Financial Contagion can be seen as a spread of, mostly bad news, from one institution/country to another. Thus far, 3 US banks have crashed in the first 5 months of 2023: i) Silicon Valley Bank – March 10, ii) Signature Bank – March 12, and First Republic Bank - May 01.
Now, two more banks appear to be under pressure: Pacific West (PacWest) and Western Alliance. Although PacWest has commented that they have “a strong cash and available liquidity” a bank run does not tend to be a rational exercise. It is important that the US general public feels reassured about the strength of their financial system, and psychology can play a big part in this.
How far will this go before the contagion stops? Will the money exiting smaller banks flow to larger institutions or will people look at alternative places to store their money?