Mothballing the Basel III Endgame | The Future of US Bank Regulation with Jason Cave
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The ECB is ready to do whatever it takes to preserve the euro. And believe me, it will be enough. Thank you. Let's close this f***ing door.

With the Trump Republican sweep of the presidency and Congress, there's bound to be some regulatory change for banks and non-banks alike. I'm so pleased to be joined by Jason Cabe, Senior Consultant at Potomac Global Partners, who has over three decades in bank and financial regulatory experience. He was the Deputy Director and Chief FinTech Officer at the Federal Housing Finance Authority, and prior to that, spent nearly three decades in executive roles at

at the Federal Deposit Insurance Corporation, or FDIC, including serving as senior advisement to Chairman Sheila Baer and Gruenberg. Jason, wonderful to see you. How are you doing? Welcome to Monetary Matters. You know, I'm doing great, Jack. It's good to be here. I don't feel as old as those three decades, but, you know, I'm really happy to be here. So thanks for inviting me.

It's my pleasure, Jason. How are you assessing how financial regulation is going to be over the next four years? Clearly, there's going to be, in my view, there's going to be changes there. That's pretty natural when administrations change. I would say, you know, really since the great financial crisis, you've probably seen more

change in policy with changes of administrations. When I first came to the FDIC, the independent agencies were a little slower to adjust to the changes in administrations. But, you know, I think it's also fair when you look back over a longer period of time, that's not always been the case. So I think it's fair to say that

There are a lot of stakeholders in the space, banks, lobbyists, policymakers, public that will continue to have an important voice in how financial policy is shaped in this country. So a lot of changes. We've got a new leadership in the

in the house as well with, with French Hill, who's a banker. So that's great to have somebody that is, is knows the business. So yeah, I think we will see, we'll see a lot going on in this space. I think it'll be pretty positive for banks. I particularly hope and believe it'll be positive for community banks and regional banks as a,

former regulator at FDIC. I spent a lot of time with community and smaller regional banks. They're the lifeblood of the financial system. I strongly believe it. It's an important role for large banks, but nobody quite does what smaller banks do in their particular local area. And we need to do all we can to continue to make them not just viable, but strong. We're the envy. I spent

About 20 years in different roles on the Basel Committee. And I will tell you, our banking system is the envy of the world, the diversity in what we have by having small banks, medium-sized banks, and large banks. And I think with some of the new people in key positions in Congress, I think that mandate will be continued. So I'm pretty positive on that.

So you said now there's a lot of change in banking and financial regulation, depending on who is in office. The Democrats elected, they have one agenda. The Republicans get elected, they have another agenda. You said when you first joined, it was different. Is that the case, Jason, that when you entered the bank regulation world, there was a bipartisan consensus of deregulation and of...

saying we should regulate and we should lower capital ratios. And basically, we should let the free market do its best. And that was Clinton and George H.W. Bush. Everyone was on board. Yeah. Yeah. That was the case. I mean, I was there at FDIC when they finally, you know, they slowly did away with

you know, Glass-Steagall, you know, they did it before Gramm-Leach and, you know, with some of the changes that they allowed Citi and some of the others to do, and that was under Democrats. The interesting thing, so the FDIC-

Five-member board, generally three from the winning party's side and then two from the opposition. When I first came to town, the board was split more on turf than politics. So you had two members that were also members of the same party as the chair, but they sat and ran national banks and thrifts.

Generally, the inside directors of different parties generally came to a greater consensus on what I would call some FDIC-specific issues, such as

Pricing, special authorities, anything where the FDIC was using their particular authorities and looking for a board vote or anything where the FDIC was looking to make sure their mandate was covered. The battles were really more on those lines than party. That's changed.

And the regulation that came in the wake of the great financial crisis, I think it had several consequences. And tell me if you agree with that. I think it did lower systemic risk by raising capital standards. I think also the risk weighting on certain securities increased.

became appropriate. So you could no longer have mortgage-backed securities with tons of credit risk that were very poorly underwritten and have that be at a very low risk rating would have a much higher risk rating. It also severely punished those instruments with high credit risk, very severely rewarded instruments that had low credit risk. And that's why banks bought a ton of agency mortgage-backed securities as well as treasuries that have little to no credit risk.

I think it also moved a lot of the risk taking out of the banking sector. So that's why you have very well-performing alternative investment companies have done very well over the past 15 years. And then I think maybe it's on the whole helped big banks a little bit because

you had all these new compliance regimes that is expensive. And as things scale, you know, JPMorgan can afford to pay a lot of lawyers. But if you're some small bank that has one or two branches, it's a lot harder. So do you roughly agree or disagree with anything I said? No, Jack, I wish you were there. But no, I mean, in the, I will tell you this, we spent...

The amount of, what are those things to you? I think about the Basel end game. So the end part of Basel three, the funny thing is Basel three is goes over like a decade and a half. There was the first part where it was right in the heat of things. And we went to the Basel committee and we got things figured out, you know, that, that, you know, the, the principles, Bernanke, Baer, Tarullo, you know, Dugan, they had like milliseconds to kind of come together with the most,

comprehensive part of this package. The committee in the U.S. have been spending years now on the final piece of it. So the point was there was a lot that was not perfect in that. And I think if we could go back and look at

gee, did we put the banking system on as good a footing as we'd want? I think the answer still is yes. The rules were very weak. Banks really took advantage of them to their own detriment. And we clearly had a problem that was not just capitalization, but that liquidity providers didn't have any confidence in the capitalizations. A lot of people said, well, it was a liquidity issue or a capital issue. I think the issue is you had credit-sensitive

people doing a lot of the funding that had no confidence in the solvency. So you can call it what it is, but that really was what was going on. So the committee in the US did a great job of improving the quality and quantity of capital. But when you get into the details, and I think the important one that we're still seeing is like with mortgage servicing.

That was an area we really ratcheted up both the deductions and the risk weights for banks that were in the mortgage servicing space. And the view was a lot of people said, this is it. Between this, the lawsuits that came, all the litigation. And listen, I can only speak for myself. If I could do it again, I think I would have listened a bit more to some of the people that said, this might be it for banks.

What do you mean by that, Jason Banks? Meaning that when you go back pre-crisis, banks were still the dominant players in the mortgage space, mortgage servicing and the like, whether it was Wells, B or A, go down the list in the regionals.

We really put a regime in place on that space and not just the bank regulators, but when you look at the Department of Justice with the litigation, with some of the toll, all those, the triple charges and the litigation, when you took it together, I think it made that a very unaffordable and unsustainable asset class for banks, for large banks. And so

Thus, the rise in non-banks. And I want to be careful. I think the non-banks, most of the non-bank services are doing a very good job. I think there was a lot of view of, oh, gosh, what's going to happen? I think they've performed quite well. But when you look at, were we really looking to cause that shift? I don't think so. I believe what we thought was banks will pay up

they'll be better capitalized, they'll cover this risk better. I don't think we were looking or I certainly wasn't looking

to to sort of say we need to get this out of banking. Do you see what I mean? So it was it's one of those things. And I think that's where regulators need to do a better job of really understanding the sensitivity of of some of these asset classes. What's the what's the straw, the real straw that breaks the camel's back? And is that really what we want?

Are we willing to go there or not? I think that's something that, you know, what I learned, some of the assumptions were always that these were negotiations. You start high, they complain, you get to a place everyone can live with and you move on. We started to find out not the case in every asset class and every exposure. And I think we're still kind of wrestling with the effects of that. So, Jason, what are we looking at now? You say Democrats, when they get elected, they have a certain regulatory agenda. Republicans...

When they get elected, they have a different regulatory agenda. I assume that Democrats are on the whole for stronger regulations. Republicans are more for light touch regulation. They may call it free enterprise. Tell us what is coming down the pike and what's

What are the salient issues? Where do we even begin? Is it the implementation of Basel III endgame, which I think Basel III passed in 2017, but in the US has not been implemented? What is it there? Is it the Consumer Financial Protection Bureau? Is it the Treasury, the OCC? What matters and why? I think there's a few things. I mean, there are some of the big issues and I've seen some things floated and

I'd rather not get into whether we merge all the agencies, some good friends. I would say there have been some good pieces. A fellow, Alan Pawlowski, who I worked with at FDIC, who's now an investor, he's with the

uh, flag star people on that board, Alan and I worked together and, uh, at FDIC, he put out a pretty good piece. It's on LinkedIn. Uh, I thought it was very thoughtful on some of the different aspects of what you could do, uh, with the different agencies. I'm not endorsing. I would just say it's a, it's a good read, but you know, Jill Satina, others have, have as well, you know, I think there's clearly issues that can be done, but I'm going to focus more on the policy things. Um,

I think Basel III has gotten a lot of airtime. And I would tell you, Jack, that that piece of Basel III, that was really meant when the U.S. was working in Basel, that was really meant to put the European banks on similar footing to the U.S. banks. Tell us what you mean by that, Jason. So what I mean is the main part of the final Basel work

was meant to put in place a good, solid risk weight floor against internal models, not to geek out too much. But we put in this thing years ago that allowed banks pretty much to set their own capital requirements. Well, you do that, you give people an incentive to say, you know,

Yeah, I know I got to put 50% risk weight for mortgages under the standard rules, but I got a pretty good experience here. So my number is 8%. And so we in the US were like,

That's pretty low. And we had some concerns with it. So in the great financial crisis going back, there was this thing called the Collins Amendment that pretty much took any benefit of using the internal models off the table and said, you know what? The floor here is 100 percent. In other words, it's the same as standardized.

What we realized was that was a big competitive inequity for our banks because Europe was allowing their large banks to come up with mortgage risk weights, 5%. So that was a big deal. So the main thing we were really doing to fix the final chapter on Basel III was to come up with a floor that really kind of made the Deutsche banks and the big Swiss banks have actually some capital. That was really it.

What happened was Silicon Valley hits, and then we start picking on these other little things here and there. And I really feel that it's almost taken too much of the oxygen out. It's gotten small banks concerned that we would then start to bring these standards and impact them. That was never the point. So I feel that post-SVB,

I think mistakes were made. We could have done things, the US could have done things much simpler. This really SVB in my mind as a former supervisor, when I made a supervisor and examiner in the field, this was an interest rate risk issue. And you could deal with this very simply. You tell examiners, when you see banks that have unrealized losses that dwarf their capital,

You put in constraints immediately to have them work through that portfolio and adjust and structure. And if they don't, you fire people. That's really, really what it is.

It's not, let's take Basel III, gold plate mortgage risk weights, do all of this. And, you know, again, I think this issue with the available for sale, that was a very tricky issue. We, you know, what to do with losses on securities, it's always been tricky. And, you know, I think that

The Fed and the FDIC and OCC could have taken a much more surgical approach, and they didn't do that. And I think now they're suffering for it. And now we have something that's taken up so much oxygen. And I'll tell you, Jack, the issue with SVB was uninsured deposits. And yet nobody's done anything on that.

That was the issue. You had 40 billion leaving SVB in a day with the next day they stayed open 100 billion. That was we were dealing in the financial crisis with numbers like 15 billion over a few days with WAMU and some of these things. So this this was like nothing you'd ever seen.

And what concerns me now as a private citizen is the things that have come out of the FDIC, broker deposit rules, has absolutely nothing to do with what happened at SVB. Nothing to do with it. So I feel that what happened was we grabbed a few things that we didn't like that may be changed in the Trump one administration. And we said, well, there's our chance to get things back. And they didn't really diagnose the issue.

I hope that that gets, my sense is that will get fixed and we will come up with something that's more appropriate because, you know, I'm going on a bit, but what really, you know, I think with these agencies, especially the FDIC, when the small banks join up with the big banks on things like Basel III, they got an issue because that never was the case. Small banks realize that

Having higher capital for big banks, that was okay. In fact, that's probably how things should go. Something has changed so that now small banks realize it's coming down to our shores at some point. And Republicans or Democrats, I go back to, again, the resiliency and sustainability of community banking. These agencies need to get a hold of that and show these institutions good faith. That's not the case.

And I think there's just been a lot, whether it's the fintech issues, whether it's Basel III, whether it's broker deposits. I think that the regulators have, whether they've done it on purpose or inadvertently, they've given a lot of passes to larger, the SIFIs.

possibly at the detriment of the smaller guys, like the broker deposit regime. That really, that could have been, I don't, my sense is, I don't think that's got much legs of getting finalized.

That really would have hurt the smaller and regional banks. Larger banks don't care about that rule. They would have picked up, again, cheaper funding, better funding at the detriment to other guys. I just think those policies are not helpful for the wonderful, vibrant, diverse financial system we have.

So there's two types of capital ratios. There's risk weighted and non-risk weighted. So if you own a bunch of risky stuff, you have to hold more capital against it. But you hold supposedly riskless or low risk securities like treasury securities. You don't have to hold as much capital against it. And I believe the risk rate for treasuries is literally zero. So you're saying Basel III is going to impose, I think that's what you're referring to when you talk about a risk floor, a risk.

supplementary leverage ratio or a total leverage ratio that does not, you're not going to let these Europeans get away with, oh, our mortgages are incredibly low risk because we XYZ reason. Yeah. Two parts. And it does get in the weeds. So the supplementary leverage ratio, that for the most part has been decided. It's the risk weight floor. What I mean that you have for risk weights on mortgages,

large U.S. banks pretty much are locked in at whatever the standardized approach is. So let's keep it simple. Say it's 50% in the U.S.,

JP Morgan cannot go and look and say, my default history is such that the real risk weight for that mortgage shouldn't be 50, should be 12. Doesn't matter. Under the Collins Amendment, just to simplify things, and somebody's going to tell me I've got it wrong. I'm keeping it simple. Under the law of the land in the U.S., doesn't matter what your model says. The answer is 50. Europe right now is 50.

If they did run the model, they say the number ought to be a 2% risk weight, not 50. That Deutsche and the big Swiss guys and everybody else can go with the 2%. So again, they would have a huge advantage.

Huge advantage in those markets. What the Basel Committee said is we're going to come up with a general risk weight floor, not as high as 100% the U.S. has, but we came up with what was a wonderful compromise, 72.5. So again, wasn't the full 100%, but again, it put in a much more substantive number

So, it was really all done on the risk weight side, not the supplemental leverage. Clearly, the supplemental leverage ratio was also done to put some leveling there with the US banks. But again, this was belt and suspenders. And a lot of people said too, you don't need to do this. The Europeans said, you already got us on the leverage ratio. And my view is,

If they're saying we don't need to do it, we already got it. We probably needed to do it because they found a way around it, quite honestly. So which is one of the things and just on that point, you know, there's a lot of people are sort of saying maybe the U.S. will just scrap Basel III. Maybe they'll just, you know, do do whatever. I don't know, because the the issue is, is if you if the U.S. backs away totally from Basel III. And again, I have no idea what's going to happen, but if they do that.

The Europeans then will also back away. So what do you have? You have a town in Switzerland. That's what you have. I mean, exactly. But what you could end up having is if you don't change the U.S. law, the Collins Amendment, you then have a situation where the U.S. banks, the largest, are still subject to a high floor. Europe then also says, well, if U.S. isn't doing Basel III, we're not. And then we're right back to things. So it'll be interesting to see how it all gets played out.

So you're talking about a risk floor of risk weighted assets. So you're not going to allow internal based models to deviate materially below what the risk based model should be. So you said mortgage weights at 50%. That to me sounds pretty high. I mean, it sounds appropriate in a 2007, 2008 world, definitely. But in a world now where mortgage delinquencies are very, very low, yeah.

That does sound high to me, but I'm, you know, Jason, I don't really know that much about the regulatory world, but I, you know, because of, I'm a journalist and the Silicon Valley bank, I've looked at a lot of like bank balance sheets and there's so much agency mortgage backed securities, which I believe the risk rate is 20% and relative to actual mortgages, whole loan mortgages. So that makes sense. Banks are penalized, uh,

for holding hold loan mortgages, they are rewarded for owning agency mortgage-backed securities, which are guaranteed by Fannie Mae, Freddie Mac, Jenny Mae. And so that's what they do. And what if Silicon Valley Bank owned tons of agency mortgage-backed securities and treasuries, but mainly agency mortgage-backed securities, which have very little or basically no credit risk, but tons of interest rate risk and convexity risk? Jason, at your time at Basel, how much did interest rates

risk come up. The nerdy word IRBDB, like interest rate in the banking book, because from what I've seen, people just refer to that as market risk. So all of this regulation after the great financial crisis, there's tons of credit risk that shouldn't have been taken, but interest rate risk did fine because interest rate went down. So banks actually made money. So looking back, you'd say, we're not worried about interest rate risk, we're worried about credit risk. It appears that all the regulations have taken up

credit risk and not interest rate risk. And probably, you know, everyone who has been working has been, you know, working, you know, unless they are, you know, quite up there in age, they've been working at a time of declining interest rates over the past four years. And, you know, you talked about how Silicon Valley Bank, it should have been the examiner say, you should got to sell these securities. Why do you favor that approach as opposed to having certain regulations on, you

how much interest rate risks banks can take. And rather than say a 20% risk weight, it depends on what the duration is. If you have a thousand year bond, that should have a higher risk weight than a one year treasury bill or something like that. Wonderful. Great question. And it'll sound cavalier. The reason why I prefer a supervisory approach

It's because over my 20 years doing Basel work, interest rate risk in the banking book has come up often. And if you saw some of the complicated calculations and approaches that the Basel committee wanted to sort of mandate on the U.S. to do, you would also say there's got to be another way. So it's and right now, I think some of our European colleagues are

They're sort of, they're chuckling a bit because this has always been a challenge where Europe kind of put together what I call more of a pillar one regime for interest rate risk in the banking book. And the U.S. has always fought back and said, well, we're going to handle this with our supervisors. We're not going to mandate this. Capital credit risk is one thing, all that weirdness. So it's been a long process.

held U.S. position that we are not going to subject our institutions to a Basel-style capital requirement for interest rate risk in the banking book. Now, some people could say, well, how good did that work for you? Our view was we have supervisors for that. So there is a little bit of...

Shall we say what happened there? You know, I think the Europeans are sort of saying, you know, if you had you said you had supervisors there. So what what happened at Silicon Valley and some of these others? So while I think that's a fair criticism, I would not subscribe to your supervisory approach didn't do well. So now let's go back to the table with a pillar one. I think it's very difficult to put in place.

And I would rather the U.S. say, we need to fix our supervisory approach. And I actually do not think it's that difficult to do. I think it's given supervisors more authority in the field.

I think it's shortening the lead time for these matters requiring attention. It's getting away from putting 600 matters requiring attention, have like four and say, like, if you don't do it, you're fired. That's how we did it in the old days. I don't know what a matter requiring attention and one that requires immediate. But let me tell you.

All we've done is let consultants also get very rich with coming up with all of these timelines and all of that. The institutions step back and it's like running a train station rather than we have four things. If we don't get fixed, we'll kill us. And if you don't get it fixed, the regulators are going to have you fired. That's what we need to go back to. And I also know that's not easy, but I'll tell you, Jack,

It's a lot easier to do that than go to Basel with our tail between the legs and say, okay, let's come up with this unbelievably complicated approach for pillar one in the banking book. I guess a few things that are salient for the

regulatory agenda are, you mentioned broker deposits, fintech issues, and systemically important financial institutions, SIPI. Let's talk about broker deposits and fintech issues, which are related. Broker deposits is, you know, a crude explanation I'm going to offer is banks need deposits and they get them from a service that gets the depositors. So they're basically renting deposits rather than having a direct relationship

with clients. So what is the broker deposit rule? Why do you think that you said it had very little to do with Silicon Valley Bay? And then also, what are these fintech issues? Which also, I think, plays into banking as a service, B-A-A-S regulation. Yeah, it does. I'll try to encapsulate it. I mean, the broker deposit rules have been around for over 30 years.

And they go back to a time when banks would call a broker on the phone and say, we need 20 million, 1 billion of funding. Can you get it? And somebody would deliver a broker, whether it's Merrill Lynch or somebody else would get their customers over to that bank. And everything was good until the bank started to, a lot of times these were also large deposits. So some of them were uninsured.

And everything was good until the bank either lowered the rate or started to get in trouble. That money was the first to go. It precipitated a lot of bank failures. And so Congress put in one of the FDICIA statutes, Statute 29, gave the FDIC a whole lot of authorities to restrict banks' ability to continue those types of funding arrangements when they got in trouble, restrict the rate paid, restrict a whole lot of things. It became a...

Scarlet, you know, A, you know, this was a dirty word. So if you had a lot of broker deposits too, your regulators treated you tougher. And it was one of those things. It was, we're not saying you can't do it, but you better not have a lot of it. And so that's how it has been treated. Again, and I think it's important to have, I think it's one of the most powerful tools the FDIC has ever

to protect its franchise, to do what it needs to do. So I think the statute is important. What is my concern? I think it's a concern that a lot of people raised when they saw the FDIC proposal. A couple of things. One is the definition, the FDIC expanded what's considered a broker deposit. So it's a very potent statute and regulation. So you have to be very careful what you put in that box.

So the FDIC has gone back and forth, you know, with what goes in that box. And, you know, in 2020, you know, Yelena McWilliams relaxed certain aspects of the definition. You know, she saw that, you know, if we're going to make financial innovation more vibrant for smaller banks,

There's a lot of business that they could be doing or that they're doing and that they're constrained in doing, working with fintechs who are bringing money in because money comes in from customers in different ways than it did 30 years ago. So she was seeing the fact that, look, a lot of people have their banking relationships with the fintech and the fintech connects with the bank, gets the banking services and all that.

The problem with that is under the definition of broker deposits, that's a broker deposit because anytime there's a third party, anytime there's a third party, it's all of a sudden a broker deposit and the tough rules come in place. So that he kind of, um,

relaxed some of that, not totally, but gave some room to a lot of those relationships so they wouldn't be brokered. Marty Grunberg at the time put a very spirited dissent on that as a member of the board, but not chair. And what happened really in its simplest sense in July of this year, he pretty much brought the rule back to where it was before Yelena had softened it. Without a whole lot of...

analysis and the like, it really just said that that's really how it ought to be. And so my concern with broker deposits, again, is I think the statute is important. I think it would be good for

Congress and the new team to look at certain aspects of it. I think this view of anytime a third party is involved, it's brokered and it's a problem. I think that's outdated. I think there's a lot of these services where you bring in this intermediary, it actually helps balance funding. It helps meet people's needs. I think it's an outdated approach, but that's a statutory issue. Regulator can't just say we're going to change that aspect of it.

But, you know, I think that and the other issue is most of these broken deposits are all under the insurance limits. Right. The issue with SVB was an uninsured deposit issue.

What we saw at that small bank recently where the FDIC, the first bank of Lindsay, it's uninsured. It was an uninsured issue at first for all these banks. That's the issue. It's not the broker issue. It's that people are not sure what the FDIC is going to do. Do I get a bailout or not?

So the broker deposit rule did very little to address that issue. So the thing that actually the FDIC put out that I think actually has promise is they also put out an RFI at the same meeting where they put out the broker deposit rule. They said, we don't know a whole lot about uninsured deposit behavior. We're not getting a lot of information. They put out an RFI on it, which was interesting to do at the same meeting that they put down the hammer on broker deposits.

That RFI, I think the FDIC should continue to see if how they can improve what they capture by way of data, how they monitor uninsured, how they're talking with market participants. Because I will tell you as an FDIC person, we got very little information on uninsured deposits. And you think about as an insurance company, you would think that's something we'd have a lot of. We had scant data on not just...

the balances, but really how those behaved, what they were being used for, was an area that was really a blind spot. So I really think the FDIC ought to get smarter in that area, not kind of coming up with some of these other rules that really don't address the issue. The FDIC insurance limit is $250,000. So if you had $240,000 and

and the bank goes under, the FDIC will make you whole. If you have $250,000, they'll make you whole up to $250,000, and then the rest of the $10,000 is your risk. Do you think that basically the cap on that level of limit should be raised? Because I know the last time it was raised was from $100,000 to $250,000 in 2010. And I'm looking at...

The amount of deposits in the banking sector was about $7 to $8 trillion, and now it's $17 to $18 trillion. So it's more than doubled. Why not take it up to $500,000 or even a million? You're right. They went up during the great financial crisis up to $250. They had been at $100 for a while. Looking at whether those limits need to go up,

based on inflation, based on certain considerations, I think makes sense. I think that that's totally appropriate. I think it's also important to look at what private market solutions are out there.

There are companies that offer these things called reciprocal deposits. I work with one of them. And there's Intrify and R&T and Stonecastle, a lot of these places that have been around for a while that allow banks and their customers ways to be able to maintain the full benefits of deposit insurance by parceling out money amongst other banks in a network. And so it's

That addresses some of the, what I'd call a lot of the uninsured deposit risk. But there's still, and I think that those are things I would hope the new team looks at to say, are we giving enough credit for the value of those programs? I hope that's something that's looked at because I think they have performed pretty well post-crisis. There's been some Fed studies done.

on banks that had reciprocals and did that provide them more of a runway? Some of the large regional ones, the answer was yes. So I think that I hope people look at those programs. But that doesn't mean that looking at the 250 and increasing it a bit makes sense. What I got a little concerned about, Jack, is you had Rohit Chopra saying, well, the FDIC

They've haircutted banks at this uninsured depositors at First Bank of Lindsay recently. That's not fair because they didn't do it at Silicon Valley. And what concerns me is the answer is, so we should just cover, the FDIC should cover everybody. Or we should go raise the limits across the board, or in some cases, go back to some of our crisis programs and have unlimited deposit insurance coverage. And again, look, leave this to policymakers.

I worked on some of those programs during the crisis and they helped, but that's a cost to the government. That's all of a sudden, the whole point of deposit insurance was you're supposed to have limits, you're supposed to see some market discipline. And especially when we have these private market solutions, I think that I would hope that people look at this in totality and don't just go and say,

Well, that's not fair. The FDIC sometimes covers the big banks and not the small banks. So let's cover everybody. I think there's hopefully some other alternatives that get considered in that space. You said previously, Jason, that the FDIC didn't have a great look into

the level of uninsured deposits. Tell us more about that because I know just right now from Silicon Valley Bank to First Republic Bank, they disclosed to investors their percentage of uninsured deposits. Was there a time where that was not even disclosed to the FDIC, something that is now disclosed to the investing public and the public?

Or was it more granular information that you wanted to get and you just couldn't get it? It's really, and I don't even know so much of it's we couldn't get it. I don't know if we were asking for it. But I think the real issue is that number is a real ballpark estimate that gets, and we get it as well. So the good news is, yeah, we get the number as well. My concern is it's a ballpark number. It does not,

get into any sort of detail on the type, whether there's mitigants. And for a lot of institutions, I'm not saying for all institutions, I think that the FDIC, I also think the investors probably should get a better number too, because if you throw out a number, and I could tell you right now, if you look at regional banks and you look at the number, you'd be shocked at how high that ratio is. The reality is the number is not that high.

When you really get into the details on how some of the structures are and other mitigants and the like, the number is not that high. So it sends a, you know, when you're having all of a sudden an issue and you pull up somebody's, I'm not going to mention a name, but you pull up a regional bank and you look at the number and you're like, oh my God, they're uninsured deposit ratio is 70%. We got a problem. That's not a good sign. I mean, that's not a good, that's not a good signal. If the number is really say closer to 30%, you haven't done anybody any good. So,

I think the FDIC and the industry kind of got comfortable with this ballpark approach. And I think that they probably want to spend some time saying, let's get something that's a little more granular. And then for the FDIC, you know,

to use all of the data, because the FDIC has so much data, to really then be able to cut it? How much are we dealing with that are real local businesses and payroll versus somebody that just dropped a whole lot of money in? There's got to be ways to be able to cut it, operational accounts, other things, so that the FDIC starts to get a sense, as an insurance company should, really, what's the risk here? Because that uninsured is the protection for the fund.

And so uninsureds work two ways. They also can start the stampede. And also they serve those two purposes. They also serve to share losses alongside the FDIC. So that's a very valuable, potent set of funding there. And the FDIC should be all over that. I mean, they should make that a key priority of knowing

as much as they can about that for those two reasons. Everything's fine with uninsureds till it's not. They precipitate potentially a large-scale mass exodus, which puts the FDIC in a situation of having to find a buyer quicker.

And that's the money, every dollar that leaves is one less dollar that takes losses alongside the FDIC. When you think about it like that, you would say the FDIC should almost have a whole department that just looks at uninsured deposits and has a good read into it. And they don't. They need to have better visibility there. So you're saying that when a bank reports its uninsured deposit percentage,

It is unlikely that the actual percentage is higher and it's much more likely that it's lower. So you said something like if it says it's 75% and it's actually 30, tell us why. And you said you didn't feel comfortable naming a bank. I'll name a bank that does not exist anymore. Silicon Valley Bank, 151 billion of uninsured deposits of 173 billion in deposits. So that's an 87% uninsured deposit ratio. Are you saying that it actually was lower than that? Yeah.

I'm saying in general, what we have found at the FDA or what the FDA say, not we, I'm not there anymore, is that at the point of which they closed the bank,

And they actually can look at, you know, they've got the actual records of what the real ledger shows based on, you know, did some of those uninsureds, did they participate in reciprocal programs or did they have compensating balances? There's all these different things. But when you actually get into the weeds, the number is much lower of what was uninsured. There's also some shifting that happens as well as a bank gets into trouble.

The problem with it is, and again, the FDIC has to be very careful here. There's a burden issue. You know, at the point of failure, the FDIC has truth. They have exactly how accounts at the most micro level have been set up and recorded.

It's not an easy thing every quarter for a CFO to go through when they're doing a million other things to do that, unfortunately. Maybe with blockchain, maybe with some of these other, you know, maybe we should, Jack, maybe we should be at a point where it is. And the answer is if you could do it on failure day, you should be able to do it. I'll save that for another discussion.

But I can tell you we're not there. And so the FDIC reasonably has to straddle those two worlds of saying,

How do we get something that's kind of close that doesn't make some CFO have to go through thousands of records every quarter or whatever? And again, now I'm thinking about it. Maybe the FDIC should figure out with all the tech and blockchain and everything, maybe that shouldn't be as difficult as it is today. I'm just telling you that it is. I'm imagining a reason, Jason, that the more runnable deposits are the ones that are uninsured. So a bank that has an uninsured

deposit ratio, you know, when the quarterly letter is filed, of

quarterly report SEC filing is filed is 75%. But then the uninsured deposit money leaves. And then when the FDIC takes over, then the ratio is lower because the uninsured deposits have left. That's clearly part of it. And I don't want to, so right. So that's a, you're exactly right. There is that aspect of, and also not only leaving, but do those people start to say, I want to understand more of my options to get my money in. So you're right. That's clearly a factor.

But there's also a factor that the bank is not going through the fact that some of that money has already been put in some structures that are insured. It's one of those things, it's a burden to capture some of that. Should it be? That's a different question. Should we be having systems that are much more real time and flow through? I

I could tell you that's a tricky discussion, but, but to your point, there is definitely some of that, but there's also just the fact that we, we kind of do have in a lot of these cases, two sets of, of records, which I don't want to get into that too much. That's a whole synapse issue that, that people have been dealing with, but you know, this issue of,

Getting the true reconciliation that everyone's looking at at the exact same time, that's something that maybe this new team with the focus on innovation again, you might want to sort of take up that issue because that's not where we're at today. There's still some significant lead times and gaps there in the data. Yeah.

So you mentioned Synapse as banking as a service. I want to suspend that for a moment just to zoom out. So broadly speaking, like the statement that under the new regulatory regime, your banks will do well and that regular commercial banks will do very well.

Better than they have over the past few years in terms of from a pure regulatory regime. Do you agree with that statement? Yes. Okay. And can you name the top three reasons or several reasons and rank them as to why? Like what's the number one reason? Is it because the Basel III endgame is dead? I think the Basel III endgame is at least in mothballs and will come back, I think, as much more of a scaled down version. But I also think that you're going to see leadership change.

That is going to make sure that what's done for community and regional banks is not harmful. I think you're going to see that some of the, whether it's corporate governance, some of the standards that were going to be put down on smaller banks, I think some of that burden will be relieved. I think the big one is going to be on M&A activity. I think you will see

a much more robust merger and acquisition environment. And that's good for banks that are smaller that, you know, you really what's what's in with the U.S., you really start to look at it. It is it is a very interesting system. You have a lot of banks under a billion dollars and then you have a lot of banks that are family owned where this is like they're, you know, the exit is their retirement, you know.

And right now, it's pretty hard to be able to do that. I mean, even for a domestic, easy domestic deals, the lead time to approve some of these sometimes is six months to a year. A lot of people are just like, forget about it. So that's clearly already starting to change. I think that's going to continue to change. That's going to be a big one. I think a more...

open M&A environment. I think that is going to really help. So banks can take over other banks and get bigger. How much of that is approved by the Federal Trade Commission? Like I know if Exxon Mobil wants to buy another oil company, it's the Federal Trade Commission that has to approve it. So the good news is there's no FTC. So there's a special exemption for banks and in this space. So they don't get involved at all. Really, DOJ

There's a Herfindahl index thing, but there's not too much. So it really rests with the bank regulars. It gets very complicated. Who? So when there's a holding company generally at play, which there generally is, the Fed generally has the final on those, but there is...

coordination with the FDIC and the OCC. It gets very complicated, but the FDIC also has to sign off on certain aspects of these things. So what buyers and sellers deal with is just that issue of who do we deal with? And the answer is generally, you're probably dealing with two regulators at a minimum.

And they might have a very different approach, focus and the like. And so the process gets very complicated, especially at the FDIC when then you also have the CFPB on our board and they might get interested. So it becomes a very long back and forth. This has been going on for a while. And so

I'm already, you know, Travis Hill, who I believe will be the acting chair when Marty resigns, you know, he was already challenging staff to speed up the application times. You know, in other words, you have applications that sometimes sit at the FDIC for over a year or two.

And it's not that they say no, they just say, well, we need more information. And so, you know, he's raised the issue that we need to be more responsive. Doesn't mean we have to say yes on everything, but if we don't like it, say no or be clear what we need. And so, you know, we're already seeing that from Travis as vice chair. And I think clearly if he assumes the the acting chairmanship, which I believe he will.

I think you'll see more of that. And that's going to be good for the industry. Look, I'm not a big fan of big banks getting terribly bigger, but I think that you have a lot of institutions that, again, for their viability in their communities, a billion dollar or a $5 billion bank merging up with another, I think it's going to make good scale sense. And if we don't,

We don't allow it. I just don't know what happens to some of those institutions. So I think this policy of, you know, we don't want Citi getting, you know, even bigger. And so that also means we have a policy where we don't want to get the community banks or even some of these regional banks bigger. Doesn't make a lot of sense. Doesn't make a lot of sense. It doesn't make any sense, quite honestly. I actually think it goes, I think it actually is counter to what

is probably good policy because it puts those smaller institutions in a real vulnerable position. So you oppose big banks getting bigger. Sorry, do you also oppose regional banks, let's say $50 billion in deposits, merging? One thing, too, because I don't oppose...

I'm just a private citizen. There's a little consulting here. I mean, I don't even oppose big banks getting moved. Sometimes, you know what? Big banks have to get bigger because they're the only ones that could take somebody...

on. I think we need to be very careful as we take some of our, the regulators take strongly held views of, we don't need bigger banks to get bigger to take that down and scale it all the way. And even with regional banks. And I would say my former boss, Sheila Baer, I agree with some of the points that she has made where she's like, even some of these larger regional deals, why are we stopping them? Having some regional banks

be able to compete with some of the larger banks is probably a good thing. And so she's on record on saying that. And I think that also makes some sense. So I think people need to sort of really scale these policies and again, really get a sense, what are we looking to create at the end with this? We could say,

Regulators, like they said, we don't want any mergers of banks over 50 billion. I mean, so what does that mean? So we're going to have a handful of the megas. We've got a bunch of these 20 to $50 billion regionals that need scale.

that aren't going to get investment dollars. So like, what are we doing to the, or do we think that it's important to have a vibrant regional bank market? Most of my career, we did. Most of my career, we said, regional banks are a real sweet spot. They provide a key lending to not just small communities, but the states, the businesses that they do. So, you know,

There was a view. And as you notice, there's not a whole lot of those in that space. So, you know, letting some mergers in that space so that they can actually stay around for longer rather getting rather than, you know, don't let them double, have them sit on the ropes, let them get weak. Then when they get in trouble, guess what?

The merger that they were going to do can't do that anymore. They're weak. Guess what? We got to call one of the big guys to do it. And that's kind of like what Sheila's saying. Like, is that really where we want to be? So I think, you know, some of these, the policy on regional banks, I think is going to probably shift back to being somewhat more accommodating. And I think that's good. I don't think that hurts small banks.

I think a policy that says we're not going to allow anything over 50 billion to do it, I don't think it's just good for the system. But I think and I'm hopeful that we're going to have a more rational approach there. The new administration is more friendly to mergers and acquisitions. The agencies are the FDIC, the OCC and the Federal Reserve. Tell us about who

You know, how will the new people be appointed and when are they due to be? I mean, the Trump's first day in office. Are these people new going to be appointed? I mean, you mentioned Travis Hill, who's the vice chairman of the FDIC board of directors. The current head is this Martin Grunberg, who has said he will resign, but he's waiting for a successor. Right. I follow some of this, but I think Marty has said that he's going to resign regardless on Tuesday.

January 19th or 20th. That's the new line. So that's what I mean. Travis will likely succeed because as vice chairman, it gets very complicated. Boards versus agency heads. So how it's done at the FDIC and SEC and CFTC versus FHFA, CFPB and OCC are very different because with board structures, there is an order of succession.

especially at the FDIC, where it's clear that when the chairman vacates and there's nobody nominated, there's nobody that has been Senate approved to replace that, the vice chairman steps in. That's happened many times. When I came on board, a chairman, very tragic, Bill Taylor was chairman of the FDIC. He died during an operation. So it was not expected. And so the vice chairman, Skip Hove, stepped in. So this is

This is how that goes at the FDIC. And so Travis would, again, likely take over if there's not a confirmed person, which there's not going to be. And if Marty does leave, and I would expect he would since he said he was going to, Travis would assume the position. He'd be acting chair. He'd have all the authorities as a chair.

And then, you know, depending on the confirmation cycle and that gets very complicated, you know, who knows how that goes, how they will set all that up. But until they get a permanent person through, which could be him, could be Travis, they could say, you know, you're good. But in the meantime, he would be the chairman. He'd be on the he'd be on the FSOC, be a voting member on the FSOC.

You know, there's one of the things with Mike Sue. Mike Sue's been acting comptroller, right? Of the OCC, yep.

He vote on the FDIC board in FSOC. Wow. But that's that's how it goes. That that's how it that's that's how it goes. And so a Republican, if they do a vacancy, you know, because, again, they don't have the same orders of succession, but they have vacancy act. And I'm not a lawyer, but I'm just saying they can get somebody in acting comptroller while they wait. And that person will also have the same powers that Mike had. Same with the CFPB.

So so again, I think you will have a very different FDIC board, you know, January 20th, even even though the permanents might not even be named or clearly nominated by then. You will still have a I believe a very different FDIC board in a month.

And what about the Federal Reserve? The current vice chair of supervision is Michael Barr. But I also understand that regional Federal Reserve branches have their own regulatory authority. Will the new administration get new people in there or does it depend on when their terms expire? I'm less of an expert of the Fed and how all that works. But you're right. They have regional bank presidents.

It's a different structure, voted differently, different terms. Usually that's not much happens there as those people either resign, retire, terms are up. They get replaced. They generally, the Federal Reserve Board will have a role in who those people are, but they're not the final sign off. I think what's more interesting, what happens with Michael Barr. I don't know enough about the statute on that. I've heard a lot of different things.

of, you know, clearly he has a board term. He has appointed for two things as a board fed board member for what is it, 14 years. And in addition, a separate appointment as the vice chair of supervision for whatever it was at four or five years. So those are, those were, you know, those are very separate, just like with Jay Powell. So,

You know, I think the issue is, well, you could still be a board chair. The question really is, does the president have the authority to remove him? And I don't I don't know enough about how that goes over there. So I'd rather not get into that.

So it seems like you're quite confident that there will be a new regime that's much more friendly to bank mergers and acquisitions. Tell us, where do you get that confidence if a lot of the approval is done by the Federal Reserve and the Federal Reserve people are going to be the same people? Put it this way. FDIC puts on their website all the applications that are pending. And if you look at mergers and acquisitions, like I said, while the Fed has a role, it's

The FDIC has a key role too. And I think you'll find probably that often who the holdup is, is the FDIC. Fed, and I'm getting into going a little bit over my skis because I don't get into Fed district authorities, but I think you'll also see

And for a lot of the MNAs I'm talking about, the under 50 billion, the under 10 billion, a lot of that's done under delegated authority to the regional feds. They move pretty quick. It's not the case at the FDIC. It goes to the FDIC board. So I hear you. If there's not much change at the fed and they have a key role, I think when you really dig into it, you know,

Politics don't get into so much of it at the district level, at the Fed. These things, they just kind of do their thing. So I think you get the FDIC where I think you'll see the pile of applications that have been sitting out there for a while. And if you take care of that, things start moving.

Okay. So you're saying that the source of your confidence that it'll be a more friendly M&A environment is that more often than not, it is the FDIC, not the Federal Reserve. That is the holdup. And obviously that's where your expertise is. So you say there will be a new board. How hierarchical is the FDIC in terms of like, let's say all of the new people in charge on the board are very M&A friendly, but is it the case that, you know,

If there's some merger proposal in Alaska that the regional FDIC can just resist the use of the new M&A-friendly FDIC board, or can they quickly effectuate that change and make it very regulatory-friendly for all banks in the U.S.?

Yeah, I mean, look, I think that the and the and the people like whether it's Travis Hill, who I've known for years, I mean, these are reasonable people. You have reasonable people in the regional office. You know what? Really, I think people will be looking for is some clarity. What's our what's our key priorities here? And and once the Washington team sets the priorities, what I have generally found is is.

is if those priorities are clear. And one of the other sets of people that are very important to these agencies, Jack, are the heads of divisions that sit in Washington that sometimes are the key layer between the regional people that have to do a lot and what the board and particularly the FDIC chairman is expecting.

And so those people, the heads of the divisions of supervision and other places, those are very important positions. And I think, you know, it'll be important for, you know, speaking for the FDIC, whoever is in that position, that they have a good respect and are, you know, on board with the program, that they advise the FDIC chair properly.

in their role, but that at the end of the day, when the FDIC chair makes a decision, that they execute it. And if they don't, they'll probably have some changes. And that's totally appropriate. That's how it should be. You know, at the end of the day, you know, the FDIC chair and the board is accountable and responsible. And I think what you've had

Over the past four years is exactly what I said. I think you had an FDIC chair that was not big on M&A and all of that. And I think you had that view go through the organization. And I think what you have is, again, I'm not saying that all the safeguards are off, but it's like, why are we holding up a small bank deal for two years? What's the issue?

You know, that doesn't mean Travis is going to say I want it approved. But I think what you will see more of is I want to know why we're spending that much time on a two billion dollar deal. And and, you know, and and I want to know if we're spending more than six months on these. I want you to come to the board and explain why.

Some people might say, oh, that's them saying that we got to approve everything. That's not it. But it is. It's greater accountability on some of those things. I think you're going to see more of that. Is there a difference in the FDIC's mind between a bank buying another bank and a private equity consortium or a group of private investors buying a bank? Let me put it this way. Traditionally, the FDIC has favored...

especially with failed banks, keeping things in the family, so to speak, keeping things in the banking system. And so if you look at receivership, bidder requirements and qualifications and the like, you definitely step away from it saying that it's pretty clear that they're looking for companies that are already established as banks showing up.

What we had in the financial crisis was a situation of, you got to be very careful here because the FDIC, you got a few things going on here. We might want to keep things in banks, but if we are reducing the number of people that can show up, well, I'm not an economist, but I did my basic studies. It's like if all of a sudden, if you've got less people that are bidding, what's that do to prices?

And so, you know, you can limit it to banks, but are you going to get the best, you're going to get the best price for a bank or are you going to have people show up? And so what you had was in the financial crisis, you had some of these consortiums and PEs and some of them were very successful. Like with IndyMac, you had the Steven Mnuchin, you know, consortium, you had Bank United, Wilbur Ross and those guys. And so, you know, part of that was,

because there weren't a lot of banks that at that time had the balance sheet to be able to do those deals. So look, I mean, the FDIC has to be very careful to turn people away. Now, what happened was some people at the FDIC board and other people sort of said, what's going on? These people are getting rich off the FDIC. Look at this. They do a deal. Their stock doubles. That's bad. Well,

Not so, I'm not sure it's bad. You know, when you look into it and say, well, what was the FTSU's alternative? Writing checks? You know, doing a liquidation? I don't think so. I think FTSU would have taken some big hits there. So it's an interesting relationship. But you saw

was that there was a policy statement that really made it tough for private equity and consortiums to be able to come up with a winning bid. So that's been very controversial. And was that a recent policy statement? No, this came out in 09. After a couple of the consortium deals, some people said, wait a second. And so the policy statement put some

I don't want to call them poison pills, but it puts some things that when you talk to private equity and consortiums that made it tough to show up. And that you saw that play out in the recent crisis where, you know, there's this big issue. We didn't say they couldn't show up. But, you know, when you listen and Jonathan McKernan, particularly, who is a board member, put out a couple of dissenting things. So they're on the public where he kind of complained that.

we really kind of kept somewhat of a closed system there on the bids and that probably wasn't good. So I do think that, you know, that policy will be reviewed. And I think that makes sense. The FDIC, look, it's a very delicate area, but the FDIC has to, as the party, when they do a resolution looking for the lowest cost transaction,

when you're turning down a whole big swath of money from even showing up, you know, that raises issues of how are you administering your statutory responsibility there. And so I think that issue of the role of PE, and again, I'm not saying they should be able to come right in, take over all of these, but I think this view of...

of calibrating that role better makes a lot of sense. Jason, my final question about the FDIC is just, you know, going to be a departure. So I believe the reason Martin Grunberg current head of the FDIC announced his resignation, nothing to do with politics or regulation, anything we've been talking about. It was according to CNN, we'll step down following a quote unquote scathing independent investigation, detailing pervasive sexual harassment, discrimination and bullying. Yeah.

What did you think or feel? Do you remember what you thought or felt when you first read that report? As a long-term employee of the FDIC, I felt a lot of pain for the individuals that suffered in any way, shape, or form from discrimination, harassment, that

uh you know the fdic i always used was was in some ways part of my family and that's not how you treat family um i think that uh you know clearly there were uh decisions that were made at different levels that were not uh not appropriate i think that the report

you know, really shed light on some things that clearly, if you look at other reports, had been raised that had not gotten the visibility and attention that they deserved. I also think FDIC is a big organization and you have Washington, you have regions, you have field offices everywhere. And I think the report did a good job of understanding that the challenges, it's not like you're dealing with an agency that has 200 people in Washington.

and so that that that requires a special set of of um of solutions and um and so i am hopeful that you know the new team is able to come in i have a lot of respect for marty grunberg i also know that uh you know he was very concerned by it i you know so i worked for marty uh i know that he was very uh disturbed uh he does not

condone those things. No one that I know in Washington, but things happen. But the issue here is they happen. Now, what do you do about it? Not to say they didn't happen or they didn't happen as much or whatever. That's not the right way to do it. The answer is now, okay, there's an issue that's broken, just like we expect from the banks that we supervise.

And I got to fix it. And so the new team has a tall order. I think there's a lot of expectations that when Marty resigns, that all these things will get fixed. And I would say that there's a as somebody who knows how big the FDIC is, that's a tall order for anybody.

And I hope that the new team goes in with the right people that understand how to deal with these delicate issues in a way, because you cannot have the FDIC, who is a key agency,

in a crisis situation with confidence, you cannot have the FDIC hobbled. It will be destructive to the financial system if the FDIC is in a place where it can't. Like if this was really happening, if this was really coming out back when Silicon Valley was hitting, you know, and some of those others, that would have been bad. So the FDIC needs to get its house in order. I'm confident they'll be able to do it, but...

But I think the expectations, they'll need to get moving on it quick.

Thank you for sharing your views on that. So Jason, going back to your broad view that the future financial regulatory regime will broadly be good for banks and very good for main street commercial banks, two things. Number one, Basel III, not dead on arrival, but it is severely weakened. You said mothballs, I think. Number two, more friendly to M&A. A third thing that comes to mind, Jason, is the FHFA, the Federal Housing Finance Agency, which I believe...

manages Fannie Mae, Freddie Mac, which used to be private, now are in government conservatorship. They also regulate the federal home loan banking system, which lends a lot of money to banks, especially during crises such as 2008 and 2009. And they lent a lot during 2022 and 2023, including to some banks that failed. So why is the FHFA so important

what roles they have other than managing Fannie and Freddie, as well as the FHLB, because I'm not aware. That's the only two I know of. And then who do you think, not who do you think, but what the person who will be appointed, what might you think their regulatory framework might be and the consequences of that? It's Fannie Mae, Freddie Mac, and the, what is it, 11 FHLB banks, which

When you add them up, it doesn't sound like a number. It's a big system, right? You've got Fannie and Freddie's guarantee book, probably nine or 10 trillion. The FHLBs provide financing to banks, insurance companies.

Credit unions, a lot of players, they're a key player. And by providing long-term stable financing that provides banks able to do things in the community. So the reach is huge. Money market mutual funds buy their debt. So it's one of those things. Dan Trullo wrote a report that said it was the FHLB system. And I don't agree with it. I like Dan, but he came up with this title. It was irrelevant and systemic.

which sort of kicked off that whole review that's going on with the FHLB system and doesn't need to be reformed. What I think is with the new administration coming in, and I'm not sure who it will be, I would expect the focus to go back to GSE exit. So I'm not saying that it hasn't been a focus under the last few years, but not to the same extent as it was when Director Calabria was there. I mean, GSE exit was 24-7.

I think that under Director Thompson, who I've worked for, she has still worked on it, put on the capital rules, but I think it's also a focus on equitable, sustainable housing programs, as well as really the FHLB system. And part of the FHLB system review was due to the role that they played in SVB and some of the big banks' failures. So, you know, appropriate for her to take a look at.

the system, I think the review raised a lot of issues that are probably not as easy to fix as maybe what some people thought. The FHLB system, and I'm very familiar with it as an FDIC examiner, provides significant long-term financing to institutions. And in a time when deposit volatility is up, they play an important role.

I don't think that the next team will probably spend as much time on some of the FHLB issues as they will on Fannie and Freddie. I think that this, you know, the exit and strategies will be a much bigger focus of the next director's time. I could be wrong, but that's my prediction.

FHFA put out a report, the Federal Home Loan Bank System at 100, a 100-year anniversary, and they had a lot of proposed reforms. I don't remember the exact ones, but they basically, you know, they were, my understanding, my view, that they were quite unhappy with

the federal home loan banks lending tons of money to banks that were about to fail and banks that were involved in Wall Street activities like venture capital rather than the original purpose, which was lending to banks that lend to for people to buy homes. I mean, it's in the name federal housing. So

do you, do you say that you think the focus of the FHFA will be on releasing the, I think, Fannie and Freddie rather than those, those reforms, but do you think there's any change forthcoming as well as how would you characterize? Cause I did it in, I think these came out last year. The, and I did an interview with two people who were in the FHLB system and they shared their views on it. I don't think they agree with everything in the report. I think it's safe to say, but yeah,

But you were at the FHFA up until the spring of this year. So tell us what's happened from the inside. The two sides of the house are very different, the GSEs versus the banks. I mean, the GSEs are in conservatorship. So the FDIC directs their activities. Pretty much they have to get the FHFA's approval to do pretty much everything.

the banks are much more like a regulated entity that you have. They're clear examined, they're supervised, there's policies here and there. But for the most part, they've been left

to pretty much do most of what they would like to do. And I think the crisis put a little bit more attention on, and again, it wasn't just FHFA. It was other, whether it was Dan Trullo and others to say, what's going on here? Issues that got attention, they pay a 9% dividend on their stock. So you got a lot of interesting issues, like what's really going on? And so

The issue of the lending to banks that got in trouble, that failed, the continued lending. You know, the issue, what I would call it, Jack, is the focus on collateral-based lending versus credit. And that got a lot of attention. And, you know, it's a, again...

As I say, with almost all these issues, it's a tricky issue. They are collateral. I mean, these are there. They're heavily secured. I mean, so there's nothing new here. But this view of, you know, had they been also taking more of a credit focus, you know, they would have been cutting back on some of these members sooner, right?

perhaps not letting them grow as much and all that. But that's also very tricky as well. Sometimes I kind of view it that, well, the cat's already out, the cow's already out of the barn or whatever it is at the point of which they've grown, you know, and now you've got to manage this situation. So I think it's like many of these things you can say, well, you need to be a credit risk lender first and foremost.

But is that really how the system has really evolved? Is that really where, you know, what does that really mean? Do I think that the report raised a lot of good points that if you have been totally

ignoring credit and the like, well, that's not good. But I think what you'll find is that these things in reality are probably a lot more in the middle and that you might have cases here or there. So I think the report raised some good points. But where I think some members were getting concerned, and rightfully so, is where I look at it, Jack, is I look at it as a bigger picture. If you're in an environment, you're a bank, right?

And you're in an environment where deposit money is free and easy, like we had for the 10 years after the great financial crisis. Getting tough on FHLB advances and all that. Again, I'm saying whether it's right or wrong, just macro view, I don't think it matters as much because you've got a plentiful supply of free money from deposits. My concern is

start doing this at a time when deposit funding, and again, I go back to small banks and regional banks, you're adding this pressure at a time when that funding is also getting hard to come by. So where are we going with

with that. And that's quite honestly, that's the issues. And I'll mention, you know, FSOC, I really think needs to get a step up its game as somebody who was a deputy on that for a while. You know, they need to be, you know, and I don't know whether they were. I don't my sense is they weren't really, you know, are we we were pulling here and that has an impact here. Are we really looking at it together? Because, you

You know, if deposit funding is tough and then all of a sudden it's harder for banks to be able to get FHLB funding or whatever, like what are we doing for the liquidity of insured depository institutions? So that's the thing that I think needs that we need to have. If we're going to have an FSOC, we need to make sure they're really doing those sorts of things. And they're really sure they were.

So you're a executive representative of the FDIC on the Deputy Committee of Financial Stability Oversight Council. What does the FSOC do and why is it important? And why do you say they need to step up their game? We don't have like the Bank of England or whatever, where you've got all authority resting like in one body. We've got what, 12, 13, then you add the states or whatever. You've got all these different regulators. And if we're not going to merge them all up,

We better have a place where they do more than just sit and have coffee and chat, that they actually come and make sure that together we're looking at the different pockets of the financial system to make sure that we don't have vulnerabilities, we don't have duplications, we don't have two different... If we have two different views in the same area, we hear what they are and then say, well, let's make a decision here.

That's what it's supposed to do. Supposed to look at large banks or not large banks, large firms that are not subject to regulation to see, you know, is that appropriate or activity on the non-bank designations or their activities that ought to be. That's probably one of its most important ones. And I'd like to talk a little bit about that. You know, when I was there, we designated a bunch of large insurance companies. We viewed the fact that the

MetLife and Prue and AIG, that if they had gotten into trouble, that they could cause financial distress to the system. So we designated them. We did not think much of the state-based framework for being able to address it because they were regulated by states. And part of the mandate is to assess whether the existing regulatory framework was adequate. And the FSOC

Didn't think it was. And so those firms were designated. It caused a lot of issues. We lost the MetLife case. We created a lot of, I say, animosity between the feds and the states. The state regulator, insurance regulators and members were like, wait a second. Where's our day in court? We do think we have this covered. So it was a real mess. And why do I say that? Well, Janet Yellen's treasury company,

It brought back the firm-based designations. That was the other thing. Mnuchin came in. They got rid of designations of firms. They did activities. This was a big issue. Yellen comes back in, brings back a system where that would allow FSOC to designate firms. And then they do the report on the non-bank servicers, which came out earlier in the year. And I think there's a lot of interest as to what happens next.

And now that the Republicans are going to be back in, what does that mean for some of these large servicers? And so I've been spending a fair amount of time looking at some of those issues. I was talking about it out at Scottsdale with the state, the state system who does have primary services.

oversight over many of these servicers. And so it'll be interesting to see what happens. Jason, you also sounded somewhat confident when you said that the FHFA had the focus will be on having Fannie and Freddie Mae exit conservators, i.e. a reprivatization. It will no longer be owned by the government. Tell us what is your view on that? And, you know, also,

Also, in Trump's first term, there was this hope that Fannie and Freddie would be exit conservatorship and it didn't happen. Why didn't it happen then? Why do you think it will happen now? Or that it at least will be a priority for the FHF? Yeah, let me first be very clear. I think it will be a priority. Being a priority, this has been a priority in different administrations for a long time. I think that it is a... First off...

You have an entire mortgage ecosystem that has built around Fannie and Freddie that has, I think would have the view most people that this has worked out okay. And when I mean worked out okay, we've provided a low cost stable financing to consumers. Yes. We have. And that's something like, if that's working, I'm not sure why we would mess with it. I think is what a lot, I'm not saying I'm saying that, but a lot of people in the system, everyone

you know, would say that that's something like do anything that we, anything that we do that causes that to get unstable, that's a problem. And so that, that sense, you can call it inertia, you can call it whatever that's made. I think it very difficult to, to really, um, to do anything. You know, people sort of say, well, maybe it's good at the end of the day, but in the meantime, it could be really volatile. Um, what, what's changed to maybe make it more, uh,

like made the odds go up from almost nothing to something, you know, is that the enterprises have been able to retain upwards of 150 billion of net worth, you know, so, you know, they're on their way to building capital

It's not exactly capital, and I don't want to spend 20 minutes on why it's not, but I just have to say that because some capital person will say, doesn't he understand net worth is not capital? I do. I would just say-

They've built up some money to be that where policymakers can do some things. The big issue I really think is what do you do with the NBS that comes out afterwards? And is it backstop by the government? What's the structure? That to me is the big challenge. Fannie Mae and Freddie Mac exit. What happens to the PSPA money Treasury has set aside? Does that stay? Does that go?

Is there any limits on that? You know, this idea that if they raise enough capital, that's enough. I don't think so. I think market stability in this space is really important. A guy, Chris Whalen, did a good podcast, wrote a good piece, didn't agree with everything he said. But I would tell you, you ought to read it if you haven't, because he gets into the mechanics of how the markets work. It's a good piece.

There's a lot to that. And some people would say the only way they can go out is with congressional authorization for a backstop. Others say they can do it through administrative matters, just FHFA and Treasury. The issue is, well, yes, they can. I think it really matters is what is the market reaction going to be? This is a huge, like you said, MBS, everybody has Fannie and Freddie MBS. What is it? $9 trillion, $10 trillion.

You can't have something that says, we'll figure that out. No, that has to be, and everybody has to agree, that backstop has to be money good. It has to be very clear. It isn't going to be able to just be like, well, they've got capital and there's some preferreds. I don't think that's enough for the folks that buy this paper. They're going to want something that is pretty darn close, if not an exact explicit

Treasury backstop on the MBS. That's different than a government backstop on the whole company. So those issues, but again, ecosystem and inertia and, you know, it ain't broke. Why break it? That's big. Having said that,

You know, it really depends on what the administration's priorities are. But I think those are some big issues that anybody's going to have to figure out. My sense is the next administration, this will be a focus. People will try to figure this out as opposed to say, oh, gosh, that's that's just too much. So do they put Fannie and Freddie on a diet? Yeah, that's the other issue is you have to get a private market going.

I guess that one of those things of, well, if we break them up, then there'll be this private market. You got to get that thing going. And so does the next administration come in and say, well, how you get it going is you get them on a diet. You start to increase pricing. You start to do things to sort of force a private market. And then it all of a sudden that starts to take care of the dominance issue. But that's what I mean. I think the next group will be spending a lot of time on those issues.

So before Fannie and Freddie got taken over, there was an implicit guarantee from the government that bondholders and particularly MBS holders would be made whole. That promise, implicit guarantee, was fulfilled when the government took Fannie and Freddie Mac over. Now the implicit guarantee is now explicit. So if they were to return to the private sector, the question is, to what degree would the government be giving them? And

Is there a resistance to you're saying that they needed an implicit guarantee for the bonds for the NBS? Oh, yeah. Yeah. I mean, I almost think at this point, I mean, I don't even know if look again, it's just my views. I don't even know if going back to the implicit is going to be enough. If implicit means no treasury back PSPA. So that just disappears.

No government, you know, clear government backstop. I don't know if that'll be enough because people have also said, well, up to now, we've had the... We know there is a PSP. If they get in trouble, they could draw on money. It's very clear. So I don't know if...

If but again, that's for new administration, the market to figure out. But I don't know if it'd be enough to say we're going to go back to how it was with which and we and, you know, the administration could say we showed that when push came to shove, we did it. I don't know if that'll be enough. I mean, you really the the you cannot underestimate the low tolerance investors have in this space.

I mean, you think about it. Here's the thing. When the government goes over to Japan and China, who buys all of this, and you have Fannie and Freddie sitting next to Jenny May, and the Asian investor says, "Can you explain your guarantee to the three people?" Right? The Jenny says, "Yeah, I'll go first. It's full faith and credit of the US government." Great. You got Fannie and Freddie and they got to spend five minutes explaining how it works? How do you think as an... What do you do?

That makes sense. So I looked it up. PSPA is Preferred Stock Purchase Agreements. Jason, most of this conversation, we've been talking about the banking sector. The increased regulation on the banking sector over the past 15 years has caused a lot of the credit risk to move to the non-banking sector, private equity, private credit. And that world is now huge. It has grown enormously. I think it's fair to say it is much less regulated than the banking system. Who is the regulator for

like private credit firms that raise money from investors, pool it, and then lend it out. Who regulates that? I mean, no entity we've talked about, right? OCC, Federal Reserve, FDIC officially has a mandate to regulate that, right? I'm not an SEC expert, but from sitting there at FSOC, you have the SEC, sometimes CFTC, if there's a commodities aspect, they'll have a window into it. But then you ask the question, prudential regulation.

And the answer is no. And so then the question, so then the question sometimes is, well, somebody needs to. And I think what we've learned over the years, well, not exactly. I mean, just because no one's doing doesn't mean somebody has to. But it's a very fair question to say, how does it? You know, who is in that space? Or SEC, you say you are. What is it you do? And then you say, well, what if there is a run? Well, there won't be a run because the money's locked up. And the FSOC has had those discussions and they've been good discussions. You know, these are

They put out reports on P.E. and hedge funds. And so the real issue is, is that the end of the story? Do people want to pick those things up again with non-bank mortgage servicers? You know, the states are the primary. So at least with at least with with servicers, there is an answer.

The states are the primary regulatory body for these companies, so it's not like they are unregulated. And so I think a lot of times people lump all these non-banks in the same bucket. That's not the case. Question is, how would that work if one of these firms were to get in trouble? Does the state system, is it resilient enough to be able to deal with it? How would bankruptcy work? Those are some of the issues that came up in that.

FSOC report. And so, you know, it's one of those things. It's not all non-bank. I mean, right there, FSOC's looking at the payment companies, Amazon, Google, you know, I mean, so it's it's

The FSOC could be a very, it's an important body given the structure of our regulatory system. Some people have said, well, why don't we just even like GAO and others say, why don't we just do what the Bank of England does? Because the other thing is the authorities of FSOC are not very clear. Some have said, just do like Bank of England.

It's all in one shop and they got authorities. You know, everything we've got is we're kind of trying to deal with the structure we have and with Band-Aids. But, you know, that's maybe that's for another group to decide those things. You know, I think right now FSOC is is the best you have given the structure we've we've got. And so the argument is you don't have to worry about private equity and private credit because the money was raised for five years and people can't withdraw the money anymore.

for until the five year time horizon comes up, unlike a bank where they can pull at any time. Do you buy that argument? Do other regulators who might have a pivotal role, do they buy that argument? Marc Thiessen: I think a lot of people go around not understanding the fact that there are lockup periods and restrictions

And so it helps to say, oh, that's why we haven't had a bank run in that. And that's important to understand. I also think it's important to understand, okay, but tell me more. How is it changing? How are investors, you know, like what's very key, you know, are investors now not just a lot of rich people, but also my local school district? You know, those things matter.

And I think the FSOC, when it does a good job, it's not designating everybody, but it's getting smart people to really understand those things and say, well, this has changed a bit. But so, you know, what I think is it's when it educates, because a lot of people, I didn't know the area. And if somebody says, what do you know about lockups? And I'd say,

I don't know. So that's not very good if I'm on FSOC. So FSOC does a good job when it educates and enlightens. And so that's important. But I do think that feature is highly important. I think if I was to sum up financial crisis, in my experience with all this, it's the right-hand side.

A lot of times people focus on the left-hand side where it gets invested. That's important. It's the right-hand side. Who is it? Oh, the liabilities. Right. The liabilities. And how easy is it for them to get their money out or to be able to say to the party, I can't get my money out, but if you don't give it, you'll never be in business again. To me, if everybody focuses their money

70%, we probably deal with most of the issues. Money market, everything. You look at it, you start there and then get into the other stuff that we probably do a good job. What's his name? Mervyn King wrote a good book after the crisis. Did you read it? No, no. It's a good book. I forget what it's called, but he talks about that and all this business of making money and turning things into money and all that and what it really means. The End of Alchemy? Yes. Very good. Yes.

It's a good book. And he really gets at that issue and focusing on what is money, what is money, all that. That's where it's from a systemic thing. That's where it's at. I think looking at private credit, private equity, there's going to be a, or at least been filed a private credit ETF. Their private credit alternative investment funds are buying insurance companies, which are state regulated. I think Alchemy is alive and well, Jason. It's just not a thing anymore.

Right. Right. And you're right. That's exactly the issue of, you know, it's important to I mean, I think the issue and I don't think Republicans, I think sometimes it's like they want to understand these issues. Like if insurance companies are getting bought up by private equity, I don't think you've got people that are going to be coming in saying, well, we don't need to know about that. But it's sort of like before we come up with the answer.

Let's understand what it means. Why is it also this is the good one, too. Is it current regulations that have caused that? So before we say, well, that's a problem. Well, what's what's kind of causes? Oh, you have very tough regulations on insurance. Well, is that the right regime? You know, the issue is, are the regimes still fit for today's purpose?

And so what you find, you know, maybe it's not that the private equity doing all these, these things is also that the regime for some of these regulated are done in the 1970s and they're sitting ducks. So do you, do you modernize those things? And that takes care of the issue. Yeah. It sounds like the,

primary regulator for private equity, alternative investments and private credit would be the SEC. Now, I should say that the chief executive of your company, Potomac Global Partners, has been nominated by President-elect Donald Trump to be the next head of the SEC. So I will put you in an awkward position there. But I will ask you that what if private credit regulators

raises funds from the banking system and borrows money from the banking system. So for example, a news headline comes out, private credit firm raises $35 billion fund. $22 billion is going to be in equity. So raised from investors, $13 billion will be borrowed money probably from the banking system. There, you don't even need to the SEC. That involves the FDIC and the Federal Reserve and the OCC, right? Because it's the banks. How are you increasingly worried or not worried, but

getting ready to be worried about or paying attention to banks lending to private credit alternative asset firms? Are people at the FDIC and Federal Reserve worried about that as well? And has that level of attention or worry increased over the past 12 to 24 months? Regulators are paid to worry. When I was a regular, I was paid to worry. I don't worry as much anymore because I'm not a regulator. I think it's important for them to worry. I think it's important for them to see developments. What I also think is important is

Rather than just saying, oh, my gosh, private equity or borrowing from banks, which they are and they have done for years. So I don't think necessarily that's a problem. The other issue is what worries me is if somebody says we have to stop that. And then I say, OK, so when banks lend to the same highly leveraged companies without private equity being involved, you're OK with that?

Well, no, there's a risk there too. So to me, it's like we have to be very careful about that's bad. We don't like that. Well, what's the alternative or how has that been going? And actually, maybe is it better to have private equity in there with skin in the game than some of the large, highly levered lending deals that banks have been financing for 70 years? Do you know what I mean? So that's where...

the more informed view of, let's not just say that's bad. In fact, we might actually say, hey, we're bringing in people that actually have some skin in the game. We're doing some financing here. That's actually pretty good. That's what we need. That's what a vibrant, resilient banking system is.

needs. And I think that I'm hopeful that we get some of that balance again versus I don't like that party. They're robber barons are doing that. You know, it might be and it might not be, but let's look at really the, it also gets to mandates. Focus on, you know, your mandate, whether somebody is a robber baron or whatever, there might be another department that handles that. Your part here is the financial stability. And do they add to it?

neutralize it or detract from it. In some ways, that would be the nice... I'm oversimplifying things. It's not easy, FSOC or any of these things, but maybe looking at it from that standpoint. Let's have some evidence to whether the expansion of private equity

exacerbates, minimizes, or is neutral on some of these things. So compare it to where it is now, what happens, that's the sort of thing that is helpful as opposed to, I don't trust these people. That's never a good place to...

to really begin a discussion. Jason, thank you so much for your time. It's been a real pleasure getting to talk to you. People can find you on LinkedIn at Jason Cave, and then you also are on the Potomac website at potomac.com.

Just tell us people, what are your roles as a senior consultant at Potomac? I mean, are you advising clients on exactly what we've been talking about? So I work with Potomac, a great team advising clients on whether it's regulatory challenges or business challenges and everything.

just helping give the perspective of 30 years in this business on the regulatory side. I work for other companies as well as the need arises to just really help them navigate through the regulatory and business challenges that they face.

And I should also say, too, these these views are my views and mine alone. I'm not representing any clients in any of these views. So so take them take take with them that.

Jason, thank you so much for being so generous with your time and insights. Thank you everyone for watching. A reminder, people can find Monetary Matters not just on YouTube, but on Apple Podcasts, Spotify, and wherever else they get their podcasts. Please leave a review if you feel so inclined. It helps the show. Until next time. Thank you. Just close this f***ing door.