Former FDIC Chair Bill Isaac joins Yahoo Finance Live to discuss regional banking failures, including SVB and Signature Bank, banking executives' testimonies in Congress, advice for banking regulators, and the likelihood of future banking failures.
Video Transcript
- Well, Senate Banking Committee members are currently hearing testimony from financial regulators to closely examine their role in the banking crisis that saw three major banks collapse earlier this year. Among those testifying is FDIC Chair Martin Gruenberg.
Now, earlier this week, the committee grilled a former Silicon Valley Bank CEO and Signature Bank execs. You're looking at Senator Elizabeth Warren over there grilling over mismanagement that lawmakers say led to the bank's failure. Bill Isaac served as FDIC Chair from 1981 through 1985. He joins us now with his thoughts. Bill. Thank you so much for joining us.
BILL ISAAC: Good morning.
- Good morning. All right, let's get right into this week. They've been in the hot seat this week. There didn't seem to be a lot of ownership, and both sides agreed to this with regard to SVB and the collapse of that bank. What was your thought on that?
BILL ISAAC: Ownership?
- When I say ownership, with regard to Gregory Becker, the former CEO of SVB, taking any responsibility for the problems that led to the collapse of SVB.
BILL ISAAC: Well, in the first instance here, when a bank fails, you have to blame the management and the board. They are the first line of defense. And I think that-- I didn't hear his testimony, but I assume he did allow that he had something to do with it, and the board did as well.
- Yeah, well, he blamed the board. I'm sorry, go ahead. Go ahead.
BILL ISAAC: I was going to say, I don't-- I'm not trying to blame anybody. I'm saying that I think that the board and the management are the people you look to first when a bank fails. They're the first line of defense. And certainly, when I was at the FDIC, that would be the first thing that I would look at is, what did management do, what did the board of directors do.
I think it's fair to also look at what the regulators did and when they did it. And I think they were very slow to the switch here. The state regulators in the California Banking Department and the Federal Reserve Bank of San Francisco were very slow to take actions here. And I think they could have acted a lot sooner and should have.
And so I think there's plenty of blame to go around here. Also, you had the Federal Reserve, which was very relaxed on monetary policy. It was asleep actually on monetary policy. And the Congress was not, at all, attentive to fiscal policy. And they had a lot to do with what happened in this bank and other banks that got into trouble. So there's a variety of institutions and people who are responsible in some way for what has happened here.
- So I got to ask you, now, the Fed did take some responsibility. Jerome Powell, Fed Chair, speaking out at the last press conference about failures with regard to the regional banking sector and the problems that have occurred there. But what is your advice to regulators about what they should do? Should there be increased oversight? What's your advice?
BILL ISAAC: I don't think we need a lot more regulations. Congress always reacts when you have a crisis like this. They react and say, well, let's put some more regulations in place. If anything, we probably have too many regulations in place. People can't keep track of them.
But I do believe that bank supervision and examination has to be a lot stronger. We have to be on the scene much more, and we have to. But when there's something wrong or about to go wrong, we need to get on it quickly and take strong actions. That was not done here.
The banks that failed in this round were very-- they had plenty of signs of trouble, and the regulators were not taking swift, stern action. And that's always important. The sooner you act on these things, the lower the losses are going to be, the less likely the failure will be.
So I really think that we've got to improve bank supervision and regulation that doesn't require more statutes, that requires more training and more rigor, maybe more people.
- And I've got to ask you the last time you were on, you predicted that there would be more failures after SVB. That was before first Republic failed. What is your-- do you see more to come?
BILL ISAAC: It's been a long time since we had a lot of bank failures. Back in the '80s when I was chairman, we had 5,000 failures during that decade because it was a horrible decade. We had two decades before with lots of inflation and lots of ease with monetary policy, and fiscal policy was expensive.
And plus, we were a highly regulated banking industry and all of the regulations had to come off particularly, the interest rate controls because inflation wouldn't allow them to stay in place. So we had a nightmare that we had to deal with back then. And so it takes a long time to work those things through the system.
In the '80s, it took about almost 15 years to clear all those things through the system. And then the tubes in the 2000s and 2008 to 2010, we had a lot fewer failures, but it still took a long time to get through everything through the system. And then the Fed made a terrible mistake. It kept interest rates down to near zero and kept them there for a long time, which built up a lot more problems.
So that's what we're feeling now are the effects of the Fed and the Congress. They went-- they took the deficit from $5.6 trillion at the end of the Clinton administration to $32 trillion today. That's a stunning increase in the deficit. So it's going to take time to work all that out. It took us a long time in the '80s. It's going to take us a long time now.
I don't think we're at the end of the failures. I'm not going to say how many we're going to have or how fast they're going to come, but I'm confident we will have more because with fiscal policy and monetary policy is so disruptive. It's going to take a while to get all that through the system, and it's going to be painful.
When Paul Volcker was chairman of the Fed, and I was chairman of the FDIC in the '80s, it was really painful for a lot of people to go through what we had to go through to get rid of inflation. And we've got to get rid of inflation. It's really difficult on older people and retirees and people with low incomes. Inflation is a horrible disease that they shouldn't have to suffer through.
- Yeah, definitely difficult for those living on a fixed income. We'll certainly talk to you again in the future. And no one likes providing a doomsday scenario, so we will certainly see what happens with regard to the banking sector and regional banks in particular. Our thanks to Bill Isaac, former FDIC Chair. We appreciate you.
