Another US bank under pressure. How worried should we be about a financial crisis?

AMERICA’S banking system is at a critical juncture. The recent fragility and collapse of several high-profile banks are most likely not an isolated phenomenon. In the near term, a damaging combination of fast-rising interest rates, major changes in work patterns and the potential of a recession could prompt a credit crunch not seen since the 2008 financial crisis.

Back then, amid a housing market bubble, lenders had handed out high-risk loans to people with poor credit histories or insufficient income to afford homes. When the market collapsed, so did many of the banks that made these loans, causing the Great Recession. The epicentre this time is different, but the result may be the same: recession, lost jobs and widespread financial pain.

Just in the past few months, Silicon Valley Bank, Signature Bank and First Republic Bank have failed. Their combined assets surpassed those held by the 25 banks (when adjusted for inflation) that collapsed at the height of the financial crisis. While some experts and policymakers believe that the resolution of First Republic Bank on Monday (May 1) indicates the turbulence in the industry is coming to an end, I believe this may be premature. On Thursday, shares of PacWest and Western Alliance were falling as investors’ fears spread. Adverse conditions have significantly weakened the ability of many banks to withstand another credit shock – and it is clear that a big one may already be on its way.