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MNI INTERVIEW2: US Regulators Need More Oversight-IMF’s Adrian
U.S. regulators need stronger rules to ensure financial stability, including ways to allow large banks to fail, and must boost their resolve to act when supervisory concerns surface as they did ahead of last year’s regional bank turmoil, IMF financial counselor and director of the Monetary and Capital Markets Department Tobias Adrian told MNI.
He said the March turbulence that began with Silicon Valley Bank and spread to other regional rivals – and required massive intervention from the Federal Reserve and the FDIC – was due in part to an excessive regulatory focus on the largest banks but also a lack of intervention from supervisors once troubles were identified.
“Resources were clearly allocated towards the biggest most systemic banks, but there may have been less attention to those regional institutions that are considered midsize,” Adrian said in an interview in his offices at the Fund’s Washington headquarters. “Of course, when we look at the three failures last year, SVB, Signature, First Republic – those are the second, third and fourth largest failures of banks ever in U.S. history since the FDIC was created.”
U.S. regulators had plenty of discretion to get SVB managers to address some of their exposure to unrealized Treasury losses and excessive reliance on uninsured deposits, but failed to do so.
“Overcoming supervisory hesitation you know, which is something you don't need to change anything in terms of laws or regulations, you just need to change the culture of the supervisors,” Adrian said. “They could have then gotten them to fix those issues. My understanding is that they did not.”
Adrian and a co-author argue in a blog published Monday that last year’s banking turmoil, including the troubles at Credit Suisse, provide a gut check for financial supervisors on the lingering shortcomings of existing rules. (See MNI INTERVIEW: Ample Fed Reserves Need Tigher Rules-Acharya)
STILL TOO BIG TO FAIL
“The bottom line is that progress has been made, but there is still further to go in putting an end to too-big-to-fail,” Adrian wrote in a blogpost released Monday. “Even smaller banks can be systemic. Supervisory and resolution authorities should ensure sufficient recovery and resolution planning for the sector.”
The authors note that an emergency guarantee to all uninsured depositors, while calming to the financial system in the short-run, creates longer-term quandaries that have yet to be addressed, including a major spike in moral hazard.
“The United States, in addition to easing collateral requirements for liquidity support, the authorities cited systemic concerns to invoke an exception allowing protection of all deposits in two of the failed banks,” Adrian and his co-author wrote.
“This significantly increased costs for the deposit insurer which will need to be recouped from the industry over time. Even very large and sophisticated depositors were protected—not just the insured.”
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Why MNI
MNI is the leading provider
of intelligence and analysis on the Global Fixed Income, Foreign Exchange and Energy markets. We use an innovative combination of real-time analysis, deep fundamental research and journalism to provide unique and actionable insights for traders and investors. Our "All signal, no noise" approach drives an intelligence service that is succinct and timely, which is highly regarded by our time constrained client base.Our Head Office is in London with offices in Chicago, Washington and Beijing, as well as an on the ground presence in other major financial centres across the world.