US Bank Failures and Fear of a Crisis Like the 2008 Crisis

The problems of various US banks have awakened the specter of the 2008 crisis in recent days, financial collapse which has certain similarities but also many differences with the current situation.

Silicon Valley Bank (SVB) and Signature Bank failPlus, the bailout of the First Republic by big US banks echoes IndyMac, Bear Stearns, or Lehman Brothers, proper names for the cataclysm that led to the Great Recession.

Preventing a repeat of such a scenario is the great goal of the financial sector and the US authorities, who, fortunately, today – according to almost all experts – find a completely different scenario fifteen years ago.

How it was in 2008

Subprime mortgages, the proliferation of subprime-backed securities, and the bursting of the US housing bubble combined to create the 2008 crisis.

Now the crisis is mostly about liquidity, and compared to the toxic values ​​that abounded in many investment portfolios fifteen years ago, the asset that is now causing problems for banks is, oddly enough, one of the safest.

The massive purchase of long-term Treasuries using multi-year low interest rates and their sudden loss of value due to the rise in money prices announced in recent months by the Federal Reserve (Fed) is a major concern for US banks in a rush.

For companies that are able to wait for the maturity of these bonds, the situation is not a problem, but SVB was forced to sell most of this portfolio at a big loss in order to face a withdrawal of money from its clients, mainly companies. technology and emerging companies that are having a tougher time following the boom of recent years.

from there, its collapse was due to a classic bank runaccelerated by the interconnectedness of the technological world and the fact that nearly all bank deposits exceeded the $250,000 guaranteed by the United States government.

Panic SVB

After the fall of SVB, the next domino was Signature Bank, another private firm, in this case also associated with the cryptocurrency sector, but also characterized by servicing businesses and having the most uninsured deposits.

Many of them are in a panic customers rushed to withdraw their funds after the fall of SVB and the authorities were forced to intervene in essence.

Despite this swift decision by regulators, concerns continue to spread to other regional US banks that have gone public and some outside the country, such as Credit Suisse, which was supposed to receive support from the Swiss Central Bank.

In the United States, the most striking case was that of First Republic Bank, another medium-sized institution that specializes in serving high-net-worth clients, which investors called the next potential victim because it also had many accounts that were not covered by a bank guarantee and were difficult to access. liquidate assets, especially mortgages.

On Thursday, a group of eleven major banks met to invest up to $30 billion in essence and try to stop the infection that way.

The consensus among analysts is that, unlike what happened during the previous crisis, now the big banks should not be hit hard and the crisis should be contained.

“SVB is not Lehman and 2023 is not 2008. We are probably not seeing a systemic financial crisis,” Nobel Prize-winning economist Paul Krugman said in an op-ed this week.

containment plan

The reaction of the major banks, which have responded to the government’s appeal, according to various US media reports, is an action without precedent and testifies to the solidity of the sector.

Previously, the US Administration has already reacted decisively: in addition to immediate intervention in the SVB and Signature, all your deposits are guaranteed and he offered the rest of the banks a liquidity line to avoid having to dump long-term bonds at a loss.

Having experienced the chaotic collapse of Lehman Brothers, Washington moved quickly to try to put out the fire, although last Friday’s drop in stocks shows that markets remain restless.

new rules

Another legacy of 2008 is all the banking regulation that was put in place after this crisis and which is now putting banks, especially the most important ones, under tighter controls and regulations.

While not everyone agrees, some analysts and many politicians point out that regulation approved in 2018 under the Donald Trump administration may have contributed to this crisis by exempting mid-sized banks from some of these rules.

Despite this, experts agree that today the rules are much tighter and the banking sector is healthier.

“Compared to 2008, the system has become more transparent, with a stronger foundation, and the government has identified remaining problems and developed programs to address them,” explains Brad Macmillan of financial firm Commonwealth in a note.

McMillan, like many other analysts in recent days, is calling for calm: “This situation is worth watching, but this is not the beginning of the next financial crisis. Unlike 2008. government acted quickly and decisively. While we can expect market turbulence (…), systemic effects will be limited.”

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