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A non-expert’s guide to what the banking turmoil means for you

The Globe asked economists, bankers, and business leaders to explain how all this impacts the institutions you interact with daily

Bank failures this months have sparked conversations about the broader economy and what's next for financial institutions of all sizes.Ally Rzesa

The collapse of banks from Silicon Valley to Switzerland in recent weeks is prompting some big questions. What does this mean for the tech industry? For wealthy investors? For the global economy?

But most of us don’t live in the startup ecosystem or fully grasp the nation’s complex financial system. The typical American has just $5,300 in the bank, far less than the $250,000 insured by the FDIC in a bank failure. Just one in three people can comfortably cover a $400 emergency expense.

So what does the banking turmoil mean for most of us? (Does it mean anything at all?)

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The Globe asked economists, bankers, and business leaders to explain how all this affects the institutions you interact with daily: the bank where you store your money, for example, the company where you work, or the small businesses in your neighborhood.

Here’s what you need to know.

Is this the ‘Great Recession’ all over again?

The recent hullabaloo was caused by the risky behavior of a few institutions, rather than the collapse of a sector of the economy.Ally Rzesa

As far as we know, no.

This month’s hullabaloo was caused by the risky behavior of a few institutions, rather than the collapse of a sector of the economy, like when the housing bubble burst in 2008. We’re in better shape now to recover from missteps, said Joseph Gagnon, a senior fellow at the Peterson Institute for International Economics.

“This is a much simpler issue and an issue we understand well,” he said. “But that doesn’t mean it shouldn’t ring alarm bells.”

What’s next for the banks?

Many of the banks that failed recently have landed in the safety net of stronger institutions. USB bought Credit Suisse; New York Community Bank took a chunk of Signature Bank. And Silicon Valley Bank, the California darling that had a big presence in Massachusetts, was acquired by First Citizens Monday morning.

But the turmoil has affected which banks people trust.

Americans are moving to their money out of mid-sized banks to those larger and smaller, where they feel the deposits may be more secure.Ally Rzesa

If you keep your money at one of the financial giants deemed “too big to fail,” you’ve got company. Many Americans are moving money to major banks that are strictly regulated by the government. In the two weeks since SVB failed, an estimated $550 billion has moved out of smaller banks to large institutions, according to JPMorgan Chase.

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But there is something to be said for the power of local. In Massachusetts, community banks — teensy in comparison to, say, Wells Fargo — also report doing well. South Shore Bank has picked up around 30 new clients and $25 million in deposits recently, said CEO Jim Dunphy. Massachusetts-based Leader Bank found 100 new business clients, including several former customers of SVB, added president Jay Tuli.

That success could be at least partly because many are small enough to participate in an Insured Cash Sweep service, where banks extend federal insurance beyond the $250,000 deposit limit by breaking up large sums and distributing them among multiple institutions. And more than 70 banks in Massachusetts are also members of the Depositors Insurance Fund, a private fund in the state that insures deposits beyond the FDIC limit.

“When people go under the hood, they realize the strength of these banks,” Tuli said. “It becomes an easy decision.”

The worry lies at the midsize banks. Those institutions often store several billion dollars in deposits, but are not big enough that they’re required to have a certain amount in reserves. When SVB crashed, many saw their stock prices fall, but they’re bouncing back.

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Kathleen Murphy, president and CEO of the Massachusetts Bankers Association, said the storm has passed.

So, are the remaining banks in the clear?

There is no guarantee.

Rising interest rates have triggered large unrealized losses in the bond portfolios of banks of all sizes. Basically, the Federal Reserve’s main tool to fight inflation — making it more expensive to borrow — is forcing banks to walk a narrow tightrope.

At the end of 2022, federal regulators estimated that banks were facing over $600 billion of unrealized losses. Today, that number could be even higher; a Stanford University researcher estimated that US banks experienced $2.2 trillion in unrealized losses this past year. Put another way — according to a Columbia University paper — 10 percent of banks have larger unrecognized losses or lower capital than SVB did at the time of its collapse.

The consequence? More banks than initially suspected could run into solvency troubles, and potentially bank runs.

“If you have less than $250,000 in the bank, you don’t really have to worry,” said Columbia professor Tomasz Piskorski. “But there is more vulnerability in the financial system broadly than there seems to be on the surface.”

What if I need a loan?

When banks are vulnerable, they often tighten their belts and lend less money. That could turn the recent chaos into what Treasury Secretary Janet Yellen called “a source of significant downside economic risk.”

If banks tighten up, that could hit residential developers who need loans to build housing. Midsize banks, too, provide the bulk of commercial real estate loans. That could hinder construction of apartment buildings, office towers, and biotech labs. Small businesses may find it harder to access capital. Mortgages might get harder to find.

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When banks are vulnerable, they often lend less money, which could affect loans for mortgages, small businesses, and developments of all sizes.Ally Rzesa

These obstacles just add to the challenges independent entrepreneurs face right now, including skyrocketing inflation and the labor shortage, said Greg Reibman, president of the Charles River Regional Chamber.

“Every time they faced another problem, it’s like taking another block out of the Jenga tower,” he said. “It’s really very wobbly already, then comes the banking thing.”

How does inflation play into all this?

One silver lining: Bank turmoil could be good for the fight against inflation.

Banks are now in conservation mode, looking to hold capital and dole out fewer loans. That slows borrowing and encourages consumers to spend less money — actions that ultimately cool down prices.

Until now, the Federal Reserve has only been partly successful in taming inflation from near-double-digit heights hit in 2020. When the agency lifted interest rates by 0.25 percent last week, rather than 0.5 as was previously expected, it was a sign that the banking crisis was working in their favor in this instance.

What now?

Economist and Harvard professor Kenneth Rogoff — who warned of a “looming financial contagion” as early as January — is now looking ahead.

From a policy perspective, several officials, including Senator Elizabeth Warren, are pushing for the Federal Deposit Insurance Corporation to raise the deposit insurance cap beyond $250,000. And lawmakers in Washington are revisiting Dodd-Frank, a policy that subjected all banks with $50 billion or more in assets to enhanced regulation until it was softened in 2018.

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“The other shoe to drop,” Rogoff added, “is the shadow banking system, which are things that look like banks in many ways, but are not regulated that way.”

As we look ahead, the recent crisis will likely have an impact on national banking policy and the size of the shadow banking sector. Economists are also looking for unrest at international banks.Ally Rzesa

Americans could shift toward institutions that lend money but do not operate as a traditional bank, be they credit hedge funds, asset-backed commercial paper conduits, money market funds, and more. Customers are already pushing millions into money market funds at Fidelity, as the Globe reported earlier this week. The problem? These institutions are not insured by the FDIC, which could lead to chaos if there is a mass exodus of customers like in 2008.

Rogoff is also watching European and Japanese banks to see how they come out on the other side, but it’s not yet clear how this shakes out.

“These things go in waves,” he said. “Just because nothing happens for a few weeks doesn’t mean that it’s over.”

Matt Stout of the Globe staff contributed to this report.


Diti Kohli can be reached at diti.kohli@globe.com. Follow her @ditikohli_.