SVB, Signature Bank failures have 'a common thread' of political counter-narratives: Reporter

American Banker Washington Bureau Chief John Heltman joins Yahoo Finance Live to discuss the ongoing testimony of SVB and Signature Bank executives at the U.S. Senate hearings.

Video transcript

- Executives from Silicon Valley Bank and Signature Bank are testifying right now about the failures of their institutions in front of the Senate Banking Committee. The banking turmoil began in early March and has since dominated headlines. On March 8, crypto-friendly bank Silvergate wound down operations after taking dramatic losses following the collapse of FTX.

On the same day, Silicon Valley Bank revealed a massive loss from withdrawals and plans to raise over $2 billion in capital to make up for it. The next day, there was a $42 billion bank run and. On March 10, shares were halted, and regulators took control of the bank.

Two days later, the feds took control of another bank in crisis, Signature Bank. Biden tried to reassure Americans, saying that the banking system is safe. But days later, Switzerland's Credit Suisse also started to crack, with shares hitting new lows.

First Republic was also suffering. And on March 16, 11 big banks rescued it with a $30 billion deposit structure. Now, in the meantime, SVB filed for bankruptcy and UBS acquired Credit Suisse. Regulators then announced First Citizens Bank would acquire the bulk of SVB's assets.

But more trouble was brewing for First Republic. And the bank released a statement, saying it was, quote, "pursuing strategic options." About a week later, regulators seized First Republic, and the bank was sold to JPMorgan Chase.

In the last couple of weeks, the fallout from the crisis has stayed with us. Shares of PacWest dropped on May 4 on reports of a sale. And shares stayed in the red on news that the bank lost nearly 10% of total deposits. Today, regionals, yeah, well, they're mixed right now. However, as this hearing goes on, it'll be interesting to see where that tick-by-tick action continues to move, Julie.

- Yeah, and especially since the focus now has turned towards regulation, maybe the banks will actually get a little break. We'll see what ends up happening. But the hearing is underway for those bank executives, also for regulators.

To help break down the implications of the crisis, we're joined by John Heltman, "American Banker" Washington Bureau chief. John, good to see you again. Obviously, it's a pertinent day to be discussing all of this.

And I guess to pick up on my last point here, it is some of the executives who are testifying today. There's also another hearing that is talking to the regulators. Those two tracks, what do you think we need to be paying attention to? Which is more important right now?

JOHN HELTMAN: Well, how's this for an answer? They're both equally important. So watch both--

- Good answer.

JOHN HELTMAN: --one with each eye on two separate screens. There is a common thread through both of these hearings. And that is that since the outset of this crisis, at the very beginning, Democrats and Republicans were kind of trying to figure out what they thought about all of this. And that has since, I think, somewhat solidified into two counternarratives.

On the Democratic side, the point here, like what you are seeing here with this series of bank failures, is a failure of regulation, a failure of or an inability of regulators to adequately regulate because of some of the policies put in place during the Trump administration. And that's their line.

Republicans, by contrast, have solidified around this idea that it is the regulators themselves that are institutionally unable to regulate banks. And so it's the regulators' fault. And new regulations or overhauling the regulations to make them more stringent on midsized banks would not be helpful, would not have prevented this crisis. And I suspect that in both of these hearings today, you're going to be hearing basically reiterations of those dual tracks.

- Has the flight of deposits stabilized, from your perspective?

JOHN HELTMAN: Well, the regulators certainly seem to think so. Janet Yellen had comments out this morning of a speech, saying that the contagion risk is contained, that deposits have stabilized. Regulators in there prepared testimony for the hearing this morning saying similar things. Now, they also are saying that there are some risks out there in commercial real estate, potential credit risks, credit write-downs there that could affect regional banks and smaller banks.

But yes, so there's-- the deposit flight seems to be over. It seems like there aren't any other SVBs out there that have enormous reliance on business accounts to make up their deposit base. Those that rely more on those are seen as more risky. You mentioned PacWest. That's kind the next one in line, Western Alliance similarly.

So we may see still more failures. But those banks aren't really on the order of size that SVB or even Signature was.

- I mean, as we talk about--

JOHN HELTMAN: Sorry, First Republic.

- --the so-called idiosyncratic features of the various banks that failed, right, whether it was in crypto or whether it was relying on start-ups or sort of the balance of business, that hasn't been something historically that has been regulated at all, right, in other words, the type of businesses that a bank caters to. And it doesn't seem like that that's something that the regulators would consider, is it? So how do you address those risks without directly addressing those very specific things at those banks?

JOHN HELTMAN: So the bank regulators, especially the Fed, but really all the bank regulators have-- they have regulation, and they have supervision, right? So regulation is pursuant to a law. And it will say, as part of our-- so, for example, the Federal Reserve's guiding light is the safety and soundness of the banking institute or the banking institutions they regulate. They can pursue or push a regulation saying, you can't do this, or you have to do that. And that applies to all banks equally.

They also have something called supervision, where there is somebody looking over a banker's shoulder and saying, are you sure you want to do that? Is that a good idea? And if they do it anyway, they can issue something called a matter requiring attention or a matter requiring immediate attention, which then goes to the board and forces a decision. Now, some of the concern, again, from the Democratic line of argument here, is that in the prior administration, there's this emphasis on not using supervisory actions to act as de facto regulation, right? That's something that I think Democrats are going to try to push back on.

But to answer your question, there's lots of things that bank supervisors can do to tell a bank, don't do this or do more of that. For example, if your deposit concentration is way too high in one particular sector, that might be something that they would get dinged for, a bank would get dinged for now that they wouldn't have before.

- There's typically more theater politically here on events like this than there is on 42nd and Broadway--

JOHN HELTMAN: Oh yeah.

- --especially on these occasions. So how can regulators signal not just to banks that they've got a firm understanding about what they need to do, but also to the broader public that they're acting in the best system-- in the best manner for the broader system at whole?

JOHN HELTMAN: Well, they can just say those exact words and let lawmakers question them. That's part of the point of this exercise, of bringing the regulators out, bringing the banks out or the bankers out to call for-- call to account for their actions.

Now, the regulators have been up to the Hill a few times. And they're going to be up again. So the regulators are in the House today. Bankers are in the Senate. Tomorrow it's bankers in the House. And then Thursday it's regulators in the Senate. So everyone's going to get a taste.

And I think at this point especially, the FDIC put out its proposal for how to replenish the Deposit Insurance Fund last week, which placed most of the onus on the biggest banks to repay that loss that was incurred during the failure of Silvergate and Signature. They invoked something called the systemic risk exception, which means that they would insure uninsured deposits at a loss to the Deposit Insurance Fund, or the DIF. And then they were also then required to do a special assessment to refill-- to sort of replenish those losses.

And during the board meeting, the FDIC board meeting last week, during that proposal, Republican board member Jonathan McKernan took exception to the idea that the biggest banks would be paying for this. I would be interested in seeing if any Republicans follow that line of argument during either the hearings today or later this week.

- John, we're going to continue to keep a live look on this up for some of our viewers as much as we can. But we got to wrap things here for today. John Heltman, who's the "American Banker" Washington Bureau Chief, John, always a pleasure getting some of your insights and coverage around this, too. Thanks so much.

JOHN HELTMAN: Thank you.