Citigroup’s Jane Fraser Shares an Inside View of the Banking Crisis

What’s it like to take a call from Jamie Dimon of JPMorgan Chase asking you to pony up $5 billion to deposit in First Republic Bank?

Just how often do regulators and the leaders of the nation’s largest banks talk about “things,” like the state of the industry and public perceptions of it?

What goes on behind the scenes that the public — even much of the industry — has little insight into, until someone writes a book long after the fact?

Rest assured, senior regulatory officials phone executives at major banks regularly, not asking what to do, but getting insight on the potential ripple effects of X, the impact of Y, or how Z will be perceived. An old Washington hand once told The Financial Brand, one of the fears of regulators is the unexpected consequences of straightforward actions, which sometimes only working bankers can foresee.

The point being, you’d hope they were talking to each other.

Speaking in a “fireside chat,” Jane Fraser, the chief executive officer at Citigroup, shared some color on how those conversations went after bank runs led to the collapse of two large regional banks in two days. David Rubenstein conducted the Jane Fraser interview at a March 22 meeting of the Economic Club of Washington, D.C. Rubenstein is cofounder and co-chairman of The Carlyle Group, a global investment firm. He also serves as the club chairman.

Following are excerpts of their hourlong conversation, which covered a wide range of topics, including the Federal Reserve rate hikes, the logic of covering uninsured deposits at Silicon Valley and Signature banks, and what might be the next dominos to fall. She also discussed the group decision by Citi and others to buttress First Republic Bank with $30 billion of deposits as customer panic threatened to topple yet another bank.

The questions and answers are lightly edited for clarity and, in some cases, grouped by topic.

Are the Federal Reserve’s Rate Hikes Partly to Blame?

Rubenstein: Your bank is the fourth largest in the United States: JPMorgan Chase, Bank of America, Wells Fargo, and then Citigroup. There is a bank on the West Coast, Silicon Valley Bank, or there was a bank there, not as well capitalized. Were you surprised by what happened?

Fraser: You had a combination of two pieces: the macro and some idiosyncratic factors around Silicon Valley Bank. But then you also had the impact accelerated by social media.

First, we knew that when we got wind of lower-for-longer rates, it was going to be pretty painful.

And second, you had “idiosyncratic factors” — I think that is the polite British way of describing them — in Silicon Valley Bank. [Fraser is Scottish by birth.]

So as all this played out, you saw some pretty serious holes in their balance sheet management. They had a very concentrated client base. And that client base ended up burning cash much faster than anticipated. And the bank ended up wanting to raise capital. And it went down pretty quickly.

Rubenstein: Did the Federal Reserve recognize that some banks would be really hurt by higher interest rates in the way that Silicon Valley was? Or do you think the Fed was more focused on fighting inflation and didn’t worry about the impact on the banks?

Fraser: The Fed’s job, number one, is fighting inflation, and we want the Fed to be very dependable in fighting inflation. And that should be their most important priority. There are ramifications of that, but there are certain banks — which I say are an isolated few — that have really been impacted very negatively that didn’t necessarily manage their balance sheets that well.

“The Fed’s job, number one, is fighting inflation, and we want the Fed to be very dependable in fighting inflation.”
— Jane Fraser, Citigroup

Rubenstein: So in the old days when there were bank runs, you used to see people lined up on the street to get their money out. Now on your iPhone or whatever phone you have, you can take your money out. Money moves so quickly. Was that a factor as well?

Fraser: It’s a complete game changer from what we’ve seen before, David, you’re absolutely right. There were a couple of tweets and then this thing went down much faster than has happened in history. And frankly, I think the regulators did a good job in responding very quickly, because normally you have longer to respond to this. So they acted with quite a lot of speed given how quickly this happened.

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Fraser on Covering Uninsured Deposits

Rubenstein: During the Great Recession, the U.S. government passed TARP [short for the Troubled Asset Relief Program]. Under the TARP legislation, large amounts of capital were injected into banks, including Citi, and even banks that said they didn’t need it. … Effectively that meant that the shareholders, the creditors and the depositors were all protected. This time around, at Silicon Valley Bank, depositors were protected because of a decision made by the Biden administration and others over a weekend. Do you think that was the right decision, to protect only the depositors and say goodbye to the shareholders and goodbye to the creditors?

Fraser: It’s very important to protect the depositors. The banking system everywhere around the world depends on confidence, and that confidence has to be in the safety and security of deposits. So in terms of the most important job here, they did the most important job, which is making sure the depositors were whole.

Jane Fraser from Citi is interviewed at the Economic Club

Citigroup’s Jane Fraser was interviewed by David Rubenstein, cofounder and co-chairman of The Carlyle Group. (Photo courtesy The Economic Club of Washington D.C./Gary Cameron)

Rubenstein: So some people say you have a moral hazard when you protect all the depositors in Silicon Valley Bank, because the implication is that if somebody else has a problem, we’ll protect them and so forth. So the $250,000 limit on insured deposits is meaningless, more or less. Do you think the Federal Reserve and the Secretary of the Treasury ought to be saying, “We’re not going to protect every depositor” or “We’re going to protect certain depositors?”

“This is not something that is spread across the entire banking system. This isn’t like it was last time. This is not a credit crisis.”
— Jane Fraser, Citigroup

Fraser: I don’t think they need to right now because the banking system is pretty sound. And we’re talking about a few banks.

We heard it from [Federal Reserve] Chairman [Jerome] Powell today. This is not something that is spread across the entire banking system. This isn’t like it was last time. This is not a credit crisis. I mean, this is a situation where it’s a few banks that have some problems and it’s better to make sure that we nip that in the bud.

[Fraser is referring to Powell’s remarks after the March 22 meeting of the Federal Open Market Committee.]

A Deposit Injection for the Wobbly First Republic Bank

Rubenstein: There’s another West Coast bank, First Republic Bank, which has offices around the country, but is based in San Francisco. It has had some problems and they’ve had a gigantic decline in their market value and so forth. Do you expect that somebody will bail them out or buy them?

Fraser: Well, I’m not going to comment in depth on First Republic because they are actively working through the challenges that they’re facing right now. And what you saw last week [March 16, see The Financial Brand Crisis Timeline] was a number of the large banks, 11 of us got together to put a large capital deposit injection into them to help buy the time to make sure that they could come up with the right solution for the restructuring that’s needed.

Rubenstein: So the large banks and others put in roughly $30 billion of deposits. Citigroup put in $5 billion. So how did that happen? Did Jamie Dimon call you up and say, “Hey, you have $5 billion you don’t really need?”

“You don’t put $5 billion into the system through the generosity of your own heart. You do it because you have confidence in the system itself.”
— Jane Fraser, Citigroup

Fraser: One of the great things about this was that the banks did all come together. We usually try to kill each other in different deals that we’re trying to do. There’s a lot of competition between us. But in this instance, this is one where we’re in a strong position. We want to stop what could have been a problem. And we all know when there is a confidence crisis, the “logic” that takes over isn’t necessarily rational. So we wanted to help protect the system. …

Despite this being quite a divisive environment that we’re all operating in, this is an instance of the banks coming together and saying, okay, what can we do here to support a system that we have confidence in?

You don’t put $5 billion into the system through the generosity of your own heart. You do it because you have confidence in the system itself.

Rubenstein: You expect to get that money back eventually.

Fraser: Yes.

How Did the First Republic Lifeline Come About?

Rubenstein: Jamie Dimon is a great banker. But why do you think he was doing the calling around to get those deposits together, and not the Secretary of Treasury, the Chairman of the Federal Reserve, the Chairman of the FDIC? Why is it a nongovernment person who is doing this? I would have thought a government person would do this.

Fraser: David, why did you think that Janet [Yellen] wasn’t calling around during this? Do you believe everything you read in the newspapers?

Rubenstein: When people in Washington do something good, they usually let the press know about it. Jamie Dimon seemed to be getting all the credit, if credit is the right word.

Fraser: Jamie played a role. I think we all played a role. There was a lot of engagement and debate. I think people should take confidence in this. There was really good engagement, there was brainstorming and there was good intent of how do we come together and try and give some support into something that we believe in. It’s a good thing.

Fraser on Credit Suisse and the Next Dominos to Fall

Rubenstein: Credit Suisse seemed to dissolve very, very quickly. Were you surprised at how quickly that bank kind of went away after about 100 years of being around?

Fraser: The nice thing is we’re talking about three or four banks out of the thousands that are here in the U.S. and the rest of the world. So let’s have that perspective.

“I don’t think anyone was falling off their chair that Credit Suisse ultimately ended up where it did.”
— Jane Fraser, Citigroup

I don’t think anyone was falling off their chair that Credit Suisse ultimately ended up where it did. It was really a question of time. It’s been a troubled institution for a long time. Those of you who don’t know it, it’s a very global bank and it’s got a very strong operation. But it’s had a lot of issues. It’s had a lot of management instability. It’s had a number of different crises. So no one was hugely surprised that this happened. It was really a question of time in everyone’s mind.

Rubenstein: Are you worried any other bank, without mentioning one, might have a financial problem? Is there another shoe to drop? Or is the problem patched up now?

Fraser: There could well be some smaller institutions that have similar issues, in terms of they’ve been caught without managing the balance sheets as ably as others have done. And it’s quite likely there may be a few of them. We certainly hope they’ll be fewer rather than more. But again, it should be manageable within the existing toolkit that’s there.

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Powell and Yellen? ‘Yes, They Do Call’

Rubenstein: Do Jerome Powell and Janet Yellen call you? You’re running one of the biggest banks.

Fraser: Yes, they do call.

Rubenstein: What do they say?

Fraser: They ask for opinions on things. It’s great to see that we’ve got people that aren’t just telling you what to do. They’re soliciting advice, trying to understand what’s happening in the economy. What are we seeing? What are we learning? Because we’re a big global bank. We’ve got operations everywhere.

So they’ll be asking for advice. They won’t necessarily take it. But I’m a mother of teenagers, so I understand that.

Fraser on Latest Fed Rate Hike: ‘Very Sensible’

Rubenstein: The Federal Reserve has announced that it’s going to increase the discount rate by another 25 basis points. Do you think that was the right decision now?

Fraser: I think it was a tough decision. But it was jolly sensible, if you’ll pardon the British expression.

Jay Powell said, we don’t know how much credit tightening is going to come from what’s gone on in the last couple of weeks. We don’t quite know what’s going to happen there. But we do know that inflation is a real problem. It’s persistent.

It’s starting to come off. But he has to tackle this. “In Jay, the markets trust,” and many of us do, because he has been so clear about slaying the inflation dragon. But he’s going to wait and see what the data shows as to what the impact of the last couple of weeks have been.

That feels like a very sensible response.