While Yellen Assures, Banks Run

The Treasury Secretary’s claim that all is well are belied by the reality at First Republic Bank

WSJ editorial. Excerpt:

"Like SVB, First Republic benefited from the Federal Reserve’s zero-interest rates and quantitative easing, which caused deposits from its wealthy customers to soar. It used these deposits to fund loans that appeared safe at the time but now look much less so. Markets today are enforcing more discipline.

This is another illustration of how the Dodd-Frank regulatory apparatus has failed. Democrats blame the 2018 bipartisan banking reform, which freed regional banks from many burdensome regulations applied to the big banks. But First Republic’s Tier 1 leverage ratio is greater than that of most big banks, though it still may not be enough to absorb losses.

The underlying problem is that the Fed’s modern monetary experiment and Dodd-Frank regulation distorted bank balance sheets. Vulnerabilities are emerging as the Fed corrects its inflationary mistakes. The more the Biden Administration insists the economy and banking system are A-ok when they’re manifestly not, the more markets get nervous."