Surveillance: Bank Supervision with Clarida

his economic history professor claren As. Somebody spoke of creative destruction this morning, and that reminded me of a guy named Hyman Minsky who long ago in faraway had Chumpeter as his doctoral advisor. And of course Hyman Minsky, and the lore talks about a Minsky moment, or maybe talks about the efficacy of regulation. Let's bring over the cacophony of another time in Hyman Minsk over to what Michael

Barr at the FED needs to do. What is the best outcome of bank the new bank regulation and the lessons we're learning in this march. Well, I think that you know, there's been a lot of progress DoD Frank and in particular for the large, systemically important institutions with

stress testing and liquidity and all the rest. I think what this episode does reveal is that institutions may look small, they can get big, as you know, a SVB, for example, tripled in size in a couple of years, and even institutions of that size, as we saw with the Weekend,

can be systemic. So I think the clearer direction of travel is going to be that under existing statutes and laws, the FED has enormous flexibility in the way that it supervises institutions on a case by case basis, and I think we're going to see that level of supervision, in particular scrutiny of things like the hold of maturity portfolios being under water, and liquidity and the uninsured deposits. They're all going to be factors in So the direction of

tap travel is going to be Tighter's vision. Would you suggest our Central Bank will have to adapt to the political realities of Republicans hugely distrustful of the big accumulation of capital, almost in a Jacksonian way. How big will that umbrella extend out from the too big defails? I think I think it's going to certainly extend into a number of the names that are in that one hundred to two hundred and fifty. I remind you that was

actually by statute in twenty eighteen. The statute said that less prudential scrutiny for banks under two hundred and fifty billion. But again, the legislation given the FAT a lot of autonomy within that on an individual bank basis, and we're going to see see that, I think with tighter supervision.

What we just saw, though, a lot of people are putting the finger at the Federal Reserve and saying that they should have had more supervision of this bank, and that this was a policy failure that has really interfered now at their ability to raise rates elsewhere. Do you think that that's fair? Do you think that this was a policy mistake, or do you think that this is a direct result of rolling back that aspect of Dodd Frank in twenty eighteen. Well, I've looked into it a

little bit again. You know, I'm no longer in that building or talking to those folks. The interesting thing, Lisa, is that the stress tests that were set up very successfully after Dodd Frank typically looked at scenarios with deep recessions, high unemployment and falling interest rates, and SVP would have done great in that scenario. They didn't have a lot of direct exposure in lending or the like, but what they did have, obviously is a lot of exposure in

long duration treasuries and mortgages. In particular. There's something called a global market shock that looks into to that. I've also seen some work that indicates, again I can't judge, but that SVP would have passed the standard liquidity test. So clearly, I think they're going to be setting this on where to pre judge where they end up, but I think that is going to be reviewed and changed. That's said rich And this is a point that Neil Data made and he's going to be on later in

the show. He said, you know, the FED basically is hiked a lot. Why are they surprised by duration risk and why is it being treated as a bug rather than a feature of the hiking program. From your vantage point, do you think that perhaps there has been a bit of complacency about the resilience of an economy that so far hasn't broken, but now it's starting to show some more acute strains. I don't think i'd use the term complacency. What I would say is I broadly agree with Neil

in the direction of travel. Look, when you raise rates, you invert the yield curve on a sustained basis that is intended to tighten financial and credib conditions, and it is tightening financial and credit conditions. And so I don't I hope nobody in the building spot that we could get to this point without there being a tightening and lending now importantly, and let me get this on the table. What the FED did Sunday night was exactly the right move.

It's essentially expanding the discount window authority to lend against good collateral, which has been in place since nineteen thirteen, and that's an entirely appropriate thing for the FED to do, to give institutions liquidity against their security portfolio. So I think that was right. But yes, I'm broadly in that camp that when you raise rachel and you invert the curve, you're going to make lending more expensive and intermediaries are going to bear some of that burden. Absolutely, how much

more likely is a hard landing in your view? A recession that does inflict some more pain today than say, a week ago. It's certainly more likely. You know, I've been in the camp consistently. I think since doing your show last all that we we more likely than that we will see a recession with a with a rise and unemployment and some negative prints on GDP. Again, we have a rat hiph cycle of this magnitude and how quickly that is going to be the outcome. But yeah,

have the odds of a hard landing gone up? They certainly have. I'm still I don't think that's my baseline for a hardline landing, but sure the odds have to have gone up somewhat riche and I just want to finish on this this line that you often hear when central banks don't do something you expected them to do, and you hear things like they might know something we don't know. Does the FED ever know something we don't know? Well, look, the short answer is yes, not often, and not to

a great degree. I tell you one one situation where we didn't know anything that people didn't know was about the coronavirus, and so we didn't have any special briefings or insight banking troubles. Richard if they weren't. Banking trouble was behind the scenes, So they things that the FED

wouldn't know about but wouldn't talk about. Well, yes, because the FAT has supervisors on the ground with thousands of banks at a very granular level, and so certainly some of that information is not in the public domain and appropriately So that's why things become so speculative. TOMP in the next week down into this decision. It's so difficult for this FED chair. Should we have cleared on tomorrow? Can we get a man for another? I think he's

joining us every day. You're out next week. What you don't know is that Richard clod is going to be he He's going to be guest anry next week. Richard, Thank you sir for being with us. What an important morning, Richard Clardy. There the form of FED chair, FED Vice Chair and currently of pimcut Donic Constant does not have Laren Jackson. He's going to make a cool he's the

head of macro strategy at MAZOOO Americus Dominic. Let's start here, ECB. First, how much daylight is there between what you think they should do and what you expect they will do? Um? Well, well not too much. I mean, I think they are a little bit behind the FED in terms of raising real rates and fighting inflation. So if I were to expect the FED, for the sake of argument, to stop and the ECB was expected to raise fifty, it is pretty easy for them to just scale that back and

sort of signal that they're almost done. But I would expect them to sort of still push push rates a little bit higher. In a famous Constant twenty twenty hindsight, Dominique, you absolutely nailed it on this show a number of weeks ago. You pounded the table, a lonely table, saying they are super restrictive. Is they go into these set of meetings? Are they still super restrictive? Yeah, I mean

financial conditions are actually tightening through all of this. You know, the idea is, I don't know, if you recall last year, there was this FED paper talking around sort of our double star, that's we won't know it until we see it. And I think the idea is that we're seeing it now that rates have basically been getting to sort of break aspects of the financial system, particularly in the US,

which is a different situation than say Europe. But yeah, I mean absolutely super restrictive if you, I think it's part of the speed with which rates have gone up, so you can sort of maybe revisit these levels in a more calmer tone. But the fact is, if you want to find inflation, you better sort out your financial system first. You can't fight inflation and solve a financial

system at the same time by raising rates. Dominic, we're expecting to hear from Janet Yellen later this morning that everything is fine in the financial system, that we have real resilience. What would it say from your advantage point to risk markets if the FED comes out and says, you know what we were wrong. Inflation isn't the pre eminent concern, and even though everything is stable, we're not

going to raise rates anymore. Don't that don't don't don't think that could potentially be a liability for some of the risk your assets. Well, the issue for the financial system in a sense. If you say it's fine from a capital perspective, you know that's that's largely true. But obviously it's from a liquidity perspective that you've got the issue.

And we saw it in the guilt market last year, whereby liquidity problems can become solvency problems for in that example of the insurance sector, and that's what you're seeing in the medium sized bank. So you you know, you do you know it is true. You can say, you know, financial system is fine, but you've got to focus on liquidity and on that basis you have to kind of when the liquidity problems coming from the so called you know, risk free rate and the Treasury yeel curve that's attached

to that, then then that's your problem. So you can't basically fight inflation. And I agree that does maybe give people a cause for concerning around the credibility around inflation. But the other thing that we've been arguing for a while is this inflation is sticky and it's almost beyond the control of the FED. There's a time element with which inflation will come down that the FAT can't necessarily control. Domini const you invented the linkage quantitative finance into economics

of credit suis with Neil Sas years ago. You do have experience a credit suis to say the least. Can you imagine UBS merging with the credit suis? You know, oh, absolutely, yes, I mean that's I think that's the h you know, I don't think. I mean that what the Swiss National Bank has done is obviously extremely important, a massive liquidity facility. There a lot of idiosyncratic problems obviously, you know, at

Credit Suis. It would it's kind of fairly intuitive that in the long run or the medium term, some sort of resolution would involve the Swiss banks finding some kind of uh tie up, you know, good bank, bad bank, whatever you want to call it. The main thing about Credit Suie is they have a wonderful private bank and that's what they kind of want to preserve. An investment bank is you know, it is what it is. Would that private bank be valuable to other UK, Continental or

American banks? I mean there's a mystery here to the new culture of credit. Sueetz, do you denote a new culture? Yeah, I mean I'm not a bank analyst, but I mean I would say the private bank has always been the sort of jewel in the crown, and you know, it's it's been very impressive and I would I would absolutely imagine it would be attractive to a lot of people. Yes, I think we're all bank analysts this week. Thank you,

you know, Dominate Constant, Thank you, sir of Missouo. Let's go straight to the guest, Peter Roppenheimer, Chief Global equity strategistic Gamer Sacks. Peter, great to catch up with the really difficult moments. So thanks for having at some time in your schedule. You did like European banks. The facts have changed in the last week. Do you still like them? We do, clearly. In a situation like this is massive uncertainty, and I think the volatility that you've been speaking of

Lisa discussed is going to continue. But I do think it's important to recognize the underlying fundamentals here are pretty good. You've got strong capital buffers kill core to one capital of around fifteen percent from head about five percent to the European banks during the crisis in two thousand and eight. You've got stable funding dynamics one point eight trillion of excess deposits, and you've got very ample liquidity and the liquidity coverage ratios around one hundred and fifty percent at

the end of last year. So it's a very different fundamental situation. And indeed, rising interest rates, which we've been seeing is actually very good for the banks, but confidences everything, and while this uncertainty continues they're likely to remain volatile, but they are cheap, and I think they're fundamentally in a relatively strong place. Peter, we note your decades of experience and seeing multiple crises. I know you've been to Zurich any number of times that what matters is to

take lunch at the Chronoole. Does restaurant Chronoole, that's what everybody does in Zeroca is the only place to eat. I get it. But when you're eating there now in this crisis a Chronoole? Is Switzerland part of Europe? Or is Switzerland still separate from Europe amid this crisis? Well, I don't think in a banking crisis that anything is really separate, and particularly in a banking situation where you've

got cross border integration and connectivity. So other central banks around the world will be talking to the Swiss authorities, and I think will be also preparing statements or willing to provide as much liquidity that's required if this situation

continues to unwide. Obviously there's a difficult decision that the CB have got to make, as Lisa was saying earlier, but I think again they will emphasize the robustness of the underlying system and their readiness to provide liquidity using some of the existing tools that they already have, potentially providing more. But I think they'll take some comfort from the underlying balance sheet strength of the banking sector in Europe, which of course we couldn't have said a decade ago.

So I think from that perspective it's a much more robust underlying situation. Peter, will you still be bullish on European banks? Off? The ECB does not code, does not hike rates today and indicates that they're on pause until they have more clarity. I think that it's very unlikely they'll say they're on pause, because that will, if anything, provide some sort of sense that they're concerned about the contagion effects of this. I think they've got to look

at the underlying fundamentals of the economy. Actually that's looking pretty good. We don't expect a recession this year in Europe. Inflation, core inflation, underlying inflations above their target rate. They've signaled quite strongly they expect a raiser. It's by fifty basis points.

And the banking system, again, as I would say, appears fundamentally resilient and so I think they would want to sort of stay the course, but at the same time provide statements that are reassuring about their willingness to provide liquidity, to emphasize existing tools that are in place that have been built up over the last few years since the sovereign debt crisis, and their ability to look at other

things as well if it's required. And Peter, do you think that tighter financial conditions, tighter lending standards are just inevitable now after what we've seen in the last week. Yes, I do, and I think this is all really a function of a massive shift in the cost of capital that we've been seeing over the last year year and a half. I mean, you only have to go back a year and a half and about a course of all government debt around the world had a negative yield.

You know, people were paying for the privilege of lending money to governments. That world has changed. You're getting close to five percent on US dollar cash for zero volatility and risk, and that's high hurdle for asset markets to pass. But it also means that there is a tightening in financial conditions and arise in the cost of cattle, which is inevitably having an impact on pushing valuations of assets down, and it's clearly causing some friction in areas of the

financial markets. But if the underlying situation is robust and the cattle buffers are in place, it won't prevent these problems, but may restrict the contagion and the systemic fallout from them. And that's I think fundamentally the important point to take away from this delicate moment. But we appreciate your time this morning. Thank you. Up in hind there of Garment Sex. I think they're going to look asymmetrically and they're gonna say, if we make decision A, what does it mean on

an asymmetric basis B and C as well? And to give us clarity on that not only in the United States, but in a Europe that surprised a lot of people with optimism is Neil Datta. He's out of you as economic research at Renaissance Macro and he has absolutely nailed the resilient American economic experiment over the last number of quarters. Neil, wonderful to have you with us and try to get away from talking about banking crisis. Just in all of

your study of economics at NYU Neil Datta. Is it just simple the ECB will ignore the data and the ECB will be on plan as scheduled. I don't know, that's an open question. My own sense is that they probably don't go fifty. I mean, remember, wasn't it Laguard that was called picking up the phone? And how terrible of a decision it was for him to let Lehman

go under. So you know, she's again, We'll see that she's probably going to air on the side of faustion here and we'll see that again in the next hour here with daylight savings time in America. And you know, I've never heard dot to talk about ECB, so that's pretty cool. You know that this is a moment where all experts in random things that just seem to pop

up day to day. And that's sort of the question that I have for you is how do you even chart a path forward when the facts change this quickly and they are material because this leads to an actual tightening and credit conditions with lending. Yeah, I mean that's true.

I mean the question is exactly. I mean, part of the reason why the economy was so resilient, remember, was that it wasn't especially credit sensitive to begin with, right, that's one of the reasons why you know, the folks talking about long and variable lags for the last eighteen months, then shifted talking about the weather, then shifted talking about seasonal adjustment issues, and now are saying, oh, look, the lags finally kicked in. You know sometimes in this business

lease that's better to be lucky than good. Well, and this raises this issue of how do we even know what our biggest challenge, what our biggest threat is. And I go back to what Nerio Rubini was saying, which is, if the FED pauses, if the ECP pauses, this could allow an unmooring of inflation expectations at a time when you do have an economy with strength. What is your concern about that? Is that still a pre eminent risk or will the tightening take care of itself? No? Absolutely,

I think it's a risk. I mean I don't think what's happened right now in the banking system, as unnerving as it may be, is enough to really send the US economy into a below potential growth state. I mean remember, I mean, as the data make clear, we went into this with a lot of momentum, right, You're talking about Atlanta FED tracking three three and a half percent, and you're talking about inflation running five percent, so you're talking

about an eight nine percent nominal growth environment. That helps grease the wheels a little bit. So, you know, even though the data is still let's try to remember them, the momentum going into all this is pretty robust, and that gives us a bit of a shock absorber once this goes on. At the same time, the inflation data are not encouraging. I mean, people looking at PPI and saying, oh, you know, this is a reason for them to back off.

I mean, it's absolutely ridiculous. You know, core inflation is running hot. Inflation has been so strong over the first two months of the year that if it didn't do anything for the rest of the year, it'd still be up one percent. So yeah, I mean, I think the risk is if they pause, they may have to come in later and then they may have to be even more aggressive. So I tend to sympathize with that view. You'll give me a level here, And one of my great themes is Europe just flat out does not have

a nominal GDP persistency like America. We are generally because of technology and maybe a different demographic and economy set at a higher level. If I'm right on that, what's your run rate a nominal GDP? I think we're in a five to six percent underlying nominal growth environment right now. You know, you talk about two two and a half percent real growth around four percent inflation, So you know, six percent I think is a reasonable benchmark. That seems

to me to be pretty constructive as well. Can they pause, I mean ECB today or FED here in a number of days. Can they pause with a strong statement that they will resume rate hikes is appropriate at some point. I mean, they could do that, but I mean my sense was, in reading the events of last weekend and what the FED is done, my assessment is it goes back to the Bernanke discussion about using the right tools

for the right job. What they did was try to ring fence the banking system to create the space for themselves to keep hiking to deal what's slowing down the economy, you know, an underlying demand. Remember, rates are a blunt tool that affects you know, all industries at the same time, right, not just the banking sector. So I thought, in some ways you can make the argument that what they did over the weekend was a way to create the space to ultimately hike you know, at the margin, obviously it

makes fifty basis points less likely. You can't talk about a systemic risk exception and still go fifty. But I think you can make a reasonable argument to keep going twenty five. You know, the data remain quite strong and we're not at a point yet that suggests significant economic damage as a result of this. As Michael McKey mentioned, I mean, home building stocks have been doing well. Housing can't work if credit isn't flowing to households. Neil just

quickly here. Has a chance of a very hard landing or a harder landing become more likely in the past week as we've seen some of the tensions come to

the four. Yes, it has because I think the biggest risk of a hard landing as if the FED follows the markets pricing of interest rates, because the markets, the fixed income market has an implicit Dubash bias, and if the FED follows that, it risks in trenching inflation, which further will push the FED away from where the markets are, and that will I mean, risk a much harder adjustment later. Yell Dotta, thank you so much. Through a usance macro

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