Sheila Bair on risk of rising interest rates to the financial system

When interest rates rise, it creates instability.  My friend and dear mentor, Paul Volcker, was very critical of inflation targeting because the protracted period of accomodative monetary policy would inflate financial assets, inflate the value of stocks and bonds, and then when interest rates have to go up to fight inflation, the value of those assets go down...  There's this correction mechanism that can have instability ramifications on the financial system so I think and hope the regulators are on top it.  There's a lot more capital now in the banking system, but I'm still a little wary.  I think we need to learn more.

Sheila Bair, MSNBC interview, 5:40 mark, March 11, 2023

Sheila Bair on the SVB bank run

This bank seemed to have a reasonable plan to stabilize itself, but its depositors panicked and almost all of its deposits were uninsured.  Insured deposits generally do not run.  People have confidence in the FDIC.  They're not worried about their insured money, but uninsured deposits can run and most of this was from pretty sophisticated institutional investors: venture capitalists, startups, as you mentioned.  That's what I find so astonishing, that there was this herd mentality by sophisticated individuals to take this money out.  

You mentioned my books.  I also write children's books and I'm thinking maybe I should write one about banking for venture capitalists because their behavior suggests maybe they didn't understand the mechanics about banks where it's a classic Jimmie Stewart problem: you come in and take out all the money at once, you're going to force the bank to close even if it may otherwise be solvent.

~ Sheila Bair, MSNBC interview, 0:45 mark, March 11, 2023

Sheila Bair on how bank stress tests did not include a recession and rising rate scenario

There's been a significant weakening of these stress tests to begin with, but I think most important is that they don't really stress the scenario that I am worried about and a lot of people are worried about, which is that we go into a recession, inflation remains persistent, interest rates keep going higher... that perfect confluence of events that is exactly what happened when Paul Volcker was chair of the Fed.  Actually he had to go through two recessions to get inflation under control, maintain interest rates at very high levels.  That may well be what the Fed needs to happen and that is the extreme stress scenario that they should be preparing for, but that is not the scenario the banks had to show that they should survive and be resilient.

~ Sheila Bair, former FDIC chair, interview with The Claman Countdown, July 6, 2022