Bureaucrats invented the SIB designation during the 2008 financial crisis when fraud and mismanagement in real estate lending threatened to destroy many of the institutions lining Wall Street.

Now it appears regional bankers have joined this protected class. When the Silvergate, Silicon Valley, and Signature banks blew up, Janet Yellen stepped into the breach and declared no more! Officials will not allow any bank to fail if its collapse represents a risk of contagion.

The only bankers left to worry about consequences for the decisions they make are running the smallest and least significant banks.

It turns out they paid to transition banks into something a lot less useful in the economy, but they’re somehow just as likely to collapse and need another bailout.

The Federal Reserve took interest rates to zero and kept them there, giving banks access to essentially free money. Banks borrowed from the Fed’s discount window or took depositor funds and used this free money to buy Treasuries or Mortgage-backed securities with yields. Then they pocketed the interest rate spread.

Today interest rates are on the rise, and the wheels are coming off. Bankers made the assumption that rates would remain low indefinitely. When that turned out to be wrong, the banks began sliding into insolvency as value of their vast holdings of bonds fell.

This problem is compounded by deposit flight at small and regional banks.

There is no question letting banks collapse would be devastating to the economy. It would be worse today than 15 years ago since the stimulus-fed financial sector has only grown larger as a percentage of the overall economy.

The bailouts and the lack of consequences for behavior ranging anywhere from incompetent to criminal could end in an epic financial disaster that ultimately collapses the U.S. dollar.

A question is whether officials will be able to artificially prop up the banks one more time… or if the final reckoning is now upon us.

This week’s Market Update was authored by Money Metals Director Clint Siegner.

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