Moving from concerns over transitory risks at the tail end of the COVID-19 pandemic to entrenched inflation in 2023, on top of pervasive negativity, the U.S. banking system was tested like never before, former SVB CEO Gregory Becker told the congressional leaders.

Small- and mid-sized banks came under pressure in March, starting with Silvergate Bank and later SVB. Silvergate was the likely victim of over-reliance on volatile, and somewhat untested, cryptocurrencies, while SVB was caught in something of a contagion of fear.

Becker said a February piece in the Financial Times “provided negative commentary” on the securities portfolios and holdings in cryptocurrencies for both Silvergate and SVB.

“Rumors and misconceptions” spread quickly online, he said, triggering a run on deposits. On one day, March 9, about $1 million every second was withdrawn from SVB, he said. The next day, about 80% of its total deposits, or $142 billion, were pulled out of the bank.

“To put the unprecedented velocity of this bank run in context, the previous largest bank run in U.S. history was $19 billion in deposits over the course of 16 days,” he said. “I do not believe that any bank could survive a bank run of that velocity and magnitude,” he said in reference to the May 10 withdraws.

Days later, Signature Bank — a state-chartered, federal-insured crypto industry lender based in New York City — was closed by state bank regulators in what the bank’s former chairman of the board, Scott Shay, described as “a series of truly extraordinary and unprecedented events.”

Fear is contagious and negativity breeds negativity. Early May saw PacWest Bancorp become the latest bank in financial distress.

Shares fell after it released a statement saying it was executing a strategic plan to maximize shareholder value by exiting non-core products, improving operating efficiency and strengthening a community bank focus. While shedding assets, the company said it was not victim to the same forces that triggered the collapse of SVB.

“Our cash and available liquidity remains solid and exceeded our uninsured deposits, representing 188% as of May 2,” it said.

Ed Moya, a senior market analyst at New York brokerage OANDA, told UPI that banks may still be exposed to the same risky bonds that hobbled SVB, leaving them on the hook for further losses later this year.

“Banking concerns will not be disappearing at all as credit conditions continue to tighten and that will cripple small- and medium-size businesses later this year,” he said. “The economy is starting to feel the impact of the Fed’s aggressive rate hiking campaign and that is going to break some parts of the economy.”

An increase in lending rates may have caught financial institutions off guard given the changing rhetoric on U.S. inflation. Holding its lending rates near zero in late 2021, the Federal Open Market Committee said that inflation was elevated, but that was largely a reflection of “transitory factors.”

Supply-chain bottlenecks and a post-vaccine economic rebound led to a 6.2% increase in annual inflation to October 2021, the largest increase in more than 30 years. The following summer inflation was closer to 10%, encouraging an aggressive series of rate hikes meant to cool the economy.

Those lending rates led to a significant drop in the value of the Treasury bonds held by SVB, adding to fears that deposits weren’t safe and triggering a bank run. The interest rate risk was particularly acute for SVB, since a large share of depositors were startups, whose finances depend on access to cheap money.

Michael S. Barr, the vice chair for supervision at the Federal Reserve, said last month that the board at SVB didn’t manage risks and that effective supervision was impeded by “reducing standards, increasing complexity and promoting a less assertive supervisory approach.”

“Its senior leadership failed to manage basic interest rate and liquidity risks. Its board of directors failed to oversee senior leadership and hold them accountable,” he said. “And Federal Reserve supervisors failed to take forceful enough action.”

On Tuesday, Senate Banking Committee Chairman Sen. Sherrod Brown, D-Ohio, was more direct.

“The simple answer, the same answer we find to most big bank failures; because the executives were getting rich … Executives put short-term profits above everything else,” he said.

Barr also found that Federal Reserve supervisors didn’t “fully appreciate the extent” of the bank’s vulnerabilities and didn’t move fast enough to fix the bank’s problems, which Fed officials will likely have to answer for as they appear before Congress on Wednesday and he will get the opportunity to shed more light on, appearing before the panel himself on Thursday.

While SVB’s former CEO blamed media reporting for contagion, its own collapse sparked fears of a repeat of the Great Recession. Overseas, troubled Credit Suisse entered into a forced marriage of sorts with Swiss investment bank UBS, while more banks in the U.S. economy fell by the wayside.

The recession in 2007-08 was triggered by the collapse of Lehman Brothers after heavy exposure to subprime mortgages. James Bullard, the head of the St. Louis Fed, said, however, that the financial sector is not the same as the one that existed more than a decade ago as central banks and private banks deploy tools that limit damage that would otherwise have occurred without the necessary safety valves in place.

“Let me be clear: the government’s recent actions have demonstrated our resolute commitment to take the necessary steps to ensure that depositors’ savings and the banking system remain safe,” added U.S. Treasury Secretary Janet Yellen.

Meanwhile, the U.S. economy is cooling off and the media narrative has moved on to more recent concerns, such as the looming default on the federal government’s debt. Policymakers at the Federal Reserve, however, might not be done yet with rate hikes as inflation remains about 3% above its 2% target rate.