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Will Your Bank Be the Next Lehman?

by Richard A Reagan

While stock markets may be ignoring the weakness in the US banking system right now, that weakness remains. First Republic Bank isn’t out of danger yet, despite billions of dollars in aid from larger banks. And Silicon Valley Bank and Signature Bank may have been just the first canaries in the coal mine.

Remember 2007, when Bear Stearns first began to show signs of trouble due to its exposure to subprime mortgages? When the federal government finally brokered Bear’s sale in early 2008, everyone thought that the worst was over. But then Lehman happened.

Everyone expected Lehman to get bailed out too. But it didn’t

That threw Wall Street for a loop, and markets panicked in response. Within weeks, it seemed like the whole system was going to come crashing down. 

While the $700 billion TARP bailout calmed nerves for a while, markets continued to fall, until they bottomed out in March 2009.

No one wants to return to those dark days, but we may not have a choice. For all we know, the recent weakness in the banking system could be the impetus behind the next financial crisis. So which bank will be the next Lehman?

In recent testimony before the US Senate, Treasury Secretary Janet Yellen gave some surprising testimony. She testified that at banks that were deemed to be likely to cause systemic risk if uninsured deposits were not protected, the government could decide to make even those uninsured deposits whole. 

“A bank only gets that treatment if a majority of the FDIC board, a supermajority, a supermajority of the Fed Board, and I in consultation with the President determine that the failure to protect uninsured depositors would create systemic risk and significant economic and financial consequences…”

So if Bank of America or Wells Fargo were to fail, those banks would likely be deemed systemically significant, and even uninsured depositors would be made whole by the government. That’s the treatment that SVB and Signature got. But what about your local bank or credit union? Would they get that same type of protection?

Right now everyone expects that every bank the size of SVB or Signature would get that kind of protection. First Republic is the 14th-largest bank in the country, so presumably it would get that kind of protection too. But what if it doesn’t? And what if smaller banks, say the 37th-largest bank, doesn’t get that kind of protection? What impact would that have on the US banking system?

A failure to protect smaller banks could lead to significant panic among bank depositors. We’re already seeing deposits being moved out of smaller banks into larger, more systemically important banks. But that concentrates risk too, possibly increasing the impact if one of those large banks fails. 

Will federal regulators allow another failed bank to go the way of Lehman? And if they do, are you prepared for it? These are uncertain times we’re in, and if you haven’t thought about how to safeguard your assets, you could end up in a lot of financial pain if we experience another 2008-style crisis.

If you’re interested in options on how to protect your wealth we’ve put together a FREE GUIDE to help you through that process. Click here to download

 

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