Assumptions on banking regulation risks ‘were wrong’ ahead of SVB collapse: CFPB director
CFPB Director Rohit Chopra sits down with Yahoo Finance’s Jennifer Schonberger to discuss the state of the banking system, the causes of the Silicon Valley Bank failure, and the proposals for banking safeguards.
JENNIFER SCHONBERG: Welcome back to Yahoo Finance live, I'm Jennifer Schonberger. With the recent failure of Silicon Valley Bank, consumers are questioning the safety of their deposits while lawmakers and regulators are assessing how to prevent a failure like this from happening again. Joining me now in an exclusive interview is the director of the Consumer Financial Protection Bureau, Rohit Chopra. Director Chopra, thank you so much for sitting down with me and having me here at HQ.
ROHIT CHOPRA: Thank you so much, it's great to be with you.
JENNIFER SCHONBERG: I want to kick off the conversation and ask you about the health of the banking system. Now what stresses, if any, are you seeing in consumer finance markets right now?
ROHIT CHOPRA: Well, obviously the last several weeks we saw quite a bit of anxiety from so many people in the country about whether their deposits are safe, and they are. We've been looking very carefully though to make sure, are there other places where consumers can be harmed or taken advantage of on all products and services? So right now, we're not seeing any uptick in any major product area, but we are certainly not taking our eye off the ball.
When financial systems-- they're all very fragile and one little pinprick often can lead to all harm for individuals, we saw that in the last financial crisis in 2008 and we are very on guard to make sure that people are protected.
JENNIFER SCHONBERG: There's still a lot of question marks as to why Silicon Valley Bank failed, and for that matter, Signature and Silvergate, what do you think were the major causes?
ROHIT CHOPRA: Well, in many ways, it's similar to what we saw in past crises, panics. There's a mix of managerial incompetence by banks but also places where the regulations may not have been where they needed to be and the regulators not always taking the steps they need to do it. We're obviously doing a review to see what went wrong, but there's no question in my mind that several years ago there was deregulation that occurred assuming that banks of a certain size would not create risks to the entire economy.
And that fundamental assumption was wrong. Even though Silicon Valley Bank may be just a fraction of a size of JPMorgan, Chase, CITI, Wells Fargo, it still was giant enough where its failure could have led to really serious consequences. So I think that's such an important data point. And we now need to use that fact to really help fix the system so this does not happen again.
JENNIFER SCHONBERG: And to your point, you actually warned about the risks posed by banks with $100 billion or more in assets. You called them systemically important last year. What needs to be done to prevent a failure like this from happening again? You spoke about regulations. How do regulations need to be changed for banks of this size given the issues that ensued?
ROHIT CHOPRA: Well, it's really tough to call some of these banks small or smaller. They're still very large and much larger than the thousands of local banks in the country. So there's just some basic safeguards that you always want. Bankers and their shareholders they've got to have some skin in the game. That means they've got to hold the right amount of capital, there's got to be some real accountability on executive compensation so that they don't take out of control risks.
They've got to have the cash on hand to meet when depositors want to get their money out. These are common sense safeguards that we need to make sure are in place especially to avoid catastrophic effects of one or more of their failures. We had to take extraordinary measures to contain the damage of the failures of Silicon Valley Bank and signature. But we need to make sure that we're really learning from this and taking the right steps to prevent it.
JENNIFER SCHONBERG: Social media seemed to play a role in the speed of this. So to your point, given the new reality that we live in, do we need a certain level of liquidity and capital to prevent a failure happening in such short order that we saw?
ROHIT CHOPRA: Yeah, it's a good point, communications are so much faster, banking is much more 24-hour, there's more real time payments. That's just reality, we're not going to be able to turn back the clock on that nor should we. But it does mean that bank runs can happen more rapidly, they can happen in ways that are overnight. And we need to take that reality into consideration when setting up the right type of oversight and rules.
At the end of the day, banks are really the plumbing of the economy and when they're not working well our whole society suffers, and that's why it's so important to get this right.
JENNIFER SCHONBERG: I want to ask you, the FDIC director Martin Gruenberg is reassessing, conducting a review of the deposit insurance system in this country. He's expected to have a report out by May 1st. Given that you actually sit on the board of the FDIC, how do you think deposit insurance needs to be reformed? Should we be raising the level of deposit insurance?
ROHIT CHOPRA: I don't have any firm conclusions on that but I'm certainly very open to that. But that can't be the only thing we do to address this. I would not want the end of this to just be changes in deposit insurance, it is very clear that we need to beef up the oversight and really look hard at those regulations that were gutted a few years ago.
JENNIFER SCHONBERG: Also this week we heard from FDIC chair Gruenberg. He testified before Congress and he was asked whether community banks should be exempt from having to pay for Silicon Valley Bank's failure. He said that the FDIC does have discretion but ultimately it's up to the board to make that decision. Again, since you are a board member, what's your thinking on this?
ROHIT CHOPRA: Yeah. I agree with him, I think the law tells us that we've also got to look at the institutions that benefited from some of those emergency actions. I think it would be hard to say that community banks played a role in causing this if anything they are offering a safer way for the system to operate. So I think that's right, I think we have to take a hard look about whether we limit or exempt the smallest and safely operating banks from having to pay for this.
JENNIFER SCHONBERG: Director Chopra, thank you so much for your insight, I so appreciate, it hope to speak with you again soon.
ROHIT CHOPRA: All right. Thanks again.