Months before Silicon Valley Bank and Signature Bank collapsed, U.S. financial regulators received warnings about how the industry’s mounting unrealized losses had the potential to spark a crisis.
Silicon Valley Bank was shut down earlier in March by California regulators and was put in control of the U.S. Federal Deposit Insurance Corporation.
“Without your immediate and proactive intervention and collaboration with FHFA in resolving this issue, community banks may soon be forced to realize what are now only unrealized losses – an unfortunate outcome that during unprecedented times could ignite itself to create a crisis,” Rebeca Romero Rainey, ICBA’s president, wrote in November to Barr and the heads of the FDIC, the Office of the Comptroller of the Currency and the Federal Housing Finance Agency.
Deposits have soared since March 2020, and U.S. banks invested billions of dollars in safe, interest-earning assets like Treasury bonds. When the Fed raised interest rates in 2022, those assets lost value. For many banks, the FHLB system is a vital source of cash. To pay depositors who withdraw their cash in times of crisis, banks often get loans from the Federal Home Loan Banks. These loans, known as advances, are implicitly backed by the U.S. government, and they don’t carry the heavy stigma associated with borrowing from the Fed. For smaller banks, the FHLB and the Fed can be the only sources of quick cash.
Five members of the U.S. House of Representatives also sent a letter to the heads of the FHFA and the bank regulators in December. They urged FHFA to “act immediately to avert an unnecessary economic challenge” and asked the bank regulators to grant waivers for banks to keep access to the home loan banks.
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