Game of Trades: Domino Effect of a Typical Banking Crisis: More Bank Failures Are Going to Lead to Widespread Panic
Liquidity issues have led to two bank closures in the past week. They mark the second and third-largest closures in history. Investors are concerned that more are on the way. This has led to a drop in regional banks, which have been hit hard, even for those with sufficient capital to operate.
We could be looking at the first banking collapse since 2008. This has the potential to add contagion and fear to other parts of the financial system.
While banks aren’t a massive part of the S&P 500, their collapse could kick off a broader market meltdown. That’s because the banking system plays a large role thanks to its ability to allow companies to operate.
Banks have been increasing their leverage in recent decades. So any small mistake could be magnified throughout the economy. And any small run on a bank can easily lead to a bank’s failure, even if investors have their deposits protected by the FDIC.
As that happens, investors could panic. When that happens, they will want to go to safe assets. That includes cash, government bonds, gold, and potentially cryptocurrencies. These assets have already seen notable moves in the past week.
This move comes as the Treasury yield curve has been negative for some months, suggesting economic pain in the not-too-distant future. And while a banking crisis may stop the Federal Reserve from further raising interest rates, the damage may have been done.