Brainard: US banking system is ‘sound’ and ‘stable’
CNN
By Alicia Wallace, CNN
The broader US banking system remains sound and stable, but the two regional banks that failed were “poorly managed” and “took unacceptable risks,” White House economic adviser Lael Brainard told CNN’s Poppy Harlow in an interview Wednesday at Semafor’s World Economy Summit in Washington, DC.
Last month, the collapse of Silicon Valley Bank and Signature Bank triggered a crisis in the US banking sector, roiled financial markets and fueled uncertainty about the potential for negative ripple effects to spread throughout the broader economy.
The US Treasury, in conjunction with the Federal Reserve and the Federal Deposit Insurance Corporation, intervened after the regional bank failures to ensure bank customers could access all their money and to attempt to stave off future bank runs.
“The banking system, it’s very sound, it’s stable; the core of the banking system has a great deal of capital that was put in place in the wake of the 2008-2009 global financial crisis,” said Brainard, director of the White House National Economic Council. “There were some banks who were not managing their risks effectively. They failed, and the president took strong actions along with the Secretary of the Treasury and the banking regulators,” she said.
“Those actions reassured Americans their deposits are safe, the banking system is sound; but it was also important to the president that the executives of those failed banks were held accountable and, very important, that taxpayer money not be at risk,” she continued.
The failures, however, fueled uncertainty about the potential for additional bank collapses as well as possible negative ripple effects that could spread to the broader US economy, especially as the Federal Reserve is in the throes of a dramatic rate-hiking campaign to bring down inflation.
Brainard, who recently served as Fed Vice Chair before joining the White House in February, said she believes that the efforts of regulators and those undertaken by banks have created an additional layer of stability.
“Bank executives have seen some of the stresses that the two failed banks were under, and they’re shoring up their balance sheets, and they are convincing depositors and investors alike that they have a good strategy for risk management,” she said.
Still, the failures also expose potential consequences of the 2018 rollback of some post-Great Recession financial regulations, said Brainard, who at the time opposed watering down the regulations.
“When those strong safeguards were put in place [through Dodd-Frank], it materially strengthened the banking banking system,” she said. “Weakening those safeguards — liquidity, management, capital, strong capital buffers to absorb losses, strong living wills for when a bank fails — all of those things were removed or weakened in the size class of $250 billion, where those two banks failed.”
With the benefit of hindsight, she added, there’s a lesson in answering, ‘What was the benefit as opposed to the cost?’
“The cost is now apparent that we did see two failures that led to ripples throughout the system,” she said.
This story is developing and will be updated.
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