The next financial crisis may be lurking not at banks, but in their shadows.

(Originally published March 20 in “What in the World“) A lot of energy is being spent, and gallons of ink being spilled, looking for the next Silicon Valley Bank, which became one of the first high-profile financial casualties of the end of the near-zero interest rate era. The hope is that we can quickly spot the next victim and so contain the contagion, thus preventing the next financial crisis and consequent economic turmoil. But just like the last time, we may be looking in the wrong place.

Silicon Valley Bank has already been written off as an almost ludicrous case of mismanaged concentration risks. SVB relied too heavily on deposits for financing. Too many of those deposits were large and uninsured. Too many of its depositors were from a single industry whose business fortunes were not only correlated, but whose abundance of cash was a happy symptom of low interest rates scouring for returns by investing in risky new ventures few investors really understand. Tech is an inherently risky business and one that becomes much riskier when the price of money rises. SVB took those deposits and invested too many of them in a single asset, long-term Treasuries, the price of which like any bond declined as interest rates rose.

But SVB, and Signature Bank, and Credit Suisse are, we hope, are isolated cases. SVB was big, the 16th largest U.S. bank and the second-largest bank failure after Washington Mutual in 2008. But barring Credit Suisse, whose problems predated interest-rate normalization, the giant banks that dominate global finance are much more resilient because they’re now girded by financial regulations imposed in response to the global financial crisis.

These rules ensure the biggest banks have sufficient capital, sufficient liquidity, and sufficiently liquid assets sufficiently diversified to weather massive financial shocks. (Contrary to what some columnists have written, they’re also required to shelter themselves sufficiently from interest-rate risks under the Basel Committee on Banking Supervision’s guidelines for Interest Rate Risk on the Banking Book.) And even if they still fail, they have “living wills” in place to ensure their failure doesn’t pull the financial system down with them.

But these rules are applied to only the biggest banks, the ones deemed “systemically important.” Smaller banks like SVB (now infamously) lobbied to be exempted from these rules. But it wasn’t difficult, really. Because no single one of them posed a threat to the global financial system. SVB’s failure has therefore sparked a debate over whether all banks are “too big to fail” from the perspective of their community or region.

That debate still misses the threat. And the threat is that, while we imposed regulations after the crisis to protect our biggest bankers from risks gone bad, we didn’t impose similar risks on the people paying the banks to take those risks—us, the savers. So, as interest rates fell to zero and below in the years following the crisis, we the savers had to find new and more innovative ways to secure the returns we needed to fund our college educations, our retirements, our homes in the Hamptons, our dreams.

This didn’t go unheeded by regulators. On the contrary, they’ve been wringing their hands about it for years. As early as 2016, the International Monetary Fund noted that post-crisis regulation of banks had prompted a shift in finance from banks to bonds, which in turn shifted the job of allocating capital around the world to non-bank players. Instead of banks, an armada of insurance companies, pension funds and asset managers like Blackrock and Citadel Securities—in other words, all our savings vehicles beyond ordinary bank deposits—filled the void and became big lenders and market makers in their own right.

This sector of largely unregulated credit is often referred to as “shadow banking,” and one country that has battled it for years is China, where banks and other finance companies have used nonbank financing to keep funds funneling into the nation’s property sector in defiance of official efforts to curtail it.

In theory, spreading these intermediary roles among more players reduced systemic risk, since if any single insurer, pension fund or asset manager made a bad bet and failed, they’d be smaller and have less impact on the overall system than if a huge bank failed. Sound familiar? It should: it’s more or less the same argument for how mortgage-backed securities were supposed to reduce the risk of a housing-market collapse.

But the smaller non-bank financial intermediaries, the IMF noticed, tend to behave as a herd, taking bigger risks on a less diversified range of investments. That means they’re all more likely to run towards the same exit in the event of a fire. And because regulations allow them to take bigger risks with less visibility of other investments, they’re more sensitive to changes in interest rates, not less. As a result, when interest rates rise, banks reel in credit and shrink their balance sheets, but “nonbank financial intermediaries contract them more than banks.” Worse, they reel in their credit much more quickly than banks, too.

The IMF has worried about the particular risk this poses to mutual funds. While an individual fund’s manager may not feel the need to panic in the event of an adverse event, the same cannot be said of the fund’s investors. If they, like SBV’s depositors, panic en masse and begin a wave of redemptions, the fund’s manager might have to start dumping the fund’s assets, thus triggering a wider tsunami of selling and a shortage of liquidity in smaller markets for stocks and bonds.

Since 2008, the size of these open-ended investment funds, the IMF says in its most recent Global Financial Stability Report last October, has quadrupled—to $41 trillion. And while most of their assets are in developed markets, they’ve been investing an increasing proportion into less liquid stocks and bonds.

As the Fund warns:

“In the face of adverse shocks, OEFs that offer daily redemptions to investors but hold relatively less liquid assets are vulnerable to the risk of investor runs (or large outflows) that could force these funds to sell assets to meet redemptions. The sale of assets could in turn generate downward pressure on asset prices that may amplify the initial effects of the shocks by inducing additional redemptions. These price pressures would be further intensified if funds were to engage in herding—that is, mimic other investors’ trading behavior, possibly ignoring their own information and beliefs.”

The world got a glimpse of what might happen in 2020, when as the global Covid-19 pandemic emerged, funds experienced what the IMF calls a “dash for cash.” Disaster was averted only after central banks stepped in to start buying corporate bonds and exchange-traded funds for the first time.

Now, the IMF warns,

“…more aggressive monetary policy tightening by central banks against a backdrop of continued inflationary pressure, as well as increased uncertainty about the macroeconomic outlook stemming from persistent supply chain disruptions and Russia’s invasion of Ukraine could cause a sudden repricing of risk and a disorderly tightening of global financial conditions. Such an adverse shock, combined with the inherent vulnerability of OEFs holding illiquid assets but offering daily redemptions, could trigger further outflows from these funds and amplify stress in asset markets.”

Of course, markets can be set off just by an utterance, so naturally central bankers aren’t talking about these buy-side risks much yet. But it seems likely that it’s fears of big redemption-driven fund flows, and not bank failures, that are behind Sunday’s announcement by the U.S. Federal Reserve that it was opening daily U.S. dollar swap lines to ensure that its counterparts in Canada, Europe, Japan, Switzerland, and the United Kingdom have sufficient dollars to sell any investors making a run for the exits this week.