Fed should stop raising rates now, says former FDIC chairman after Silicon Valley Bank bankruptcy


Sheila Bair, chief banking regulator during the 2008 financial crisis, says the stunning collapse of the Silicon Valley bank is exactly why the Federal Reserve needs to end its war on inflation.

“The Fed needs to pause and assess the full implications of its actions before raising short rates,” Baer, ​​the former chairman of the Federal Deposit Insurance Corporation, told CNN on Sunday in a telephone interview.

“If they paused, it would have a stabilizing effect on the markets,” said Baer, ​​who led the FDIC through 2008 Washington Mutual failure. Silicon Valley Bank is second only to Washington Mutual in size The largest bank failures in US history.

Until Friday, investors expected a significant increase in interest rates by half a percentage point at the Fed meeting on March 21-22. Bair said a raise of that size would not have been “prudent” given the collapse of the Silicon Valley bank.

Similarly, Goldman Sachs told clients Sunday evening that “in light of the stress in the banking system,” the bank no longer expects the Federal Reserve to raise rates next week. Goldman, however, still expects a quarter-point rate hike at the Fed’s May, June and July meetings, though it added that there is “significant rate uncertainty.”

To combat inflation, the Fed aggressively raised interest rates at rates not seen since the early 1980s.

These interest rate hikes contributed to the collapse of Silicon Valley Bank in at least two key ways.

First, higher borrowing costs have stirred up frothy parts of the US economy, especially the tech industry served by the Silicon Valley bank. Second, the Fed’s rate hike has eroded the value of Treasuries, which banks rely on as a central source of capital.

“When there is less money, financial assets lose value. This needs to be carefully managed,” said Bair, who led the FDIC during the wave of bank failures during the 2008 global financial crisis.

As of the end of last year, US banks sitting on $620 billion in unrealized losses (assets that have lost value but have not yet been sold), according to the FDIC. These assets could lose even more value if the Fed continues to raise rates.

Silicon Valley posted a $1.8 billion loss on bonds it held last week as it rushed to sell securities in an attempt to bolster its balance sheet.

But news of the need to raise cash spooked customers, many of whom were tech startups. They panicked pulled out $42 billion just last Thursday when Silicon Valley Bank shares plunged 60%, according to California regulatory filings. By the end of the day, the Silicon Valley bank had a negative cash balance of about $958 million.

“It was a bank robbery,” Baer said. “As far as I can tell, the assets are of good quality if held to maturity. But people are people.”

The worry is that bank customers and investors may start to turn down other banks that are considered the next weakest links. That’s why the US government intervened with extraordinary plan of salvation Sunday to ensure customers were made whole.