On Monday, the head of the Federal Deposit Insurance Corp. warned a gathering of bankers in Washington about a $620 billion risk lurking in the US financial system.
By Friday, two banks had succumbed to it.
Whether US regulators saw the dangers brewing early enough and took enough action before this week's collapse of Silvergate Capital Corp. and much larger SVB Financial Group is now teed up for a national debate.
SVB's abrupt demise - the biggest in more than a decade - has left legions of Silicon Valley entrepreneurs in the lurch and livid. In Washington, politicians are drawing up sides, with Biden administration officials expressing "full confidence" in regulators, even as some watchdogs race to review blueprints for handling past crises.
To his credit, FDIC Chair Martin Gruenberg's speech this week wasn't the first time he expressed concern that banks' balance sheets were freighted with low-interest bonds that had lost hundreds of billions of dollars in value amid the Federal Reserve's rapid rate hikes. That heightens the risk a bank might fail if withdrawals force it to sell those assets and realize losses.
But despite his concern, the toppling of two California lenders in the midst of a single workweek marked a stark contrast with the years after the 2008 financial crisis, when regulators including the FDIC tidily seized hundreds of failing banks, typically rolling up to their headquarters just after US trading closed on Fridays.
Even in the darkest moments of that era, authorities managed to intervene at Bear Stearns Cos and Lehman Brothers Holdings Inc. while markets were shut for the weekend.
In this case, watchdogs let cryptocurrency-friendly Silvergate limp into another workweek after it warned March 1 that mounting losses may undermine its viability. The bank ultimately said Wednesday it would shut down.
That same day, SVB signaled it needed to shore up its balance sheet, throwing fuel onto fears of a broader crisis. A deposit run and the bank's seizure followed. The KBW Bank Index of 24 big lenders suffered its worst week in three years, tumbling 16%.
"With Silvergate there was a little bit of a regulatory blind spot," said Keith Noreika, who served as acting comptroller of the currency in 2017. "Because they wound it down mid-week, everyone got a little spooked, thinking this is going to happen to others with similar funding mismatches."
Representatives for the FDIC and Fed declined to comment.
Trump eased oversight of small and regional lenders when he signed a far-reaching measure designed to lower their costs of complying with regulations. A measure in May 2018 lifted the threshold for being considered systemically important - a label imposing requirements including annual stress testing - to $250 billion in assets, up from $50 billion.
SVB had just crested $50 billion at the time. By early 2022, it swelled to $220 billion, ultimately ranking as the 16th-largest US bank.
The lender achieved much of that meteoric growth by mopping up deposits from red-hot tech startups during the pandemic and plowing the money into debt securities in what turned out to be final stretch of rock-bottom rates.
As those ventures later burned through funding and drained their accounts, SVB racked up a $1.8 billion after-tax loss for the first quarter, setting off panic.
'Real Stress Test'
"This is a real stress test for Dodd-Frank," said Betsy Duke, a former Fed governor who later chaired Wells Fargo & Co.'s board. "How will the FDIC resolve the bank under Dodd-Frank requirements? Investors and depositors will be watching everything they do carefully and assessing their own risk of losing access to their funds."
One thing that might help: SVB was required to have a "living will," offering regulators a map for winding down operations.
"The confidential resolution plan is going to describe the potential buyers for the bank, the franchise components, the parts of the bank that are important to continue," said Alexandra Barrage, a former senior FDIC official now at law firm Davis Wright Tremaine. "Hopefully that resolution plan will aid the FDIC."
The issues that upended both Silvergate and SVB, including their unusual concentration of deposits from certain types of clients, were "a perfect storm," she said. That may limit how many other firms face trouble.
One complication is that the Fed has less room to help banks with liquidity, because it's in the midst of trying to suck cash out of the financial system to fight inflation.
Another is that a generation of bankers and regulators at the helm weren't in charge during the last period of steep interest-rate increases, raising the prospect they won't anticipate developments as easily as their predecessors.
Indeed, even bank failures have been rare for a time. SVB's was the first since 2020.
"We're seeing the effects of decades of cheap money. Now we have rapidly rising rates," said Noreika. "Banks haven't had to worry about that in a long time."