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After this week's bank failures, some encouraging signs, but worries persist

MARY LOUISE KELLY, HOST:

It has been a terrible, horrible, no good, very bad week for banks. And it all started with a classic bank run.

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NEIL CAVUTO: All right. America's 16th-largest bank has collapsed. That's the big news right now.

UNIDENTIFIED JOURNALIST #1: The FDIC just reported that California regulators shut down Silicon Valley Bank.

UNIDENTIFIED JOURNALIST #2: Many called it the backbone of Silicon Valley.

KELLY: Last Thursday, customers tried to pull $42 billion out of Silicon Valley Bank or SVB.

KAMAL KAPADIA: Thursday morning was the first time we've got an inkling that things were going belly up.

ARI SHAPIRO, HOST:

Kamal Kapadia is one of the customers who was not able to get her money out. She's the co-founder of a Bay Area startup which had millions frozen in its bank account at SVB. And she began to scramble, realizing the company needed somewhere else to put its money if they could somehow withdraw it.

KAPADIA: So I ran into Chase. They didn't have a manager available at the time. So I literally, like, stood on the corner, like, in downtown Berkeley, and I saw a Citibank. I ran there. They were not open. So then I moved - I ran to Bank of America, and they were able to open an account for me.

KELLY: By last Friday, regulators had shut SVB down, the biggest bank failure since the global financial crisis in 2008. Columbia University law professor Kate Judge says it might be the very first bank run fueled by group text.

KATE JUDGE: I mean, I think one of the lessons that we've learned is that in a high-tech environment, you're no longer going to wait for people to be physically standing outside the door of their bank demanding their money back.

SHAPIRO: Days later, another U.S. bank collapsed, and the government took the extraordinary step of saying it would backstop all depositors' losses at both banks.

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PRESIDENT JOE BIDEN: Thanks to the quick action of my administration over the past few days...

SHAPIRO: By Monday morning, President Biden was reassuring bank customers their money was safe.

(SOUNDBITE OF ARCHIVED RECORDING)

BIDEN: Your deposits will be there when you need them.

KELLY: Investors were not convinced. When the market opened, regional bank stocks took record dives.

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UNIDENTIFIED JOURNALIST #3: A business update now. Credit Suisse shares hit an all-time low...

KELLY: By midweek, European bank stocks were slipping too, brought about by a crisis of confidence in Credit Suisse.

SHAPIRO: And the unease seems far from over after this already rocky week for banks. So to help us make sense of this, let's bring in NPR political correspondent Susan Davis and chief economics correspondent Scott Horsley. Happy Friday to you both.

SUSAN DAVIS, BYLINE: Hey, Ari.

SCOTT HORSLEY, BYLINE: Good to be with you.

SHAPIRO: Well, I say happy, but, Scott, it's an uncertain time for banks. Any end in sight to this precariousness?

HORSLEY: I don't think we're out of the woods just yet. Anxiety is clearly still weighing on the stock market. Stocks were down today. But there are some encouraging signs out there. The Treasury Department's been keeping an eye on the amount of money flowing out of smaller banks for any signal of a more widespread run on deposits. And a deputy treasury secretary told CNBC this morning those withdrawals appear to have stabilized. In some cases, people are actually putting money back into those smaller and regional banks. Certainly, the government and the private sector have poured a ton of money into banks to help them cover withdrawals and put people's minds at ease. But, you know, confidence is a tricky thing. People feel confident right up until they don't. So I think we'll have to keep a close eye on this for a while longer.

SHAPIRO: Sue, there's some relevant history here 'cause Congress passed a law to prevent this from happening after the 2008 financial crisis, the Dodd-Frank law. But key parts of it were rolled back in 2018 with bipartisan support and watered-down oversight of mid-sized banks. So has there been any second-guessing on Capitol Hill this week as to whether that was the right call or if it contributed to the meltdown?

DAVIS: Well, not from the Republican who wrote the law. Mike Crapo is a Republican from Idaho, and he said very plainly this week there is no need for regulatory reform here. But Democrats like Elizabeth Warren, who opposed the 2018 law, reiterated this week that she believed that they should repeal it. But obviously, Ari, with the complications of divided government, that doesn't seem likely, not to mention the fact a lot of the Democrats that voted for it in 2018 aren't so sure it's the right answer to change it now. Tim Kaine is one of those Democrats, a Democrat from Virginia. He said he and a lot of other senators are waiting to see what the Fed's after-action review of what happened at Silicon Valley Bank says. That is expected to be done in early May. And they're going to look at that report for possibly some kind of legislative response. But lawmakers, frankly, do not see this as anywhere close to a 2008-level crisis and that the government has the tools to contain it.

SHAPIRO: Well, if repealing the 2018 law is off the table for now, is there anything else Congress might be considering that would be a response here?

DAVIS: You know, a group of bipartisan senators did send a letter to the Fed asking them to include in their review an analysis of whether letting these banks have concentrated customer bases like Silicon Valley had in the tech and startup industry, could that increase risk in how that might spark another regulatory debate? There's another discussion happening in Congress that could amount to something because there's interest from both Democrats and Republicans looking at the threshold limits for the Federal Deposit Insurance Corporation, the FDIC. Right now, those limits are at $250,000. Whether that should be increased, one Republican I talked to, Mitt Romney, said he might be open to it depending on how it's paid for because, you know, simply, depositors need to always have confidence that their money is going to be there when they need it.

SHAPIRO: Yeah.

HORSLEY: That's going to be an interesting discussion because right now, by guaranteeing all deposits at these two failed banks, the government has kind of created an expectation that big depositors elsewhere will also be protected. But no one is paying for that extra insurance. It's like asking for a new Cadillac when you've only been paying premiums on a Honda Civic. On the other hand, if a bank fails and its big depositors are not made whole, now there's going to be questions about fairness.

SHAPIRO: OK. So if legislative fixes are a heavy lift, are there steps regulators could take, Scott, to prevent problems like this going forward?

HORSLEY: Yes. I mean, in the case of Silicon Valley Bank, there were obvious red flags that either went undetected or at least uncorrected. And the Federal Reserve is looking at how it dropped the ball and what it might do differently. As Sue said, we're expecting a report from the Fed on that in about six weeks. Certainly, the people running the bank also bear responsibility for what went wrong, the most responsibility. They're already under scrutiny by regulators and the Justice Department. President Biden said today he wants to strengthen some of the existing tools for holding bankers accountable. That includes fines, clawing back proceeds of stock sales and barring those executives from working at other banks.

SHAPIRO: Sue, Washington itself could be the cause for financial uncertainty if Congress does not vote to raise the debt ceiling. Has this banking volatility rattled lawmakers around that negotiation?

DAVIS: You know, Treasury Secretary Janet Yellen certainly hopes so. She appeared this week on Capitol Hill at a Thursday hearing, and she told senators if they failed to raise the debt ceiling, it would be, in her words, completely devastating to the banking industry. Congress, being Congress, is still likely to push those negotiations to the brink, expected to occur really sometime over the summer. So far, Republicans haven't changed their position. Speaker McCarthy maintains that Republicans will not vote to increase the debt limit unless they get some kind of spending cuts in exchange for their votes. And President Biden and Janet Yellen again this week reiterated they want a clean increase, no conditions, in part to keep economic certainty and calm.

HORSLEY: And by the way, if Congress doesn't raise the debt limit in a timely manner, if we even flirt with a government default, that's going to make this week's roller coaster in the financial market look like a ride on the kiddie swings.

SHAPIRO: Not exactly something to look forward to. NPR's Scott Horsley and Susan Davis, thank you both.

HORSLEY: You're welcome.

DAVIS: You're welcome. Transcript provided by NPR, Copyright NPR.

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Susan Davis is a congressional correspondent for NPR and a co-host of the NPR Politics Podcast. She has covered Congress, elections, and national politics since 2002 for publications including USA TODAY, The Wall Street Journal, National Journal and Roll Call. She appears regularly on television and radio outlets to discuss congressional and national politics, and she is a contributor on PBS's Washington Week with Robert Costa. She is a graduate of American University in Washington, D.C., and a Philadelphia native.
Scott Horsley is NPR's Chief Economics Correspondent. He reports on ups and downs in the national economy as well as fault lines between booming and busting communities.