Fed's Waller: Failed banks weren't systemic, but warranted action

Bloomberg News

Federal Reserve Gov. Christopher Waller said Silicon Valley Bank and Signature Bank were not systemically important — but their failures still warranted government intervention.

In a speech delivered Friday morning, Waller explained his rationale for supporting the systemic risk exception enacted by the Fed, Treasury Department and Federal Deposit Insurance Corp. and the actions that followed, including protecting all depositors at the banks and setting up an enhanced emergency lending facility at the central bank.

"I voted for these actions, not because SVB and Signature are systemically important on their own, but to stem the emerging crisis of confidence which could have led to additional bank runs with significant adverse effects on financial markets and the broader economy," Waller said.

Waller is one of two remaining Trump-appointed members left of the Fed Board of Governors, along with Gov. Michelle Bowman. His full-throated endorsement of regulators' using the systemic risk exemption speaks to the necessity of the measure, despite the banks themselves not being too big to fail.

The six-member board voted unanimously to support the systemic risk exception last month.

During his remarks, Waller nodded to what other Fed officials have described as a "contagion" effect within the banking system, though he did not use the word himself.

"As fear of taking those losses spread to uninsured depositors at healthy institutions, it became imperative for the Federal Reserve, along with other regulators, to act," he said.

Waller did not weigh in on how the Fed's supervisory approach to Silicon Valley Bank may have contributed to its downfall. He acknowledged Fed Vice Chair for Supervision Michael Barr's ongoing review of the circumstances around the bank's failure, but said he had already had enough information to draw his own conclusions about the bank's shortcomings.

"Based on what is already in the public record, SVB seems to have done a terrible job managing its risks," Waller said.

Waller's focus on the shortcomings of the bank, rather than the overall regulatory regime, echo comments made by FDIC Vice Chair Travis Hill earlier this week. Hill, a Republican, pointed to the Fed's rapid monetary policy adjustments as a contributing factor, but said it was ultimately the banks' responsibility to manage that risk appropriately.

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"Many banks had kept an eye on their interest rate risk and asset liability management, Silicon Valley Bank (SVB) did not," Hill said. "When SVB belatedly tried to address its problems in early March, by selling securities at a loss and raising capital to fill the hole, its depositors lost confidence and stampeded for the exits."

During a question and answer session following his speech, which was delivered at a training conference for the supply chain management firm Graybar, Waller said there was one "silver lining" in the bank crisis in that it resulted in an additional tightening of credit conditions.

In the days leading up to the banks' failures, Waller said he was considering revising his view on the terminal interest rate in the Fed's current tightening cycle. Based on economic data from January and February, he said he was thinking rates might have to be 5.5% or higher, up from the consensus view of about 5.25% at the end of last year. But, now that banks are voluntarily restricting their lending because of volatility, he said, the Fed can stay on its previously stated course.

"Once the SVB situation happened and credit conditions started to tighten, that takes some of the work off of me, because if the financial market tightens the non-price credit, I don't have to do as much on the price side to tighten credit," he said. "So, what that did is it kind of kept me from pushing up my terminal rate from what it was in December. … We're gonna let some of this tightening do the work for us, so that we don't potentially have to raise rates quite as much as I thought we would have to."

In the closing moments of the event, Waller was asked about his views on the U.S. potentially losing its long-held position as the world's reserve currency.

Concerns that the dollar might lose its global supremacy have been circulated in recent months as economic and geopolitical rivals such as China and Russia have moved to drain their reserves of dollars. In recent weeks, the idea has gained momentum from reports that Saudi Arabia is considering accepting payments for oil in Chinese yuan. Such a move would cut against the petrodollar arrangement, a 1970s accord in which major oil producing countries have agreed to accept payments exclusively in dollars in exchange for U.S. military support.

Waller threw cold water on the idea that the dollar's standing as the global reserve currency was in peril. He said firms and countries around the world transact in the currency by choice because of the stability it represents. 

"This is a voluntary arrangement by trading partners around the world," he said. "If you're a German firm trading with a Japanese firm, you price your contract in U.S. dollars. Nobody's forcing you to do that. You're doing that because you want the dollar to be the basis for that trade."

Waller said the current moment is not the first time he's heard people speculate about the dollar's demise, but no other nation has been able to demonstrate the stability, rule of law and depth of liquidity to be able to actually challenge it.

"When the Euro came into existence 20 years ago, that's all I heard: 'The Euro is going to take over,'" he said. "It didn't even come close. The dollar is still the preeminent currency because people in the world want to use it."