Over the course of just 11 days, the country watched four banks collapse with their depositors’ money trapped inside. First Silvergate, followed by Silicon Valley Bank (SVB), Signature Bank and finally Credit Suisse.
But for all of the fear and anxiety the crisis created, there have been some positive side effects.
“Given the recent bank failures, more people are starting to pay attention to the safety of their money by making sure their bank is insured, checking how much the insurance limit is and frequently monitoring financial news about their bank,” said Alexa Serrano Cruz, CAMS, a banking expert and certified anti-money laundering specialist at Finder.
While the moment has rousted the masses from a state of personal finance complacency to become more deliberate and aware of their banking habits, it’s not all roses. The ripple effects of the ongoing crisis have the potential to negatively impact your money, at least indirectly.
The Crisis Could Make Loans Even More Expensive
The era of cheap, easy loans ended in 2022, when the Fed began reducing the money supply in response to high inflation. According to CNBC, banks already were tightening their lending standards in anticipation of a recession before the crisis. Now, they’re even more likely to prioritize a healthy balance sheet over expanded profits.
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The result could be what’s known as a credit crunch, where loans become dangerously expensive and hard to get.
The Fed’s ongoing rate hikes were one of the catalysts for the bank failures, but that reality was not enough to get the central bank to tap the brakes. On Wednesday, the Federal Reserve raised its rate by yet another 0.25% to its highest percentage in 15 years.
That undoubtedly will send interest rates up and — thanks to the ongoing banking crisis evolving in the background — its action increases the likelihood of a serious credit crunch.
The Situation Increases the Likelihood of a Recession
Borrowing is the grease in the economic machinery, and a credit crunch could slow growth dramatically enough to trigger a recession.
That’s because small and midsize banks — which are most vulnerable to turmoil like the current situation is producing — play an outsized role in the economy. According to CNBC, banks with less than $250 billion in assets conduct roughly half of all commercial and industrial lending in the U.S., not to mention 80% of commercial real estate lending, 60% of residential real estate lending and 45% of consumer lending.
Even before the most recent 0.25% rate hike, Goldman Sachs had lowered its GDP predictions because of the stress that the banking crisis was putting on smaller financial institutions.
Analysts expect small banks that don’t have many FDIC-insured accounts to decrease lending by a full 40%, while other small institutions will reduce their loans by 15%.
That, along with the new rate hike, has the potential to decrease purchasing power — and therefore demand — across the economy. When demand falls, businesses will slow production, reduce hiring or even conduct layoffs. The newly unemployed would have even less purchasing power, pushing demand down even further and sending the economy into an economic downturn.
Banks Might Raise Their Fees To Pay Increased FDIC Dues
The crisis also might force banks to raise their existing fees or add new ones. Here’s why.
According to NPR, the FDIC was so singularly focused on preventing widespread public panic that it guaranteed full reimbursement to all SVB and First Republic customers. This was an extraordinary measure because more than 90% of deposits exceeded the $250,000 threshold that FDIC is obligated to insure.
To make good on its promise, the FDIC used money from pooled quarterly fees that FDIC-insured banks must pay to remain in good standing. That rainy-day fund is now depleted by billions of dollars. If it’s unsuccessful in selling the failed banks’ assets, or if a new round of bank failures follows, the FDIC will have to replenish the fund by charging higher fees to its member institutions, which likely will pass those fees onto their customers at the retail level.
You’re Unlikely To Suffer Any Direct Consequences
The ongoing cascade of bank failures could trigger a chain of events that makes money harder and more expensive to borrow and could even lead to a recession. But unless you had more than $250,000 in a single account in one of the failed banks, you’re unlikely to experience any direct consequences.
Even so, you should treat the moment as a cautionary tale that inspires you to remain vigilant.
“The recent bank crises haven’t necessarily changed much for the average person,” said Jake Hill, CEO of DebtHammer. “But it’s still wise to keep abreast of this news as it develops in case your bank of choice is impacted.”
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