Former Chair of the FDIC Sheila Bair highlights what another round of regional banking turmoil could look like and what the Biden administration and regulators should be watching closely.
"We saw... runs on uninsured deposits after we had the three failures last spring, even with the so-called systemic risk determination and the government saying they were going to protect uninsured, you still saw a run," Bair, who is also a senior fellow at the Center for Financial Stability and former Assistant Secretary for Financial Institutions of the US Treasury Department, tells Yahoo Finance. "So that instability... is still there, there's less reliance now among these mid-sized banks on uninsured. It's still significant, but I don't for the life of me understand why the Biden administration has not asked Congress to reinstate the FDIC's authority to provide temporary emergency expanded deposit guarantees."
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BRAD SMITH: Continuing on with this conversation as we're continuing to be on $5,000 watch, we'll step away from that for a hot second, and go back to New York Community Bancorp, as we've been tracking that throughout this week. It's on shaky ground as it attempts to reassure investors of its deposits, liquidity, and governance.
Now this comes after the regional bank suffered a week-long plunge in its stock plus a credit downgrade from Moody's. The turmoil stoking concerns about the industry's vulnerability to commercial real estate troubles. Here to discuss where this leaves the banking sector at large, we've got Sheila Bair, who is the former chair of the FDIC and author of children's financial literacy books, "Daisy Bubble" and "Money Wizards." Personal favorite there.
Sheila, thanks so much for taking the time here on the day. First and foremost, I think a lot of people who have been tracking shares of NYCB are just wondering, is this a canary in the coal mine or something larger for the CRE market?
SHEILA BAIR: Yeah, so we've known commercial real estate was going to be a problem-- is a problem. And it's going to be a worsening problem. So yeah, it's going to-- a lot of banks that have heavy exposures to certain categories of commercial real estate-- it's important to understand that's a big group. We're really talking about urban office, some urban retail, and some multifamily-- most multifamily housing, which is included in the commercial real estate definition, is actually that's a good place to be. But in certain pockets, and particularly New York, where you have some pretty restrictive rent control laws, you're seeing some distress.
So I think it's important to not taint the entire sector. But within those segments, there is a problem. And many of these regional banks do have a heavy exposure to the distressed parts of the market. And they're going to need to work through that. Hopefully, they reserved enough, but we'll see. If they don't, we're going to have probably a few more bank failures. But it's nothing like what we saw during 2008.
SEANA SMITH: Well, Sheila, if we were to have a few more bank failures like you're saying as a potential risk at this point, what does that fallout look like and the risk that that could then pose maybe to some of the other banks that aren't on as firm of a footing here financially?
SHEILA BAIR: Yeah, well, we saw runs on uninsured deposits after we had the three failures last spring, even with a so-called systemic risk determination and the government saying they were going to protect uninsured, you still saw a run. So that instability in uninsured deposits is still there.
There is less reliance now among these mid-sized banks on uninsured, but it's still significant. And I don't, for the life of me, understand why the Biden administration has not asked Congress to reinstate the FDIC's authority to provide temporary, emergency, expanded deposit guarantees, at least for business transaction accounts.
So we're kind of in the same place we were last spring and still at the same risk of uninsured deposit runs. So I think that's something regulators need to deal with and go to Congress and get reinstatement of the FDIC's emergency authority. They're trying to cover this through lending facilities at the Fed and the Federal Home Loan banks. But that only works until it doesn't. That's much more expensive sources of funding.
And it's not-- if you're an uninsured depositor, I don't know if you're going to wait around and think, OK, they can borrow plenty from the Fed. If you think the bank's in trouble, you're going to be worried. So I do think this is still a problem. And the Biden administration should ask Congress to reinstate what's called TAG, Transaction Account Guarantee authority at the FDIC.
BRAD SMITH: And so if they were to reinstate TAG, would that be a temporary or more long term?
SHEILA BAIR: No-- yeah, it would be temporary. We used it during the Great Financial Crisis. It was very successful. Put it on. Things calmed down. Took it off. It's no-- it's not permanent. I mean, there is another discussion going on about whether there needs to be more permanent expansions of the FDIC guarantee. Those can be debated in another time.
But right now, I think the FDIC does need that emergency authority. Mr. Trump reinstated it. Got Congress to reinstate it during the pandemic. I don't know why we can't do that again. But you'll have to ask the Biden administration about that.
SEANA SMITH: Sheila, let's talk about what could potentially happen if that were not to be reinstated, if we were to see a little bit more turbulence within the sector consolidation. If we don't see bank failure, then, of course, we could see maybe consolidation. Who would that be among? Would it most likely be among the smaller players? Or do you think some of the larger banks would, in any scenario, get involved again?
SHEILA BAIR: Yeah, well, I think the regulators will be very, very reluctant to sell another failed bank to one of the so-called too-big-to-fail banks. There is a lot of criticism and scrutiny and continuing scrutiny over JPMorgan Chase's acquisition of First Republic. So I think they're going to try to avoid that at all costs.
There are-- most of regionals are healthy. They're fine, OK. This is not-- there are some with concentrated exposures. People kind of know who they are and are watching them. But I think there is room to consolidate among other regionals. And certainly, the smaller banks, the community banks really have much less exposure here. They're not really in the urban areas where you're seeing the distress.
So that's probably-- I don't know to what extent you're going to see any significant community bank failures, but certainly regionals could pick some of those up too or they could combine. That's what we did during the Great Financial Crisis. The vast majority of community banks that failed, we sold to other community banks. And I think that's the best way to do it.
BRAD SMITH: All right, Sheila, we appreciate the time here on the morning breaking all this down. Thanks so much. Good to see you, too.