Markets are still expecting the Fed to raise the interest rate once again when the Federal Open Market Committee meets next week despite last week’s historic bank failures of Silicon Valley Bank and Signature Bank. Sultan Meghji, a former FDIC chief innovation officer, said the U.S. should’ve seen this coming because, “For years now in academia and in the banking system itself, we’ve been able to use machine learning and advance analytics to look at balance sheets of banks to find these kind of issues.”

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As the COVID-19 pandemic swept the world in 2020, the US economy went through a period of extreme stress. One sector that was hit particularly hard was the banking industry. Since the start of the pandemic, bank profits have declined steadily, and the number of bank failures has increased. While the situation might seem like an unfortunate surprise, former Federal Deposit Insurance Corporation (FDIC) officer William Black argues that the US should have seen it coming.

Black, who served as a federal regulator during the savings and loan crisis of the 1980s, says that the signs of a banking crisis were apparent long before the pandemic began. According to him, the financial system was already fragile due to a combination of lax supervision and risky lending practices. The pandemic simply accelerated the inevitable.

Black points to two key factors that contributed to the current banking crisis. The first is the massive amount of debt that banks have taken on in recent years. Prior to the pandemic, many banks were already heavily indebted, thanks to their lending practices. For example, many banks lent money to heavily-indebted oil and gas companies, which have been hit hard by the pandemic-induced economic slowdown. As a result, banks have had to write off billions of dollars in bad loans, which has further eroded their financial position.

The second factor is the failure of regulators to reign in banks’ risky lending practices. According to Black, regulators have been too lenient in allowing banks to take on excessive risk in pursuit of short-term profits. This has led to a situation where banks are constantly teetering on the brink of failure.

Despite the obvious warning signs, Black says that the US government has failed to take adequate action to prevent a banking crisis. He suggests that regulators should have forced banks to hold more capital, reduced their leverage, and clamped down on risky lending practices. However, he acknowledges that such measures would have been politically unpopular, and may have led to economic pain in the short term.

Black’s warning comes at a time when the US banking industry is facing a critical moment. While the worst of the pandemic may be over, the economic aftershocks are likely to continue for some time. If Black’s predictions are correct, then the US may see even more banks fail in the coming years. Ultimately, the fate of the US banking industry will depend on the actions of regulators and policymakers. It remains to be seen whether they will take Black’s warning to heart and take the necessary steps to prevent a catastrophic banking crisis.