Fed’s Kashkari ‘Not Ready to Declare All Clear’ on Banking Sector Turmoil

Neel Kashkari, president of the Federal Reserve Bank of Minneapolis, speaks during an interview in New York, on March 29, 2019. (Shannon Stapleton/Reuters)

Neel Kashkari, president of the Federal Reserve Bank of Minneapolis, has said it is too early to declare that there are no risks to the banking sector following the collapse of Silicon Valley Bank (SVB) and regional lender Signature Bank last month, but that there are “hopeful” signs the turmoil may be over.

“I’m not ready to declare all clear, but there are hopeful signs that these risks are now better understood and calm is being restored,” Kashkari said on April 11 during a town hall event at Montana State University in Bozeman.

While speaking about the collapse of SVB specifically, Kashkari noted that the bank held a large number of deposits that were invested in Treasury bonds, which are highly sensitive to interest rates, as well as a significant number of deposits that were uninsured beyond the Federal Deposit Insurance Corp.’s deposit insurance amount of $250,000.

“If you look at Silicon Valley Bank and you measure it on how much of these unhedged risks they had, they were off the charts. They were the over-achievers in the unhedged risks they were taking,” Kashkari said.

The Minneapolis Fed President added that SVB has been the number-one most vulnerable bank in the current environment, but again stressed that “any bank in the world, if everyone gets scared, will collapse.”

Economist Warns of Credit Crunch

Kashkari went on to tout the Fed’s actions, such as its emergency facility under the Bank Term Funding Program (BTFP) and the actions of the FDIC, for helping bring calm to the banking sector and fend off concerns over a widespread contagion amid the turmoil.

However, he cited his experience being on the “front line” during the financial crisis of 2008–09, noting that “every time we thought in 2008, ‘okay we’ve done enough, it’s over,’ things flared back up again and they got worse,” adding that he was not ready to declare the turmoil is completely over.

Kashkari’s comments come a day after noted economist Nouriel Roubini warned that regional banks across the United States remain at risk in the wake of the recent banking turmoil, which he believes could lead to a serious credit crunch.

Roubini told Fox Business’s “The Claman Countdown” that many regional banks across the country are facing challenges with their business model right now, and have large amounts of uninsured deposits, which could create issues for the wider economy.

“I think the problems are with the regionals, but the regional banks are significant lenders to households for mortgages, for small businesses, for SMEs [small and medium enterprises], for commercial real estate. And therefore we’re going to have a credit crunch,” Roubini said.

Biden Administration Says Banking System Strong

Other market experts have also warned that a significant number of banks are at risk of going under within the next two years, particularly if they are smaller, regional banks.

Meanwhile, Treasury Secretary Janet Yellen has warned that not all Americans’ uninsured deposits will be protected by the federal government in the event of future bank collapses.

As of the end of 2022, roughly 43 percent of all bank deposits were uninsured, according to FDIC data.

Despite concerns over possible further financial turmoil, the Biden administration has sought to restore confidence in the U.S. financial system, with Yellen telling senators during a hearing before the Finance Committee on March 16 that the nation’s banking system “remains sound” and that Americans can “feel confident that their deposits will be there when they need them.”

Elsewhere on Tuesday, Kashkari touched on the ongoing issue of inflation, noting that he expects inflation to return to the Fed’s stated target of 2 percent in 2024.

However, he noted that further interest-rate hikes and a possible retreat from lending following the recent banking crisis could trigger a recession,

“It could be that our monetary policy actions and the tightening of credit conditions because of this banking stress leads to an economic downturn. That might even lead to a recession,” Kashkari said.

Still, the Minneapolis Fed President noted that allowing inflation to remain high could be worse for the labor market.