Or is the whole financial orchard at risk?
In the past two months, four US banks – with combined assets of over $450 billion – have failed. Credit Suisse, the once venerable Swiss institution, also shut its doors for the last time. Yet equity markets are trading higher than they were before the onset of this banking crisis.
In 2007, Ben Bernanke, then Chair of the Federal Reserve (Fed), remarked that “the problems in the subprime [mortgage] market seems [sic] likely to be contained.”
His words aged badly – in fact, it was a central banker blooper for the ages.
Jay Powell, the current Fed chair, has not been quite so foolish. But, in his latest press conference, he strayed awfully close to the ‘bad apples’ position some market analysts have taken.
Silicon Valley Bank, Signature, Silvergate and now First Republic were all poorly run institutions, he argued, with highly concentrated customer bases and a large proportion of uninsured depositors. The US banking system, by contrast, is ‘robust’. Listen carefully and you can just about make out the quiet, but growing, chorus of voices making this case.
Despite US banks’ $2.4 trillion of reserves, the banking system could soon be stressed by a lack of high quality liquid assets.
In one sense, the system is robust. The crippling doom loop between the banks and the real economy we saw in 2008 is unlikely to feature in the coming recession: the global systemically important banks (G-SIBs) are in good shape. But the absence of a life-threatening heart attack is an odd benchmark for judging success.
We worry about something different – a violent liquidation in financial markets, partly independent of developments on Main Street. There are two obvious triggers.
