Stocks have shrugged off the banking turmoil. Haven’t they?

BANK failures are usually bad for business. A sickly banking system will lend less and at higher interest rates to companies in need of capital. A credit crunch will crimp economic growth and therefore profits. On occasion, a bad bank can blow up the financial system, causing a cascade of pain.

Investors know this. They have dumped stocks when banks have failed before. In May 1984, the month that Continental Illinois, a large bank in the Midwest, failed and was rescued by the Federal Reserve, the Dow Jones, then the leading index of American stocks, dropped by 6 per cent. In September 2008, when Lehman Brothers, an investment bank, went bust, stocks slid by 10 per cent. During the Depression, as one bank after another failed, the stockmarket shed 89 per cent between its peak in September 1929 and its trough in July 1932.

This time around things have been different. In March, a month in which three American banks failed, deposits fled small institutions across the country. A 167-year-old Swiss bank was forced by regulators into a hasty tie-up with a bigger rival. Yet the S&P 500 index of American stocks gained 4 per cent – a handsome return, well above the long-term monthly average of around 0.5 per cent. Nor was the cheer confined to America: European stocks rallied by 3 per cent.