Regional banks shouldn’t be the only source of concern over the possible fallout from the Federal Reserve’s rapid rate hikes last year, a former top banking regulator said.
“I don’t see a particular problem for regional banks,” said Sheila Bair, who ran the Federal Deposit Insurance Corp. from 2006 to 2011. in an interview with MarketWatch on Thursday. “We need to watch out for all untagged securities at banks — small, medium and large.”
Bair called the hyper-focus on regional banks and interest rate risk “counterproductive” following the collapse of Silicon Valley Bank and signature bank SBNY in New York in early March.
“It’s a risk that all banks face,” she said. “All auditors need to be wary of how interest rate risk is managed. If there is a run, they must sell these securities. These are issues affecting banks of all sizes and all auditors should be concerned.”
A rush for deposits at Silicon Valley Bank intensified after it announced a $1.8 billion loss on a sudden sale of $21 billion in high-quality, interest-sensitive mortgage and government bonds. It was the largest bankruptcy by a US bank since the collapse of Washington Mutual in 2008.
The FDIC estimated that by the end of 2022, U.S. banks would have realized about $620 billion in unrealized losses on securities.
“Unrealized losses on securities have significantly reduced the banking industry’s reported equity,” FDIC Chairman Martin Gruenberg said in a March 6 speech before the Institute of International Bankers.
Days after that gathering, both Silicon Valley Bank and Signature Bank collapsed, prompting regulators to launch a new emergency bank funding program to stave off liquidity shortages at other U.S. lenders. Regulators also halted all deposits with the two failed lenders.
Bair argued earlier this month that if US banking officials see systemic risk, they should go to Congress and demand a “blanket” backstop for uninsured deposits, above the standard $250,000 per depositor cap, at a single bank.
To read: A guarantee for all bank deposits should be on the table, says ex-FDIC chief Bair
Treasury Secretary Janet Yellen said on Wednesday that her department was not considering blanket deposit insurance, but added that the appropriate level of protection could be discussed in the future.
Fed Chair Jerome Powell on Wednesday said the US banking system was “solid and resilient, with strong capital and liquidity” after interest rates were hiked another 25 basis points to a range of 4.75% to 5%. compared to almost zero a year ago.
See: The Fed is raising rates again, planning only one more rate hike this year
Bair has been calling for a pause in Fed rate hikes since December. She said instead of raising rates another 25 basis points on Wednesday, Fed Chair Powell should have paused and said the central bank needed time to assess.
“If we have a financial crisis, we will not have a soft landing,” Bair said. “We absolutely have to avoid that.”
Read: Bank failures like SVB are a reminder that “risk-free” investments can still ruin portfolios
Shares gave up early gains to trade lower in afternoon trade, with the Dow Jones Industrial Average DJIA and the S&P 500 index SPX each down 0.3%, while the Nasdaq Composite Index COMP fell 0.6%.