Economic Heavyweights On the Banking Crisis

sick at a high school on Long Island? Plus? North Korea says it has an underwater drone with a nuclear warhead. I'm Michael Block. More ahead, I'm John Stash, Aaron's wards. The Knicks and Nets lost, the Rangers won. Four teams advanced to the Elite A to the NCAA tournament. That's always straight ahead on Bloomberg day Break, The Business News you need to sturn your day, and just one fifteen minute podcast each pointing on Apples, Spotify, The Bloomberg Business

Appen everywhere you get your podcasts. Good morning, I'm Nathan Hagar and I'm Karon Moscow. Here are the stories we're following today, Karen. We began with the latest on the turmoil in the banking industry, Treasury Secretary Janet Yellen says regulators are prepared to take more steps if needed, to protect the banking system. Yellen spoke before a House Appropriation subcommittee. The strong actions we've taken ensure that Americans deposits are safe.

Certainly we would be prepared to take additional actions if warranted. Treasury Secretary Yellen's comments came a day after she said officials had not considered temporarily expanding insurance to all US deposits. Well. The con former economic policymakers are criticizing the fed's bank stress tests in twenty twenty two for failing to pro potential vulnerabilities in the banking system. Be got up with former FED Governor Dan Tarullo, but I think in the

most immediate sense this is clearly a supervisory failure. Other factors may be uncovered as the own investigation proceeds, and Dan Trullo, oversaw financial regulation and supervision at the FED, may be cooments in a special Bloomberg round table, along with former Treasury Secretary Larry Summers and Bloomberg News Head of Economics Stephanie Flanders, hear more of that conversation a

little later in the program. Well Karen, one top banking executive, says the worst of the crisis may be behind us. We spoke exclusively this morning with Standard Chartered CEO Bill

Winters in Hong Kong. I hope we're through the worst, and I think there's still some questions around business models around the world, or have there been weaknesses that have been exposed in the business models of any of the companies that have had trouble that need to be addressed at this point, But it certainly seems that the acute phase of the crisis has done. Standard Chartered CEO Bill Winter says he'd be open to looking into credit suite

as assets if they were made available. Well, Nathan, there may be more trouble for a credit suite and ubs, and it's related to the war in Ukraine. The banks are among several facing a Justice Department investigation into Russian

only guard finding help avoiding sanctions. Amy Morris says more from our Bloomberg in ninety nine one newsroom in Washington, sources tell Bloomberg News the Swiss banks were included in a wave of subpoenas that were sent out by the US government before the crisis that resulted in UBS's takeover of Credit Suees. DJ is focusing on identifying which bank employees dealt with sanctioned clients and how those clients were

vetted over the past several years. US Deputy Attorney General Lisa Monaco says the Justice Department is beefing up its National Security Division, saying, quote, corporate crime and national security are overlapping to a degree never seen before. Credit Suis and UBS declined to comment in Washington. I'm Amy Morris, Bloomberg Day Break. All right, Amy, thank you. Now, let's turn to the economy. The chorus is growing on the Fed not to raise rates this year, but to cut them.

Let's get the latest live from Bloomberg's John Tucker, John and A Double Line Capital's Jeff Gundlock is adding his voice. He took to Twitter saying the Fed's going to be cutting interest rates substantially, and they should be doing it soon. Well, he sees the same data as everybody else, an adverted yield curve that Gunlack calls a red alert recession signal.

He's at odds with the Fed. Share Jpale, who said this week that officials don't anticipate cutting rates, the market is pricing for easing before the end of the year. Live in New York, I'm John Tucker, Bloomberg day Break. All right, John, Thanks World. China is hoping to show the world it's back in business. It's hosting a high profile corporate summit this weekend, and some top American executives

will be there. We get the latest live with Bloomberg Steve Rappaboord's Steve, Good Morning, Good Morning, Karen and Nathan. Organizers of the China Development Forum say hundreds of foreign representatives from various industries registered to attend the three day event. Corporate a listers like Apple CEO Tim Cook and Fiser boss Albert Borla plan to show up, but many American companies are sitting this one out. Sources tell us that's because they want to avoid scrutiny from a newly formed

House committee investigating China's Communist Party. The conference will be held fully in person this year for the first time since twenty nineteen, before the pandemic upended business for Beijing. Live in New York. I'm Steve Rappaport, Bloomberg Daybreak. Thanks Steve While, the CEO of TikTok, had a long day on Capitol Hill, but it might not have gotten him any closer to assuring House lawmakers that the wildly popular

app is safe for national security. Show Chow was asked repeatedly whether the Chinese Communist Party can access Americans data. I have seen no evidence that the Chinese government has access to that data. They have never asked us. We have no provided in a way I've asked it. I find that actually preposterous. I looked in. I have seen

no evidence of this happening. Man. We got reaction to show choose testimony from Senate Intelligence Chairman Mark Warner, and I kind of feel for the CEO because he doesn't have an answer end of the day. TikTok is owned by Bye Dance. Bye Dance is a Chinese company. Chinese law as of twenty seventeen says every Chinese company the

first obligation is not shareholders or customers. Their first obligation is they got to turn over any information or any kind of belity to manipulate content to the Commonest Party of China. Democratic Senator Mark Warner spoke on Bloomberg Sound On with Joe Math. You can catch the show weekdays one pm Eastern on Bloomberg Radio, or listen on demand wherever you get your podcasts. Right now, SMP futures are lower by two point Stown futures are down sixty one,

and Nastack futures are higher by eighteen points. The ten year treasury is up twenty three thirty seconds now for a yield of three point three to four percent. The yield on the two year is at three point seven one percent. Straight ahead your latest local headlines and a check of sports. This is Bloomberg. It is forty nine degrees in New York. We got a chance for some showers tonight. We'll head up to the year fifty. So

pretty much where we are now. Let's take a look at some of the other stories making news in New York and around the world. Good morning, Michael Barr, Good morning, Nathan. Students became ill at a Long Island high school. About two hundred and fifty students classes at Babylon High School on Monday. Absences were down to one hundred ten yesterday. About seven hundred students go to the school. The Suffolk County Health Commissioner believes the likely cause is no ravirus.

There's a push in some New England states to help the police know how to deal with the drivers who have autism. Connecticut launched a Blue Envelope program for artistic drivers three years ago. Now Rhode Island is considering the same type of marker. Joanne Quinn has a twenty seven

year old son with autism. She says those police sirens and lights will likely be a trigger and maybe even take off if he says, hey, let's get out of the car, and he'll get out of the car and then he'll start talking at him, and with the lights and noise going, Pat's going to turn and walk away. I can't be here. I need to go somewhere else. This is a century overload. How's that going to go over with a police officer? Meanwhile, opponents fear this kind

of designation could lead to a breach of confidentiality. The Pentagon says a US contractor was killed and five US service members and another US contractor were wounded when a suspected Iranian drone struck a facility on a coalition base in northeast Syria. Defense Secretary Lloyd Austin says US Central Command Forces retaliated with precision airstrikes. North Korea says it has tested an underwater attack drone in its latest warning to South Korea and the US to stop their current

military drones. According to state media, the weapon, fitted with a nuclear warhead would destroy enemies with a large radioactive wave. Analysts are skeptical. Secretary of State Antony Blincoln says funding for Ukraine should last for much of the year. Bloomberg said Baxter as the story. Blincoln before the House Appropriation Subcommittee says the billions already being approved as being closely watched, and the embassy in Ukraine, he says forty five people

they're overseeing. This is a series of hearings focused on the budget request for an eleven percent increase. Some lawmakers have worried money is being lost to corruption and that other nations are not doing enough. B Lincoln telling the committee the US does have real burden, but notes the other nations are doing other jobs, like taking in refugees

in San Francisco. I'm at Baxter Bloomberg. Day Break Global news twenty four hours a day, powered by more than twenty seven hundred journalists and analysts in over one hundred and twenty countries. I'm Michael Barr. This is Bloomberg Nathan. Thanks Michael, time for the Bloomberg Sports Update, brought to you by Tri State Auty. Good morning, John stash hour yead morning, Nathan. Not a good trip to Florida for the next they lost in Miami, followed a night later

by a lost in Orlando. Knicks were without Jalen Brunson. They fell behind by nineteen. They did rally, but the Magic hit four late three pointers and one one eleven one oh six oh chance for the Nets to get to within a game of the Knicks for fifth of the East. At Barkley's Nets Buckley, they had a victory until three turnovers of the final minute. Cleveland, on a three pointer with less than a second ago, pulled out the win one sixteen one fourteen, sweeping the home and home.

Rangers and Hurricanes played at home at home, each winning on the road. Rangers in Allie won two to one on an out of Bucks Bowl NCUBAA tournament in overtime at the Garden, Kansas State pulled out a ninety eight ninety three win over Michigan State. The Wildcats Marquis Snowel had nineteen assists. That's the most in any tournament game ever. He's a New York City native. This is probably my career high an assists. You know. Ever, I had a couple of games of fourteen, a couple of games of

seventeen back in high school. But you know this one was special. In front of my hometown, in front of you know, the city, you know that loves me. I came here playing some worries. You know how blessed and grateful I am. Tomorrow at MSG Kansas State versus Florida Atlantic, a surprising East Regional final the owl small school from Boca Raton, Florida, but they've got a thirty four and

three record. They upset Tennessee sixty two fifty five a route, then a thriller West Regional in Vegas, Yukon a third straight blowout victory for the Huskies eighty eight sixty five over Arkansas and Gonzaga, then top UCLA seventy six seventy three on a late three point shot. Four more games tonight, including Princeton seated fifteenth, taking on freighting that game in Louisville.

John Dashaw Bloomberg Sports Live from coast to coast from New York to San Francisco, Boston to Washington, DC, nationwide on Sirius xamp, the Bloomberg Business App, and Bloomberg dot Com. This is Bloomberg Daybreak. Good morning. I'm Nathan Hagar. Markets are searching for calm on this Friday as we close out the most tumultuous two week stretch for the US

and global financial systems in recent memory. A weekend of US regional bank runs was followed by a weekend that saw the collapse of Credit Suie capped off by yet another Federal Reserve rate hike this week. It's all left many asking what went wrong, where did it go from here? And should the FED shift its priorities from inflation to

financial stability. Not to mention, many are left wondering if the Fed can achieve that soft landing amid all this turmoil, When we explored the bank failures and financial stress tests with some of the top voices in economic on a special episode of Bloomberg's Wall Street week Our, David Weston hosted that roundtable with former Treasury Secretary Larry Summers, former FED Governor Dan to Rulo, and head of Economics at

Bloomberg News. Stephanie Flanders, let's bring you part of that discussion. I want to start with you, Dan. You were a colleague for several years of j. Powell. During the time you were on the FED, you had responsibility for banks supervision. We've been told the banks were so strong we didn't have to worry about it what happened here. We didn't

think we still had banking problems. I trust that the largest banks truly are in the much better capital and liquidity position that Jay Powell referred to yesterday during the press conference. But I think there are some things that we do know. We know first that there was a significant supervisory failure somewhere along the way. Was that failure in the San Francisco Fed's inability to identify problems of growth and maturity mismatches? Is in the like early on?

Was it a supervisory failure because of the light touch approach to supervision that the Federal Reserve Board had put in place over the last four or five years, Or was it a supervisory failure because the supervisors generally had not adjusted their method of assessing liquidity to take account of very high uninsured deposit concentrations. Coexisting with the capacity of big depositors to run at warp speed rather than

the way they used to run. I also would not rule out a contributing factor being the twenty eighteen legislation in twenty nineteen FED regulation, both of which deregulated banks of under seven hundred or the regulation banks of under seven hundred billion dollars in assets the legislation banks of under two hundred and fifty. But I think in the most immediate sense this is clearly a supervisory failure. Other factors may be uncovered as the FED Zone investigation proceeds.

So Larry, let's put you back at the Treasury or for them, or at the White House. If you were looking at this situation, what questions would you be asking to make sure you understood the possible ramifications of what we've seen so far in a broader financial context. Before I answered, Before I answer that hypothetical, let me put a question to my friend Dan, who I'll just say I think did an enormous amount to strengthen our financial system during his time at the FED. Dan, I've heard

it said, and I don't know that. Even in twenty twenty two, the FED stress tests that were applied to the largest banks did not include an analysis of the stress from a major interstrate hike. If that's true, that seems kind of bizarre from the point of view of the world of early twenty twenty two, when it certainly many people, certainly me on David's show, were emphasizing that there was likely to need to be very substantial increases

in interest rates. Can you say something and if the stress tests weren't considering increases in interest rates, then perhaps the exempting of Silicon Valley Bank from the stress tests was not central to understanding the problem. Can you say

something about interest rate hikes and FED stress tests? Sure? So, First off, I think Larry, I agree with the statement you made towards the end of your question, which is actually, if Silicon Valley had been in last year's stress test FOREL rather than its stress rehearsal, I don't think it would have made much difference, for precisely the reason you say that they weren't stressing the things that were the

SVB vulnerabilities with respect to stress testing. Generally, over again, over the last five or six years, the stress test has become eminently predictable. The scenario that's used is now a single scenario, which is essentially a variant on the very first one we put in some years ago. That is a severe, quite severe recession, but it follows the basic pattern of the scenario that was developed when we

began doing the annual stress test. The scenario, of course includes a reduction in interest rates because of the hypothesis of a recession and the Fed's reaction. When I was at the FED, we were using also an alternative scenario.

It's called the adverse rather than severe, adverse scenario, and we use that scenario to test things other than the prototype of the severe recession, And indeed we used it at least one year, and I think a couple of years, to test what would happen with unusual changes and interest rates which were not then anticipated. So to some degree, the answer to your question is like supervision. Generally, the stress test has become less rigorous over time, and I

think more importantly, it's become too predictable. And the whole purpose of a stress test is that you're trying to stress against the unanticipated, not the anticipated. At the risk of preps being too tough on your former colleagues at

the fair, you talk about predictable versus unpredictable. I would argue that at a very minimum, the stress tests ought to consider what is the major risk of their moment When you were at the fed DAN in that period, I think it was reasonable to think that the major risk was a tilt towards recession and deflation. But I don't see how anybody last spring could have thought that the major risk was anything other than a spike in

interest rates. So a process that didn't consider as a risk seems to me to be a profoundly problematic process. It seems almost like the supervisors were mailing it in. Is there a defense? I would say, first, this is not by way of defense, or certainly not an apologia,

but just a bit of explanation. It's quite likely that the scenario development was taking place in the latter part of twenty twenty one if it was going to be the twenty twenty two stress test, And of course this is the period in which the FOMC was still figuring out that the inflation problem was not transitory. But I don't want to use that as a kind of exculpation

of the supervisors. Second thing to say is it's not the supervisors meeting the staff who are making the policy decisions as to what kind of stress tests to have, whether they have multiple scenarios, that's a decision of the Board of Governors, and so it rests with them. But I agree with the gravenment of your remarks, which is not to have tried to think about something other than the same scenario is a failure of supervision in and

of itself. Stephane, you've worked at the Treasure United States. You also have covered financial markets and other business issues over in Europe for a good long time. One thing we're hearing from both Larry and and is rates were going up and there weren't just going up here, They're going up over in Europe as well. Was what we're seeing around now in the banking system. Maybe not the specifics of Silicon Value Bank, but was something like that

almost inevitable. After we've pumped so much money in the system, we start taking it out, there's going to be stress, real stress, and there's going to be some failure. Yeah, And I wish I was I was closer to you guys, because I knew I was going to struggle to get a word in with you too. But I think in this conversation, I think it is important when we're thinking

about what the implications are. You know, you have to distinguish what is an outlier about not to Silicon Valley Bank, but others that have got into trouble in this episode. What is fundamentally a regulatory stupidity, you know, a very traditional problem the interest rate risk that was just hiding in plain sight, and what is a genuinely new issue which was not being fully taken into account by anyone

looking at the risks. And I think when you look at something like Silicon Valley Bank, you know clearly it was an outlier in the speed with which deposits have been built up, in its massive exposure to uninsured deposits and reliance on that for funding. I hope it was an outlier in not having a chief risk officer for

nine months, which was an extraordinary state of affairs. But what was very traditional about this, and as the discussion with Larry and Dan is suggesting, was that you know, right here was a massive interest rate risk that was whether or not it was in the stress test was something that central banks should have been thinking very hard about.

And I think it was sort of striking that. We had a lot of the debate around this, what are the hidden risk You know, all the conversations that you will have had, David, when you ask regulators what's keeping you up at night, they would always talk about private equity.

They'd talk about non bank shadow banking. Has been the thing that people were you know, was this worry for all these years, and in fact it was the most obvious problem sitting on bank balance sheets as a direct result of monetary policy actions by central banks that has actually caused this issue. I would just say, though one of the reasons maybe they weren't looking at that so closely, or that'd be interested to know what Dan and Larry

think about this. You know, there is an element of this which is new, and we see in the speed with which deposits left these institutions, and that's the non stickiness of those deposits. And I think, you know, one of the things that regulators were thinking when they looked considered interest rate risk potentially was that there was a sort of self hedging mechanism in a bank of the fact that deposits would be slow to move if they

weren't being paid the higher interest rates. That is no longer the case, and I think that probably does have longer term implications for regulation and potentially longer term implications for how much we ensure deposits. We had a decision from the Fed this week to raise another twenty five basis points. Some people had been urging that actually they

just hold given the difficults with banking. At the same time, he Jap admitted that there's more uncertainty about the extent of which what's already happened with financial conditions may have essentially imposed or the rate hike already. Did they get it right? Dan, from your point of view, did j Pal get it right? Market expectations helped him. They had sort of converged around twenty five basis points, and so

then it became a communication issue. He said, quite explicitly, it's too soon to tell how monetary policy should respond to the anticipated credit tightening. But I actually think their actions yesterday were a fairly significant response. I mean, everybody, three or four weeks ago, people are anticipating a fifty basis point increase. We got twenty five. Three or four

weeks ago. We thought we might see the step suggest a ceiling of five to seventy five or six percent interest, and now we're back to exactly where they were in December at last December when they did the last SEP, and of course they changed the language on the forward guidance type language. Instead of ongoing increases, we're back to may have some firm And of course some people were reading that as the end or close to the end

of the tightening cycle. So I actually thought that they were conveying more of an assessment of the impact than Chair Palace suggested in his remarks yesterday. I think what they did was broadly appropriate. It was a time for temporizing, because there's a lot of uncertainty and a lot of cards are going to be turned over in the next several months. And the question then was just temporizing mean

stopping all rat increases. And I think if they had done that, it would have sent actually a signal that they were very highly alarmed and would have been a mistake whether to continue precisely on the path that they were on before these banking concerns arose. I think that would have seemed almost oblivious to what was a potentially

gathering storm. And so I think, as Dan suggests that a middle ground path was right, and it was particularly right if the policy is going to be signaling in a clear way that even if your bank fails, you're going to be a depositor as well. But yes, I think what they did was broadly appropriate, particularly if we can be sending reasonably strong signals of confidence in the system.

This is Bloomberg Daybreak Today, your morning brief on the stories making news from Wall Street to Washington and beyond. Look for us on your podcast feed at six am Eastern each morning, on Apple, Spotify, and anywhere else you get your podcasts. Can also listen live each morning starting at five am Wall Street time on Bloomberg eleven three zero in New York, Bloomberg ninety nine one in Washington, Bloomberg one oh six one in Boston, and Bloomberg nine

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