A segment from the March 14, Marketplace daily report on NPR follows. The interviewer is host Kai Ryssdal and the guest commentator is Daniel Tarullo who teaches at Harvard Law School.
Between 2009 and 2017, Tarullo was on the Federal Reserve Board of Governors; specifically, he served as oversight governor for the supervision and regulation committee.
Silicon Valley Bank (SVB) analysts are looking for situations where there are balance sheet or business model parallels that could lead to more bank failures. Tarullo asserts that management will always be first in line when blame is assessed.
However that is not the full story. He believes the proximate cause is closer to home–a regulator with a light touch.
I believe his last comment highlighted below describes NCUA’s approach to supervision. How else do you explain a credit union CEO and Chair giving themselves a $10 million fund under their sole control or $1.0 million dollar credit union CEO bonus upon merger, among other abuses?
Interview Excerpts:
Ryssdal: All right, so look, that’s why we got you on the phone. You ran, among other things you did at the Fed, the committee on supervision and regulation. And I am not the first person to ask, nor will I be the first person to ask, where were the regulators? Why did this come out of the blue?
Tarullo: That’s a huge question, isn’t it? There are two places to look: One is to supervision and the other is to regulation. Now, of course, we’re stipulating that there’s a management failure, but I think everybody would agree with that. So in terms of the government, the debate publicly has been, “Gee, were the 2018-2019 changes in the [Dodd-Frank] law and Fed regulations respectively to blame?” And, as I think you know, I was opposed to both the [rollback of the] law and the changes in the regulations.
But I don’t think there’s that direct of a connection between those specific changes and Silicon Valley. And so what that tells us is the failure was in the oversight by supervisors — people who were supposed to be watching whether things like the proportion of uninsured deposits was creating some unusual risks for that particular bank.
Ryssdal: That’s not terribly reassuring, I gotta tell you.
Tarullo: No, it’s not. And I think that the review that the Fed has launched — and it’s significant that it’s headed by the vice chair for supervision, Michael Barr, who is, you know, relatively new — I think the significance of having him run that rather than staff is precisely because they want to find out where the supervisory failures lay. Were they with the specific team that had responsibility for Silicon Valley? Or were the failures more widespread in the sense that Washington was providing kind of a light touch supervisory direction to them?
Ryssdal: What do you think?
Tarullo: I suspect that it’s a combination of the two. But given the signals that the Fed was sending, you know, in the last several years, I believe that part of it is just the “don’t be too tight in your supervision, you need to find legal problems before you tell the banks to change what they were doing.”
I think it is time for credit unions, as the leading cooperative self-help business model to recognize the extensive moral risk created by our the expanding web of federal deposit insurance. There are volumes of economic study that highlight the ever growing correlation of financial instituion failure with expanding government backed deposit insurance schemes.
In our case we already, in reality, self insure credit union deposits. It is time that we remove government from the equation and build on the exisiting private insurance model that already exists. We should have learned from the world wide experience of other banking systems that the best insurance to prevent self dealing and malfeasence within our community is the pressure of peer review and self governance of our insurance pool of funds. We need to eliminate the excessive regulatory and insurance costs associated with a fund that today is viewed by our federal regulator as a bottomless slush fund that provides them with boundless authority to determine our futures as unique cooperative financial institutions.
Let credit unions take the lead in moving the nation and the entire banking environment away from this depression based design that places more and more pressure and risk on the American taxpayer.
As Ed Callahan once told us state chartered credit unions, if we’re not careful and watchful, our insurer will soon be our regulator.
Let’s at least start the discussion.