The specter of the banking crisis of 2008 is resurrecting: will things be different in 2023?

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

The collapse of Silicon Valley Bank (SVB) and Signature Bank, and the rescue of the First Republic by a major US bank, 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.

Origin

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 BLS He was forced to sell most of that portfolio at a heavy loss in order to be able to face the withdrawal of money from his clients, mainly technology and growth companies, which are experiencing more difficult times after the boom of recent years.

From there, its collapse was due to a classic bank run, accelerated by the interconnectedness of the technological world and the fact that nearly all deposits at the bank exceeded the $250k guaranteed by the US government.

Infection

After the fall BLSthe next domino was SignatureBankanother private firm, in this case also associated with the cryptocurrency sector, but also characterized by its service to businesses and the presence of the majority of uninsured deposits.

In a panic, many of his clients ran to collect their funds after the fall. BLS 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 notable case was that of First Republic Bank, another medium-sized institution that specializes in serving high-net-worth clients, which was cited by investors as the next potential victim because it also had many unsecured accounts. liquid assets, especially mortgage loans.

On Thursday, a group of eleven major banks came together to inject up to $30 billion into the organization in an effort to stop the contagion.

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.

“BLS This is not Lehman, and 2023 is not 2008. We are probably not seeing a systemic financial crisis,” Paul Krugman, Nobel Laureate in Economics, said in a column this week.

Answer

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.

Earlier, the US administration has already reacted decisively: in addition to immediate intervention in SVB and signatureguaranteed all its deposits and offered the rest of the banks a liquidity line so as not to get rid of losses on long-term bonds.

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.

regulation

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,” Brad McMillan of Commonwealth Financial said 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 in 2008, the government acted quickly and decisively. expect market turbulence (…), systemic effects will be limited.”

EFE

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