When the Federal Reserve is raising rates, an unexpected shock can trigger a recession.

Take a tour through US recessions of the past 50 years, and it’s hard not to wonder whether Silicon Valley Bank will turn out to be the banana peel that upends an already unsteady economy.

When the Federal Reserve is raising interest rates, as it is now, recession is always a risk. And slumps tend to come suddenly after an unexpected shock deals a blow to confidence during a particularly vulnerable time.

“The combination of the Federal Reserve trying to slow things down to deal with inflation, financial conditions tightening and then—under the stress—you’re going to see some breakage,” says Peter Hooper, global head of economic research for Deutsche Bank AG.

Sometimes an external blow tips over a slowing economy, as in 1990 when oil prices spiked in reaction to Iraq’s invasion of Kuwait, spoiling former Fed Chair Alan Greenspan’s hopes for a soft landing.

More often, higher rates reveal hidden weaknesses, especially after a period of easy money or an influx of financial sector deregulation. Sectors that are over-leveraged, investment funds with heavily concentrated exposure or banks with too much risk get exposed as the proverbial naked swimmers when the tide goes out.

In the early 1980s, Fed Chair Paul Volcker was waging his now-legendary fight against inflation. It triggered the collapse of Continental Illinois National Bank & Trust Co., then the seventh-largest commercial bank in the US.

Here are two more instances in which a series of Fed rate hikes exposed cracks that widened into a full-fledged downturn. The bursting of the so-called dot-com bubble in 2001 set off a recession; seven years later, an over-leveraged housing sector brought down Bear Stearns and Lehman Brothers. In each case, a rapid series of events turned wariness over slowing growth into more visceral fear of what might happen next. Investors and lenders across the economy withdrew to safety, consumers retrenched and employers began cutting workers loose.

“There is a fragility in the US macro economy that is not well understood but is plainly evident to the naked eye when growth slows to a walking speed,” says David Wilcox, director of US economic research at Bloomberg Economics and a former division director at the Fed.

What’s easy to see, Wilcox says, is that when confidence takes a sudden downturn, unemployment tends to ramp up sharply. The jobless rate shot to 10% in October 2009, from only 4.4% in mid-2007, because of fallout from the global financial crisis. Even the comparably mild recession of 2001 pushed unemployment to 5.7%, from 3.9%, within that calendar year; it continued rising until it peaked at 6.3% in mid-2003.

Many are asking now whether the spectacular collapse of Silicon Valley Bank and two other lenders in the past week will tip the US into recession. Economists so far are responding with a cautious “probably not.”

SVB, Signature Bank and Silvergate Bank, the three lenders that shut down in early March, were unusual in two related ways. Both their borrowers and depositors were heavily concentrated among technology companies. That sector expanded too rapidly during the pandemic and is already shedding workers, even as the rest of the economy continues to add jobs.

Additionally, the three banks had made significant purchases of long-term US Treasuries, a bet that surely looked safe after the onset of Covid-19, when the Fed lowered interest rates to almost zero and signaled it would keep them there for an extended period. But a sudden surge in inflation in 2021 and into 2022 forced the Fed into a series of aggressive rate hikes that slashed the market value of those long-term Treasuries.

A key question immediately following the takeover of SVB by federal regulators was whether other lenders were similarly exposed. Regulators decided on Sunday that the answer to that question was probably “yes” and acted preemptively to ward off additional bank runs by guaranteeing all uninsured deposits at SVB and Signature. The Fed also created an emergency lending facility and eased terms at its discount window, allowing banks to more easily access cash.

It also helps that regulations enacted after the global financial crisis imposed much stricter capital and liquidity requirements on the largest banks operating in the US, greatly reducing the likelihood that they would wobble under stress.

“This is not the Lehman moment,” says Neil Shearing, group chief economist at Capital Economics. “If this crisis were to end tomorrow, it is not going to be the event that causes the US economy to fall into a recession.” Still, midsize banks aren’t the only potential flashpoint. While not directly linked to US bank troubles, tetchy investors punished Credit Suisse Group AG’s stock and bonds on March 15 after its top shareholder rejected the idea of further cash injections into the long-suffering Swiss financial giant.

Julia Coronado, president of MacroPolicy Perspectives LLC and a former Fed economist, is most worried about how pension funds, insurers and other institutional investors in recent years have funneled an increasing share of their cash into private equity funds, which have in turn invested heavily in the tech sector. “It’s clearly an area where we don’t know what’s under the hood,” she says. “I’m not feeling confident, and we’re already dancing at the edge of financial stability.”

Given the strong message sent by regulators, Wilcox says he’s “reasonably confident” that investors and bank depositors will be reassured, the risk of contagion will be stamped out and this event won’t prove to be one that triggers recession. “But,” he adds, “it’s hard to be totally certain of anything once a crack has appeared in the facade.”

Written By: — With assistance by Katia Dmitrieva @Bloomberg.com