Fmr. FDIC Chairman Sheila Bair Reviews Bank Stress Test Results

SUSIE GHARIB: Joining us now with more analysis on the banks and those stress tests, we are happy to have with us, Sheila Bair — former chair of the Federal Deposit Insurance Corporation, FDIC, and now senior advisor at the Pew Charitable Trusts. And, Sheila, it’s really great having you on the program.

SHEILA BAIR, PEW CHARITABLE TRUSTS: Thank you. Happy to be here.

GHARIB: Well, I think the question that most people have: are banks most to normal? How you would you rate the health of the banking system right now?

BAIR: Well, I think it’s certainly stronger than it was in 2008. And the capital cushions are much better than they were going into the crisis in 2008. So, the sector is healing. Still, some uncertainties certainly with the housing market in particular, but if the economy keeps improving, and hopefully it will, that should also strengthen bank balance sheets.

Hopefully, we’ll get to a virtuous cycle where with the strengthening of the economy, there will be more confidence to make loans and that will in turn reinforce the economic recovery.

But there’s still a lot of ways to go and housing is still a big issue.

GHARIB: Well, let me pick up on something else. A few years ago, after another round of stress test, you were very concerned about banks issuing dividends and boosting your compensation. Your warnings were not heeded and banks did raise their dividends. And now, they’re doing it again. What are you’re thoughts on that? Are they in good shape to be paying out more?

BAIR: Right. So I think — so we were successful with some of the institutions, for instance, B of A’s dividend was not approved. Citi got a token penny, and there were other smaller banks that also had their applications disapproved. So, it was bit of a mixed bag for us last year. Yes, I did think it was premature. There were robo-signing, a disgrace, it’s ugly head, we didn’t know
what we were dealing with there, what type of losses that might entail for banks. It was in very bad shape. So, and the economy was quite moribund.

So things are better now. We have better clarity about housing. There’s still a lot of uncertainty. But we know more than last year.

Europe is in much better shape and, obviously, the economy seems to be recovering as well. So, I think there’s better justification. Though, as I look at these numbers, I think some of them probably were a little more generous than they should have been.

GHARIB: You know, one thing that most Americans remember from the banking crisis — too big to fail.

BAIR: Yes.

GHARIB: And there are still those concerns that could banks bring down the economy if there are some severe economic shocks, even though that they passed these important stress tests?

BAIR: Right, right. Well, I think the stress tests involve a lot of regulatory judgment, and bank manager judgment. So I think investors and market analysts need to look at the data that the Fed has put out and decide for themselves how robust those numbers are. My personal preference is, I wish the Fed had put more emphasis on liquidity, volatility, and the leverage ratio. There are four banks that if they had this scenario, there would actually have had leverage ratios below 4 percent.

There are two types of capital. One is risk-based capital, which is based on the judgment about how risky the assets are, and then there’s a leverage ratio. It’s just simply capital with total assets.

And when you get into a crisis situation, as we did in 2008, the market looks at the leverage ratio. They don’t trust the risk-based ratios.

So, I wish the Fed had put more emphasis on leverage ratios. Clearly, any large institution that fell below 4 percent leverage ratio and a volatile environment would have a liquidity failure. So, hopefully, next year, that can be better incorporated into the process.

GHARIB: Real quickly, I wanted to pick up on what you’re saying about more lending.

BAIR: Sure. Yes.

GHARIB: American business owners and small business owners complained that they just can’t get loans.

BAIR: Yes.

GHARIB: Do you think now they will be able to get more loans, that things are in better shape? Will we see more credit flowing through the economy?

BAIR: Well, I hope so. I think — again, this virtuous cycle, as if the banks get more confident to make loans, business gets more confident to take out loans, hopefully, it will reinforce itself. Ironically, I think this low interest rate environment hurts certain higher risk borrowers, like small businesses, because the risk premium for making a higher risk loan like a small business loan is not very substantial with these very low interest rates. So, the conventional wisdom is that low interest rates hurt savers and help borrowers. But I think for higher risk borrowers, like small businesses, the low interest rate environment is actually hurting them. So, I think a bit of a bump up in interest rates might help there, too.

GHARIB: That’s a longer conversation. We’d love to come back to you at another time.

BAIR: That’s right. OK, that sounds good.

GHARIB: Thank you so much, Sheila Bair, for coming on the program.

BAIR: You bet. Happy to be here.

GHARIB: We’ve been speaking with Sheila Bair, former chair of the FDIC, and now senior adviser at the Pew Charitable Trusts.


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