STATE GOVERNMENT RELATIONS
Indiana $2 Billion Ahead in Revenue
Indiana is nearly $2 billion ahead of its current budget after April tax revenues came in well above the expectations of that spending plan.
The state is nearly at the end of its current two-year budget, and it has collected more revenue than needed for the budget in all 22 months of that cycle.
This fiscal year, Indiana has nearly $1.9 billion more than the budget plan expected, and state lawmakers have already planned to spend a lot of that money. In the new state budget, Indiana will spend more than $1 billion this fiscal year on previously approved projects that have become more expensive due to supply chain issues and inflation.
FEDERAL GOVERNMENT RELATIONS
Sens. Tillis, Tester Call for Independent Investigation of Bank Failures
Sens. Thom Tillis, R-N.C., and Jon Tester, D-Mont., Thursday urged President Biden to appoint an independent investigator to further probe the recent bank failures. "Though the regulatory agencies tasked with overseeing our financial institutions have released a series of internal reports examining causes, failures and corrective measures, we believe an independent examination that covers the full jurisdictional scope of these failures, led by nonpartisan experts, is critically important," the senators said in a joint letter.
Tillis and Tester said that an independent review is necessary given that internal reviews by federal and state agencies concluded that supervisory actions and inactions played "a key role" in the failures. "Self-reflection, while appreciated, is insufficient to ensure stressors to our financial system of this magnitude are not repeated," they said. "Oversight efforts will benefit from a comprehensive examination spanning both federal and state financial regulators, as well as elsewhere in the federal government where response efforts are taking place." Their proposal is similar to one made by Federal Reserve Governor Michelle Bowman last week, who suggested the Fed have an independent third party conduct a review to supplement its own.
Both senators are members of the Senate Banking Committee, which held a hearing that same day with state and federal regulators on the failures. At the hearing, Fed Vice Chairman for Supervision Michael Barr said he expected the agency to propose both supervisory and regulatory changes as a result of its review of the Silicon Valley Bank's failure. Tester countered that the review showed the failure wasn't a result of regulatory failure. Rather, the agency failed to properly tailor regulation to match SVB's risk, as permitted by a 2018 Senate bill, S. 2155, he said.
"Regulation needs to fit the risk," Tester said. "I think when 2155 was put up, it was put up with the idea that if you had a risky portfolio – regardless of size – that the Fed and the other agencies had the ability to tailor whatever threat that those risky business dealings [merited]."
Fed's Jefferson: Inflation Remains Too High
Federal Reserve Governor Philip Jefferson said at an insurance conference in Washington D.C. Thursday that while inflation has come down substantially since last summer, it is still too high, and by some measures, progress has been slowing.
Jefferson – who was recently nominated for Fed vice chairman by President Biden – noted that price increases in food and energy have fallen substantially in recent months. However, core inflation was 4.6% in March, with inflation in housing and non-housing services showing few signs of decline.
The Federal Open Market Committee will meet again in June to consider raising the federal funds rate again. Jefferson said members will receive a "considerable amount" of economic data between now and then to guide their decision. "On the one hand, inflation is too high, and we have not yet made sufficient progress on reducing it," he said. "On the other hand, GDP has slowed considerably this year, and even though the effect has been muted in the labor market so far, demand clearly has begun to feel the effects of interest rates that are five percentage points higher than they were a little over a year ago. History shows that monetary policy works with long and variable lags and that a year is not a long enough period for demand to feel the full effect of higher interest rates."
Jefferson also stressed that the U.S. banking sector remains sound and resilient despite recent bank failures. Still, he said it is reasonable to expect some banks to tighten their credit standards. "The evidence is that so far, there has been only a modest incremental tightening of lending conditions, which had already tightened considerably over the past year since the Federal Reserve began raising interest rates," he said.
Regulators, CEOs Testify in Hearings on Bank Failures
Federal banking regulators Tuesday testified before the House Financial Services Committee during the first of five congressional hearings this week on the recent bank failures, where they were pressed on why supervisors did not elevate concerns raised about Silicon Valley Bank ahead of its closure. That same day, former top executives from SVB and Signature Bank testified before the Senate Banking Committee on the failures.
Last month, The Federal Reserve released a report that faulted SVB's management for its failure but also identified instances in which agency supervisors failed to elevate problems they found at the bank. More recently, Fed Governor Michelle Bowman suggested that the agency appoint a third party to conduct an independent review of the Fed's handling of SVB. Asked whether he agreed with that recommendation, Fed Vice Chairman for Supervision Michael Barr suggested that third-party review is coming through congressional oversight and reviews by the Office of Inspector General and Government Accountability Office. "I think there are such reviews going on already," he said.
Barr was also asked why the Fed was exploring stronger capital rules if he believed banks were well-capitalized – something he has said repeatedly. "The capital in the system is strong – it might need to be the case that it is stronger, and the banking system might need more capital to be resilient precisely because we don't know the nature of the kinds of ways we might experience shocks to the system, as has happened with these recent bank failures," Barr said.
In the Senate, former SVB CEO Greg Becker blamed "unprecedented" interest rate increases and a social media-fueled bank run for the failure of his institution. "I never imagined that these unprecedented events could happen to SVB, and I strongly believe that the leadership team and I made the best decisions we could with the facts, forecasts and outside expert advice available to us at the time and that we made these decisions in good faith and in the best interests of SVB, its employees and its clients," Becker said.
Watch a recording of the House hearing
Watch a recording of the Senate hearing
FHFA Seeks Comment on Risk-Based Pricing Model
The Federal Housing Finance Agency Monday announced that it is seeking public comment on Fannie Mae and Freddie Mac's single-family pricing framework and the goals and policy priorities that the agency should pursue. FHFA also seeks input on the process for setting the government-sponsored enterprises' single-family upfront guarantee fees, including whether it is appropriate to continue to link upfront guarantee fees to the Enterprise Regulatory Capital Framework, set risk-based upfront guarantee fees for both GSEs and set a minimum threshold for both institution's return on capital.
An important component of Fannie Mae and Freddie Mac's current single-family mortgage guarantee pricing is risk-based pricing, where certain guarantee fees may vary with the risk characteristics of a loan, according to FHFA. The ERCF has a significant effect on the risk-based pricing component. The agency said it will use the information gathered through public comment to enhance its ability "to continue to ensure that the Enterprises fulfill their mission by operating in a safe and sound manner so that they serve as a reliable source of liquidity and funding for housing."
Fed: U.S. Banking System Sound, Resilient Despite Recent Bank Failures
According to the Federal Reserve’s latest supervision and regulation report released Monday, the U.S. banking system remains sound and resilient, with strong levels of capital and liquidity, though the report emphasized a need for vigilance when it comes to monitoring for risk.
The Fed noted that banks face heightened credit, liquidity, and interest rate risks as economic uncertainties and rising interest rates persist. The report said that interest rates and risks from concentrated funding sources played a role in the recent failures of three large U.S. banks.
The report found that liquid assets – including cash and securities – declined in the second half of 2022. "Significant declines in the fair value of securities, combined with high levels of uninsured deposits, can elevate liquidity risks, as seen with the failure of Silicon Valley Bank," the Fed said, noting that banks now have access to additional liquidity through the Fed's new Bank Term Funding Program, which was established in the aftermath of the Silicon Valley Bank and Signature Bank failures.
While loan delinquency rates remain low, the Fed said it anticipates those rates to increase as interest rates continue to remain elevated. "[Commercial real estate] loan performance is also being monitored closely given potential deterioration in the office segment stemming from the trend toward working from home," the report said. Meanwhile, capital levels remain well above regulatory minimums.
Biden Nominates Jefferson, Kugler to Positions on Fed Board
President Biden last Friday nominated economists Philip Jefferson to serve as vice chairman and Adriana Kugler to serve as a member of the Federal Reserve board. Biden also announced that he will renominate Lisa Cook for an additional term on the board.
Jefferson is currently a member of the Fed board, having been nominated by Biden last year to fill an unexpired term ending in 2036. He most recently was VP for academic affairs and dean of faculty, and the Paul B. Freeland Professor of Economics at Davidson College. Kugler is currently executive director at the World Bank Group and a professor of public policy and economics at Georgetown University. Cook has been a member of the Fed board since 2022.
Bowman Urges Targeted Regulatory Response to Bank Closures
Last Friday, Federal Reserve Governor Michelle Bowman said the recent failures of Silicon Valley Bank and two other banks do not justify imposing new, overly complex regulatory and supervisory expectations on a broad range of banks due to the failed banks’ unique nature and business models. Speaking at a conference on financial systems in Germany, Bowman pushed back against calls for broader regulation following the banks’ closures.
"If we allow this to occur, we will end up with a system of significantly fewer banks serving significantly fewer customers," Bowman said. "Those who will likely bear the burden of this new banking system are those at the lower end of the economic spectrum, both individuals and businesses."
Still, Bowman said there were steps regulators could take to identify the root causes of the bank failures and hold themselves accountable for supervisory mistakes. First, the Fed should engage an independent third party to prepare a report to supplement the limited internal review to understand SVB's failure fully. Second, supervisors need to identify better the most salient issues – such as concentration and interest rate risk – and move quickly to remediate them. Finally, policymakers should consider whether there are necessary – and targeted – adjustments they could make to banking regulation. "This will likely include a broad range of topics, including taking a close look at deposit insurance reform, the treatment of uninsured deposits, and a reconsideration of current deposit insurance limits," she said.
Bowman also touched on the role of social media and other communications technology in fueling bank runs and negatively affecting bank stock prices. "The spread of information has always played an important role in bank confidence and bank runs," she said. "When information is more readily and quickly accessible and shared among shareholders, creditors, customers and depositors, bank management needs to be attuned to how it communicates, especially when remediating identified weaknesses."