Federal Reserve Warns Banks to be More Conservative Following Bank Failures

The Federal Reserve has warned banks to be more conservative in their lending practices following the failure of three of the nation’s 30 largest banks in the last two months. Silicon Valley Bank, Signature Bank, and First Republic Bank have all gone under, leading to a pullback in bank lending that could slow the economy.

The Federal Reserve Chairman Jerome Powell said that the bank failures mean that the central bank won’t have to raise interest rates as high as they would have had the banks not failed. He raised interest rates by 0.25%, to a target range between 5.00% and 5.25%.

The fate of another regional lender, PacWest Bancorp, is now in question. After the close of trading on Wednesday, shares of PacWest Bancorp dropped 55% to $2.88. Bloomberg News reported that the $44 billion bank is considering its strategic options, including a possible sale, a breakup, or trying to raise capital. PacWest’s shares have dropped 78% over the last three months.

The Federal Reserve’s warnings come as the central bank is already trying to slow high inflation. The bank failures have had the effect of slowing an economy that the central bank was already trying to cool. It remains to be seen how the pullback in bank lending will affect the economy, and whether other regional lenders will be affected.