The current banking crisis is triggering flashbacks to the Global Financial Crisis (GFC) of 2008. While we tackled that in It's not 2008 all over again, it would be a mistake to assume that the banking crisis will only impact banks, and not other industries.
Banking crises are never just about the banks.
Banks are the critical linchpin in moving money through the economy, and without money moving through the economy, everything breaks down. This is why the health of the banking sector is so crucial. Hence, when we talk about the health of banks, do bear in mind that it has potential implications far beyond the banks.
Will we have contagion from this? Is there a knock-on effect from the banks where this has begun? That’s what happened 15 years ago when the GFC kicked off. It started off with Bear Stearns, and then it took a while. Lehman Brothers didn’t collapse until the fall. So, these things can trickle through the financial system for quite some.
Banks are interconnected with the economy and with each other. They lend to each other. They support each other. A problem with one bank can quickly spread to another if investors begin to get worried and fearful.
This is the type of event that tends to have ripples.
This is the kind of event that tends to happen at this point in the economic cycle. Interest rates have risen a lot more than people expected, and you’re starting to see things break out there. So, it’s time to really pay attention and make sure portfolios are the way you want them to be, that you can handle any losses that might come up if things do get worse.
It could turn out to be nothing. But it’s not the time to close your eyes and think that this doesn’t bother you.
When you start to see people avoiding riskier parts of the markets, it tells you that there’s warning signs out there that people are really beginning to get concerned.
Will banks start getting worried about protecting themselves? If you’re a bank and you have to shore up your own deposits and your own financials, you’re going to stop lending. You’re going to stop lending first to the riskier borrowers and start working through the system.
When lending stops, the supply of credit to the economy is choked. That’s when the real problem starts. If the supply of credit gets choked, then businesses can’t borrow money. Businesses can’t repay money that they already have. Maybe they have debt that they need to roll over. They need somebody else to loan them more money. If the bank won’t lend them, they’re out of luck.
Or if somebody wants to open a new business, a small business, then they’re not going to get that loan, and gradually it just pinches off economic activity.
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