Persistent inflation has pushed America into an era of rising interest rates that millions of American workers have never experienced before. Consumers have been showing resilience, but also some signs of strain.
Silicon Valley Bank wasn鈥檛 huge enough to be considered a 鈥渟ystemically important鈥 financial institution that warrants extra scrutiny from regulators.
But we are learning that it was big enough to cause plenty of consternation when it failed.
The key explanation: Financial markets are all about confidence. One bank failure can stir wider questions, notably, 鈥淐ould my bank be next?鈥 Fear can spread. Risks that in theory shouldn鈥檛 be called systemic suddenly get treated that way.
A second large bank failed Sunday: Signature Bank, which at $100 billion in assets is about half the size of Silicon Valley Bank. Some other banks 鈥 but at present a relative few 鈥 are also facing serious investor and depositor worries.
All this explains why federal officials are doing their utmost to contain any panic.
鈥淵our deposits will be there when you need them,鈥 President Joe Biden told Americans Monday.
On Sunday night, federal regulators took to make it so: They said depositors聽at聽both shuttered banks will be able to access their funds, even if the amounts are above the $250,000 that qualifies for protection by the Federal Deposit Insurance Corp.
The efforts, seen by many economists as necessary, bore immediate fruit: Despite a bumpy ride for some banks, the overall stock market held steady in Monday鈥檚 trading.
But the move also comes at a price. It鈥檚 true that there鈥檚 no direct infusion of taxpayer dollars. But in effect a risky bet by the bank, and by extension its wealthiest depositors, is getting a rescue 鈥 in the name of containing spillover to the wider financial system.
鈥淟et me get this straight,鈥 of the Brookings Institution. 鈥淭he Fed regulates SVB, allows it to blow up its balance sheet with uninsured deposits, buy low interest rate mortgages unhedged ... and then when it fails screams systemic risk and bails out their creditors.鈥
Yes, that doesn鈥檛 seem fair. But it鈥檚 also understandable that officials safeguard the system in times of stress. So a key challenge is figuring out how to avert financial panics today without sowing the seeds of irresponsible risk-taking tomorrow. That鈥檚 not a new problem. But it has just gained fresh urgency.