By now we’ve all been reminded that US bank deposits are federally insured up to $250,000. Amounts above that are well out of reach for most soccer moms and barbecue dads, so they don’t have to fear losing their bank savings.
The bigger issue is whether the banking crisis will continue to spread, and how it might spread into the economy—for example, by making it harder to get loans, spurring even more layoffs, and even tipping the country right into recession.
Most experts believe that we are still far from serious consequences, although there may be more short-term pain ahead.
“For the vast majority of people, this mini-crisis is going to pass, and we’re all going to have a lot of other things to worry about in our professional and personal lives,” said Ross Levine, finance professor at the Haas School of Business at UC Berkeley . Still, he said, “This is a very uncertain time.”
Darrell Duffie, a finance professor at Stanford, was also sanguine.
“The most likely scenario is that the economy will be fine because there won’t be a big problem in the banking system,” he said. “There may be some mergers and some problems in other banks. But I think it is most likely that after one or two more banks have had to be rescued, either by merger or similar treatment, it will stop there.”
Why?
“Because the government will do its best to ensure that this will not lead to significant contagion,” Duffie said. “There are all signs that the government is serious. The speed and size of the actions so far are in proportion to putting a stop to this.”
These actions included the extraordinary steps of agreeing to freeze all Silicon Valley Bank deposits, even above the insured limits, and having 11 major banks deposit $30 billion into First Republic to signal confidence and help to keep it afloat. In addition, the Federal Reserve ensures that banks have plenty of funds on hand by making money available to them on “terribly generous” terms, he said.
But not everyone was optimistic.
John Lonski, former chief economist at Moody’s Investors Service and founder of economic/market research firm Thru the Cycle, believes many smaller and regional banks could be consolidated or collapsed, as happened in the savings and loan crisis, which triggered the failure of about 1,000 banks from 1986 to 1995.
He believes cascading effects this time could include banks tightening credit – which could make it harder for people to get mortgages or credit cards, and for businesses to get loans.
And that can lead to an even worse result.
“This credit crunch (could) finally push the US economy into this long overdue recession,” he said. That would mean more layoffs, he said, especially of middle-aged and older workers, who have higher wages.
Anastassia Fedyk, assistant professor of finance at Haas, weighed in midway between the positive and downbeat view.
“We’re in a contagion spiral going from Silicon Valley Bank to First Republic,” she said. “There is speculation at this point as to how much more damage we will see spill over to others.”
But, she warned, the domino effect could be real if investor confidence continues to decline.
“We’re already on the second domino,” she said. “The reactions from the authorities were enough to stop some of the fallout from SVB, specifically. All of these exposed deposits were protected, but not enough to allay fears that something similar could happen to similarly exposed banks like First Republic.”
While she believes a recession “is in the realm of feasibility,” it is still early and the government has many more tools at its disposal to contain the risk, she said.
All eyes will likely be on the Federal Reserve next week when it meets to decide whether to continue raising interest rates to fight inflation, or hit pause on the campaign, Levine said.
“They face an excruciatingly difficult decision,” he said. “They must assess the vulnerabilities in the banking industry. If they consider that there really are no systemic vulnerabilities, that these are just a few small banks, then they will probably choose to continue (raising interest rates). If they look at other risks, risks that they see as real or (that) could cause banks to restrict credit — even if the Fed sees banking as very prudent — then they may decide to pause rate hikes.”
Duffie believes the Fed is less likely to raise interest rates than it otherwise would have. The banking events themselves could lead to a tightening of credit, thereby reducing inflation, he said. “There is a shift in probabilities from the Fed pushing inflation and therefore taking a risk of recession to this brewing problem in the banking system having a similar effect on credit,” he said.
“Given the uncertainties, it may be very prudent to pause for one meeting cycle,” Levine said. “The markets are obviously very sensitive to banks now. Waiting to tighten credit could give everything a chance to calm down.”
Reach Carolyn Said: [email protected]; Twitter: @csaid
