Overnight, the top threat to America’s economic future is distilled in one ominous word, “contagion.” It’s the talk of the financial world that the quick, jarring jump in interest rates helped destroy Silicon Valley Bank by pounding the value of its bond holdings, leaving Big Tech’s onetime favorite lender short of the funds to cash out fleeing depositors. But all the midsize banks have also suffered big losses in the fixed-income portfolios that provide the liquidity that both reassures customers they’re totally safe, and that banks will need if even a portion of their clients pull their cash from checking accounts and money-market funds to buy Treasuries that are suddenly offering sumptuous yields. Even if the Fed’s and FDIC’s extraordinary campaign to contain the contagion works, the crisis will likely prompt regulators to clamp rigorous new strictures on midsize lenders that will make loans for businesses and homebuyers a lot harder to get.
Put simply, even though the Dodd-Frank reforms forced the banks to harbor huge capital cushions that should ensure their safety, fear is running rampant that SVB will set off a string of falling dominoes among the regionals, greatly shrinking the availability of credit and increasing the odds of a deep recession. The SVB virus has already spread, forcing the $30 billion rescue of First Republic by a group of lenders led by JPMorgan Chase.
