As more skeletons tumble out of the banking closet, former Treasury Secretary Larry Summers called for policymakers to reassure depositors and use systemic risk exemptions.
In an interview with Bloomberg on Friday, Summers stated that policy leaders should be clear and decisive so that depositors won't lose their money in large, midsize and small banks.
In the event of failures, policymakers can simply be clear that they are prepared to use systemic risk exemptions that will allow the Federal Deposit Insurance Corporation to pay off depositors, with the assurance that those funds will come from the banking industry, Summers said.
The Treasury Secretary said that they need to increase the confidence that they are providing in regulation.
Summers said the current banking crisis is not the fault of the Trump-era changes passed by Congress in 2018 and that they were ill-advised and driven by pressure from special interests. The fallout reflects problems within management at a number of financial institutions as well as major failures of the supervisory and regulatory paradigm as implemented by the Federal ReserveFederal Reserve, according to Summers.
Summers also noted that the Fed didn't do a stress test last year when interest rates were clearly on an upward trajectory.
They need to show an awareness of the duration risk. He said they needed to signal an awareness of solvency, as well as liquidity issues in the regulatory paradigm.
Is the SVB case an outlier? While acknowledging that the Silicon Valley Bank and several other banks may be outliers, such extreme examples tend to point to paradigmatic issues, Summers said.
He explained that it is important to be ahead of the curve and send clear signals of assurance with respect to bank deposits.
Summers advised that it is better to err on the side of overdoing when you're talking about protecting against bank runs than it is to err on the side of underdoing it.
Summers said there are important differences in how the terms of Swiss banks are written and how such terms are written in other parts of the continent.
He said that there's going to be a systematic rethinking of these contingent capital instruments and how they work and on what occasions they're going to be bailed in and on what occasions they're not.
Summers hopes that European authorities, with support from U.S. Treasury Secretary Janet Yellen and Fed Chair Jerome Powell, will send strong signals of support over the weekend to the European banking system.
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