The cause of banking crises since the debacle in the 1980s remains unchanged. Incentives encourage executives to take excessive risks, with few consequences if bets turn bad. It’s happening again.
The Fed’s campaign of rate hikes is showing more signs of having the intended effect of slowing the economy – but that may be bad news for those who lose their jobs or have a harder time finding one.
Crises fueled by bank runs, starting with the Great Depression, have had something in common: Unexpected changes spur bank failures, followed by general panic and then large-scale economic distress.
The Fed raised rates by a quarter-point – less aggressive than had been expected before the current banking crisis, but signaling inflation is still its focus.
The Fed, Treasury and FDIC acted swiftly to protect depositors and stem any panic, but anxiety continues to grow about the state of the global financial system.
The latest consumer prices report shows cost of living is still rising far above the Fed’s target. But don’t expect monetary policymakers to aggressively hike rates.
Lenders face a lot of risks, but two of them – interest rate and liquidity – were the main drivers of the sudden and rapid failure of Silicon Valley Bank and Signature Bank. That’s why more trouble may be ahead for the banking sector.