Fed criticized for missing red flags before bank collapse

The Federal Reserve is facing stinging criticism for missing what observers say were clear signs that Silicon Valley Bank was at a high risk of collapsing into the second-largest bank failure in history of the United States.

Critics point to many red flags surrounding the bank, including its rapid growth since the pandemic, its unusually high level of uninsured deposits and its many investments in long-term government bonds and mortgage-backed securities, which tumbled in value as interest rates rose.

"It's inexplicable how the Federal Reserve supervisors could not see this clear threat to the safety and soundness of banks and to financial stability," said Dennis Kelleher, chief executive of Better Markets, an advocacy group.

Wall Street traders and industry analysts "have been publicly screaming about these very issues for many, many months going back to last fall", Kelleher added.

According to an official, the White House is carefully monitoring developments at First Republic and other smaller banks after actions to protect depositors following the collapse of Silicon Valley Bank last week, Reuters reported on Tuesday.

Silicon Valley Bank's shutdown on Friday — followed two days later by the collapse of New York-based Signature Bank — has roiled global markets and forced US President Joe Biden to rush out assurances that the financial system is safe and prompted emergency US measures, giving banks access to more funding.

"We're certainly monitoring what's going on at First Republic. They're one of the banks that has been under a little more stress, but we have no announcements at this time about any actions that we're taking," the official said.

The Fed was the primary federal supervisor of Silicon Valley Bank. Now the consequences are complicating the Fed's upcoming decisions about how high to raise its bench mark interest rate in the fight against chronically high inflation.

Many economists say the central bank would likely have raised rates by an aggressive half-point next week at its meeting, which would amount to a step-up in its inflation fight, after the Fed implemented a quarter-point hike in February. Its rate currently stands at about 4.6 percent, the highest level in 15 years.

With the collapse of the two large banks fueling anxiety about other regional banks, the Fed may focus more on boosting confidence in the financial system rather than on its long-term drive to tame inflation, The Associated Press commented.

On Tuesday, rating agency Moody's cut its outlook on the US banking system to "negative" from "stable". US prosecutors are also investigating the collapse of Silicon Valley Bank, according to a source familiar with the matter, Reuters reported.

"I'm at a loss for words to understand how this business model was deemed acceptable by their regulators," said Aaron Klein, a congressional aide, now at the Brookings Institution, who worked on the Dodd-Frank banking regulation law that was passed after the 2008 financial crisis.

Jose Aut, a Fresno, California-based fruit and vegetable wholesaler, has been using small, private banks like the First Republic Bank for more than two decades.

"A hard lesson learned from this bank run is never, ever put all the hard-earned money in one bank," he said, adding that he had decided to withdraw a large chunk of his deposits.

The $250,000 FDIC (Federal Deposit Insurance Corporation) limit for one single bank account doesn't provide sufficient sense of financial security, he said.

"Breaking news about Silicon Valley Bank collapsing overnight is horrifying. I don't want to experience it myself."

Chang Jun in San Francisco,Heng Weili in New York and agencies contributed to this story.