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 question is whether the banking crisis will continue to spread and how it might spill over into the economy — for example, by making it harder to get loans, spurring more layoffs and even tipping the country right into recession.
Most experts believe 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 will pass, and we will all have many other things to worry about in our professional and personal lives,” said Ross Levine, finance professor at UC Berkeley’s Haas School of Business. 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 major 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 to be bailed out, whether 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 is every sign that the government means something. The speed and magnitude of its actions so far are commensurate with putting an end to this.”
Those actions included the extraordinary steps of agreeing to stop all Silicon Valley Bank deposits, even above the insured limits, and having 11 major banks pay $30 billion into First Republic to signal confidence and help 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 that 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 U.S. economy into this long-awaited recession,” he said. That would mean more layoffs, he said, especially of middle-aged and older workers, who have higher wages.
Anastassia Fedyk, an assistant professor of finance at Haas, weighed in between the upbeat and downbeat views.
“We’re in a contagion going from Silicon Valley Bank to First Republic,” she said. “It’s speculation at this point as to how much more damage we’ll see spill over to others.”
But she warned that the domino effect could be real if investor confidence continues to sink.
“We’re already on the second domino,” she said. “The regulatory responses were enough to stem some of the fallout from SVB, specifically. All those 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 its campaign, Levine said.
“They face an excruciatingly difficult decision,” he said. “They must assess the vulnerabilities in the banking industry. If they judge that there really are no systemic vulnerabilities, that there are only a few small banks involved, then they will probably choose to continue (raising interest rates). If they see other risks, risks that they see as real or (that) could cause banks to limit credit — even if the Fed sees banking as very healthy — then they may decide to pause rate hikes.”
Duffie believes the Fed is less likely to raise interest rates than it otherwise would have done. The banking events themselves could tighten credit and thereby lower inflation, he said. “It’s 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 uncertainty, pausing a meeting cycle could be very prudent,” Levine said. “Obviously the markets are very sensitive to the banks now. Waiting to tighten credit could give everything a chance to calm down.”
Reach Carolyn Said: csaid@sfchronicle.com; Twitter: @csaid