WASHINGTON (AP) – The Federal Reserve is facing harsh criticism for what observers say is a Silicon Valley bank that missed clear signs that the risk of a recession was high amid the second-largest bank failure in the state’s history. – United.
The Fed was the lead federal supervisor of the Santa Clara, Calif.-based bank that filed for bankruptcy last week. The bank is also being monitored by the California Department of Financial Protection and Innovation.
Critics point to many red flags surrounding the Silicon Valley bank, including its rapid post-pandemic growth, unusually high levels of uninsured deposits and its large investments in long-term government bonds and mortgage-backed securities. its value decreased as interest rates rose. .
“It is inexplicable that Federal Reserve regulators failed to see this obvious threat to the safety and soundness of banks and financial stability,” said Dennis Kelleher, chief executive of Better Markets, an advocacy group.
Wall Street traders and industry analysts “have been clamoring openly about these same issues for many months since last fall,” Kelleher added.
Now, the fallout from the bankruptcy of Silicon Valley Bank over the weekend, as well as New York’s Signature Bank, will complicate the Fed’s future rate decisions. its benchmark interest rate in the fight against chronically high inflation.
According to many economists, the central bank is likely to raise rates by an aggressive half-point at its meeting next week, which will intensify the fight against inflation. The Fed raised rates by a quarter point to about 4.6% in February, the highest level in 15 years.
The move follows increases of half a point in December and four three-quarter points before that.
Last week, many economists predicted that Fed policymakers would raise their forecast to 5.6% next week. Now, it’s hard to know how many more rate hikes the Fed plans to raise.
With the collapse of two major banks raising concerns about other regional banks, the Fed may be more focused on building confidence in the financial system than on its long-term intention to control inflation.
The government’s latest inflation report released Tuesday shows that price increases remain well above what the Fed wants, putting Chairman Jerome Powell in a difficult position. Core prices, which exclude volatile food and energy costs and are considered a good indicator of longer-term inflation, rose 0.5% from January to February – the highest since September. That’s well above the Fed’s 2% annual target.
“It might have been a close call if it wasn’t for the ramifications of the bank failure, but I think it would have helped them get half a point (rate rise) in this meeting,” Cathy said. Bostiancic, Nationwide’s chief economist.
On Monday, Powell announced that the Fed would review its oversight of Silicon Valley to understand how it can best manage banking regulation. The review will be led by Fed Vice Chairman Michael Barr, who oversees banking supervision, and will be made public on May 1.
“We need to be humble,” Barr said, “and take a hard, hard look at how we’ve overseen and regulated this business and what we need to learn from this experience.”
A spokeswoman for the Federal Reserve declined to comment further. A call to the California Department of Financial Protection and Innovation was not immediately returned.
By all accounts, Silicon Valley was an exceptional bank. His management took excessive risks by buying billions of dollars of mortgage-backed securities and Treasury bills when interest rates were low. The value of existing Silicon Valley bonds has steadily fallen as the Fed has consistently raised interest rates and raised Treasury yields to fight inflation.
Most banks would seek to make other investments to offset this risk. The Fed could also force the bank to raise additional capital.
The bank grew rapidly. Its assets quadrupled in five years to $209 billion, making it the 16th largest bank in the country. About 97% of its deposits were uninsured because they exceeded the Federal Deposit Insurance Corporation’s $250,000 insurance limit.
This unusually high ratio made the bank highly susceptible to the risk of rapid withdrawal of depositors’ money at the first sign of trouble – a classic bank run, and that’s exactly what happened.
Silicon Valley CEO Greg Becker previously lobbied Congress for looser regulation and served on the board of the Federal Reserve Bank of San Francisco until its demise. Silicon Valley.
Aaron Klein, a congressional aide who worked on the Dodd-Frank banking regulation bill that passed after the crisis, said: “I’m at a loss to understand how this business model was deemed acceptable by their regulators.” 2008 fiscal year.
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