennsylvania. But she added that it could further encourage financial betting by reinforcing the idea that the government would step in to clean up the mess if the financial system ran into trouble.

“There are questions about moral hazard,” she said.

One of the signals the bailout sent was to depositors: If you have a large bank account, the measures suggested the government would step in to protect you in a crisis. That might be desirable — several experts said Monday it might be a good idea to revise deposit insurance to cover accounts over $250,000.

But it could deter big depositors from withdrawing their money if their banks take big risks, which in turn could give financial institutions the green light to be less cautious.

That might merit new safeguards to guard against future dangers, said William English, a former director of the Fed’s monetary affairs division, now at Yale. He thinks the bank runs in 2008 and recent days have shown that a partial deposit insurance system doesn’t really work, he said.

“Market discipline doesn’t really kick in until it’s too late and then it gets too strict,” he said. “But if you don’t have that, what limits banks’ risk taking?”

It wasn’t just the side effects of the bailout that stoked Monday’s concerns: Many onlookers suggested that bank failures, and in particular Silicon Valley Bank, signaled that banking supervisors may not have monitored the vulnerabilities quite closely. The bank had grown very rapidly. He had a lot of clients in a volatile industry – technology – and didn’t seem to have managed his exposure to rising interest rates carefully.

“The Silicon Valley Bank situation is a massive regulatory and supervisory failure,” said Simon Johnson, an economist at the Massachusetts Institute of Technology.

The Fed responded to that concern on Monday by announcing that it would conduct a supervisory review of Silicon Valley Bank. The Federal Reserve Bank of San Francisco was in charge of supervising the bankrupt bank. The results will be made public on May 1, the central bank said.

“Events surrounding Silicon Valley Bank demand thorough, transparent and expeditious review,” Fed Chairman Jerome H. Powell said in a statement.

Kelleher said the Justice Department and the Securities and Exchange Commission should look into potential wrongdoing by Silicon Valley Bank executives.

“Crises don’t happen by chance – they’re not like the Immaculate Conception,” Mr. Kelleher said. “People are taking actions ranging from stupid to reckless to illegal and criminal that cause banks to fail and cause financial crises, and they should be held accountable, whether they are bank executives, board directors, venture capitalists or anyone else.”

A big looming question is whether the federal government will prevent bank executives from getting big compensation packages, often called “golden parachutes,” which tend to be written into contracts.

The Treasury and the FDIC have not commented on whether those payments would be limited.

Many pundits said the reality that Silicon Valley Bank’s troubles could jeopardize the financial system — and require such a massive response — suggested the need for tougher regulation.

While the regional banks that are currently in trouble are not large enough to withstand the most intense level of regulatory scrutiny, they have been deemed important enough to the financial system to warrant aggressive government intervention.

“At the end of the day, what has been shown is that the explicit guarantee given to global systemic banks is now extended to everyone,” said Renita Marcellin, legislative and advocacy director at Americans for Financial Reform. “We have that implied warranty for everyone, but not the rules and regulations that should go with those warranties.”

Daniel Tarullo, a former Fed governor who was instrumental in shaping and enforcing financial regulation after the 2008 crisis, said the situation meant that “worries about moral hazard and concerns about who the system protects are front and center again.”

nytimes Gt

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