The Wall Street Journal said the biggest question facing the economy is how bad will the banking turmoil be? Will these disruptions spread beyond the banking sector?
The newspaper considered that the collapse of the Silicon Valley Bank, which caused the beginning of the unrest, was one of the symptoms, and was not the cause of those deeper forces affecting the financial system and the economy, and explained that the main problem of Silicon Valley Bank is that it has a lot of government debt financed by unstable deposits, and with interest rates rising sharply last year, the market value of this debt has declined, so that deposits become more expensive and insufficient.
Many banks have similarly devalued bonds, so what happened is only the tip of the iceberg of debt, because total debt owed by governments, businesses and households has risen 90 percent to $68 trillion since the end of 2009, according to the Federal Reserve.
Since early last year, interest rates have risen at their fastest pace since the early eighties, and when interest rates rise, the value of loans and bonds falls, sometimes unnoticed and so lenders do not refer to market loans and bonds in their earnings statements.
But regardless of the accounting treatment, the economic reality is that those bonds and loans are worth much less than when they were issued, and someone must bear those losses. Hyun Sung-shin, head of research at the Bank for International Settlements, a Swiss-based consortium of central banks, said: "It has to show up somewhere in the system."
Total debt owed by governments, businesses and households rose 90% to $68 trillion (Getty Images)
Expected shadow banking crisis
Banks are the most obvious debtors, but they generally bear as much debt as pension funds, mutual funds, private trusts, life insurance companies, business development companies, hedge funds, and other non-bank institutions, or as they are sometimes called "shadow banks."
The 2007-2009 financial crisis began with shadow banks, companies that issued short-term debt securities and invested the proceeds in mortgage-backed securities, and regulators assumed that the next financial crisis would also begin, because banks are now more regulated, so the surprise was great when it emerged that banks were the weak link last month. This could mean that shadow banks have become less risky since the last crisis, and it could simply mean that their problems have not yet emerged.
Since the beginning of 2008, private credit has grown nearly 6-fold to $1.5 trillion, larger than high-yield bond markets or leveraged loan markets.
The IMF points to a range of risks, including that private credit often finances debt acquisitions for companies most vulnerable to economic slowdowns. So private credit, even if it is not exposed to the same kind of inflows that banks experienced last month, may face the same pressure to reduce spending that banks face, exacerbating the credit crunch and exacerbating the economic downturn.