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The Federal Reserve tries to limit any further damage to the banking system


The sudden failure of Silicon Valley Bank this month surprised a lot of people.


Yeah, but it may not have been a shock to federal regulators. Multiple news reports say they'd been warning about the bank for years before its failure. The Federal Reserve Bank oversees the banking system, so its leaders face questions as they meet in Washington this week.

INSKEEP: NPR's Scott Horsley will be listening to them, as he often does. Hey there, Scott.

SCOTT HORSLEY, BYLINE: Good morning, Steve.

INSKEEP: How much will this bank failure dominate the Fed meeting?

HORSLEY: It's definitely casting a shadow. It not only influences the Fed's decision about interest rates this week, but the Fed itself is under the microscope for the way its supervisors police Silicon Valley Bank and a second bank that collapsed a few days later. A House committee is planning to hold hearings on the subject next week. Here's committee Chairman Patrick McHenry of North Carolina on CBS.


PATRICK MCHENRY: We need to get to the bottom of whether or not this is a supervisory problem, a regulatory problem, bank mismanagement problem, perhaps all three.

HORSLEY: You know, in hindsight, the problems at Silicon Valley Bank are clear. It had really fast-growing deposits, most of which were not insured. It was overconcentrated in the tech industry, which meant a lot of withdrawals when that industry suffered a downturn. And too much of the bank's money was tied up in long-term bonds, which lost value as interest rates rose. So this was a recipe for trouble. And we now know many of those problems were identified by Fed supervisors years ago but not corrected.

INSKEEP: Well, sure. It just sounds like math. You can tell that interest rates were going to be going up. You know you have a certain number of assets. And if you're smart, if it's your business, you ought to be able to do the math and see the problem coming. So who failed to get the word out?

HORSLEY: Yeah. Bloomberg, The New York Times, The Wall Street Journal all say the bank got multiple warnings about its risk management practices. The Journal says one notice came as far back as 2019. These notices are typically confidential, though. Rutgers economist Eugene White, who's written a lot about bank supervision, says the idea is to quietly correct the problem without damaging a bank's reputation.

EUGENE WHITE: What they don't want to give is a warning not only to the public but to the financial community in general. And any change in the signal might panic people.

HORSLEY: Of course, panic is what ultimately ensued at Silicon Valley Bank. We had a massive bank run, and that's when the government had to step in.

INSKEEP: Help me with some context here. How unusual would it be for a bank to get a bunch of warnings from the Fed and not take action?

HORSLEY: Yeah, that's hard to know, but it's certainly something people are going to be asking about. We don't know how many other banks have gotten similar notices from Fed supervisors and what steps they've taken to address them. Right after a bank failure like this, there are lots of calls for increased monitoring. But often, we hear calls for a lighter touch. Literally days before Silicon Valley Bank went under, Republican senators were complaining about too much bank regulation from the Fed. Dennis Kelleher, who heads the nonprofit watchdog Better Markets, says that's no surprise.

DENNIS KELLEHER: The power and influence of the financial industry in Washington, D.C., is incredibly widespread and ever-present. And the result is that they are pushing to deregulation at all times.

HORSLEY: We know that Silicon Valley Bank was spared some of the most stringent bank oversight thanks to a law passed in 2018. What we don't know yet is how that deregulatory atmosphere affected the quality of supervision the bank did get. We may learn more about that in the weeks to come. The Fed's planning to release an internal report by May 1.

INSKEEP: NPR's Scott Horsley, thanks so much.

HORSLEY: You're welcome. Transcript provided by NPR, Copyright NPR.

Steve Inskeep is a host of NPR's Morning Edition, as well as NPR's morning news podcast Up First.
Scott Horsley is NPR's Chief Economics Correspondent. He reports on ups and downs in the national economy as well as fault lines between booming and busting communities.