THE wave of US bank runs that began with Silicon Valley Bank’s digital customer deluge in March is still wiping out small and mid-sized banks, and strategists say it can only end in recession or government intervention.

American banks are still falling like dominoes – even if those dominoes are currently getting smaller – with the US$200 billion First Republic Bank the most recent to drop, and the US$41 billion PacWest Bancorp next in line.

The problem was most succinctly summed up in Beverly Hills lender PacWest Bancorp’s Securities and Exchange Commission’s filing, alerting regulators to the fact that its deposits were depleted by almost 10 per cent, or about US$1.8 billion, in the space of the week up to May 5.

The failure of First Republic Bank, PacWest said, “heightened market and customer fears of additional bank failures, including PacWest”.

A similar warning could soon be issued by Western Alliance, one of the banks that funded the fading housing boom in its native Arizona, except naming PacWest as the inspiration.

“It’s PacWest this week, and then if PacWest gets a rescue deal or PacWest has to sell assets, then they might move to Alliance,” said Edward Moya, senior market analyst at foreign-exchange brokerage OANDA Group. “There’s a steady list that we are going to go down, and it’s not going to end any time soon.”

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Bank runs are the economic and psychological equivalent of the Covid 19 pandemic. Once the contagion is loose, it will take vast financial and intellectual resources to stop it from spreading.

The scale of this year’s banking crisis may not be comparable to the 2008 near-annihilation of the global financial system, but it has the same deep-seated psychological roots, which are notoriously hard to uproot.

When bank investors and clients see their peers wiped out in a bank run as happened in 2008 at Bear Stearns and this year at Silicon Valley Bank, they justifiably fear for the safety of their own money.

Such fears feed on themselves. In this atmosphere, as soon as an institution such as First Republic Bank starts popping up in the top 10 lists of daily stock-market losers, its fate is effectively sealed.

Investors and depositors alike yanked their money out of First Republic, as the bank disclosed days before it was seized by regulators and sold to JPMorgan Chase on Apr 30.

Similar to what happened in 2008, the only way to stop this psychological contagion spreading would be a show of overwhelming force from regulators.

Back then, the US Treasury pumped billions of dollars into ailing Wall Street banks. This time around, the Federal Deposit Insurance Corporation would have to expand its backstops to all depositors to make everyone feel safe.

But Republican legislators are in no mood to use the financial resources of the US for what they dub “bailouts”. Such actions are the quintessence of the profligacy that the Freedom Caucus and other right-wing legislators accuse the Biden administration of promulgating.

“We are not going to see any calm unless we get clear action from lawmakers and regulators that deposits are fully saved,” said Moya. “Given the political environment, and given that we are dealing with debt ceiling drama, it’s hard to imagine that happening any time soon.”

Among the dominoes that preceded First Republic were Silicon Valley Bank, Signature Bank and Credit Suisse Group. All shared certain characteristics, catering to extremely wealthy – and, it turned out, extremely fickle – clients and carrying Treasury bonds on their balance sheets.

The only domino that didn’t tumble was Deutsche Bank, which was more diversified in its business lines and its balance sheet.

“We just have too many regional banks that put too much of their money in long-dated Treasurys and they are probably going to have to take some massive losses,” said Moya.

As in 2008, there’s a high risk that the banking crisis will feed back into the economy. Regional banks are not systemically important, as Credit Suisse and Lehman Brothers were, as individuals.

As a whole, these banks are the very essence of the modern financial system, however. The banking system was built around lenders steeped in the social and economic dynamics of their town or state.

Wealthy Americans and big business can go to national banks and expect the same service as from a local institution. Middle-class Americans with more complicated credit histories and small and medium-sized businesses depend on smaller banks and personal relationships with loan officers.

As is true of the retail industry, the financial industry is unimaginable without the small and medium homegrown boutiques that fill in the gaps within the nationwide chains.

The only consolation for the bulls is that the banking crisis is still relatively small scale. By some measures, the banks that were brought to the verge of failure in the 2008 financial crisis were holding trillions of dollars in assets.

Citigroup, which was to all intents and purposes a zombie by the time regulators swooped in to take it over, was about five times as large as Silicon Valley Bank when it foundered.

Lorenzo Di Mattia, manager of hedge fund Sibilla Global Fund, said the slow-burning nature of the regional banking crisis will extend to its economic impact.

“It all takes time. There will be a hard landing but not necessarily this year,” he said.

This year’s banking crisis is not as widespread or dramatic as the 2008 version. It could take just as long to eradicate, and leave damage to savers’ psychology that is just as lasting.