Has enough been done to calm Wall Street over the banking crisis?

Just what we needed right now: another banking crisis. But after the bloodbath at the beginning of the week, a rally quickly got underway. Regional banks in the United States – in real danger of experiencing a run on their deposits while larger rivals benefit from inflows – found some support.

Perhaps Wall Street’s nail-biters had worked out that the doomed Silicon Valley Bank (SVB) had a rather unique financial and client structure. Ditto New York-based lender Signature, which shut down over the weekend. Interventions by the US Federal Reserve do seem to have helped calm nerves.

An unequivocal win is that there appears to be little evidence of any contagion spreading on this side of the Atlantic. The Bank of England brokered a rescue of SVB’s UK arm, now in the hands of HSBC. Charlie Nunn, the CEO of Lloyds, meanwhile said he had seen no signs of the “flight to quality” seen in America from depositors on these shores when he spoke at a Morgan Stanley event.

He did add a note of caution: “Let’s see how that plays out and we’ll see how people feel over the next period of time”. But that was perhaps understandable given this is a developing situation; he wouldn’t want to get caught in the Michael Fish effect. But even the perennially crisis-wracked Credit Suisse – under the cosh from regulators, in the midst of a mess of its own over weak internal controls – claimed inflows from depositors.

It didn’t hurt that US inflation came in as expected at 6 per cent, down from 6.4 per cent the previous month. There really wasn’t much to celebrate given that consumer prices rose month on month and core inflation, which strips out volatile components such as food and fuel, is proving difficult to shake off for the Fed; but the markets like it when forecasters get it more or less right for a change.

So is the worst over? Let’s see how this plays out. One welcome development is the questions now being asked about regulation in the US. This affair has cast a terrible light on the Trump administration’s easing of post-2008 rules on medium-sized banks, at Wall Street’s behest; where was the supervision of SVB?

Bills to address the situation have been promised, but they will struggle to get past a divided Congress. The Biden administration has been flexing its muscles, as it needs to. Even if this episode proves to be more squall than storm, it is a lesson on the risks of reduced regulation. The Fed is not out of the woods. Next week’s interest rate decision, and especially the accompanying comments, will be watched very closely.

In the wake of its interventions, including the guaranteeing of funds for very wealthy SVB depositors, there is also the question of “moral hazard” – the danger of allowing financial institutions and their backers to feel shielded from the consequences of their actions. It is somewhat helpful that SVB’s chief executive and chief financial officer are facing investor lawsuits.

After 2008, we hoped to hear nothing more of “moral hazard”, “liquidity” and “central bank interventions”. Their return should be a wake-up call. If the emerging calm holds, SVB’s demise may have been a useful lesson.