The problems of various US banks have awakened in recent days the specter of the 2008 crisis, a financial meltdown which has certain similarities but also many differences with the current situation.
The Silicon Valley Bank (SVB) and Signature Bank collapsesplus the rescue of the First Republic by the big US banks bring echoes of IndyMac, Bear Stearns or Lehman Brothers, proper names of the cataclysm that led to the Great Recession.
Preventing a similar scenario from repeating itself is the great objective of the financial sector and the US authorities, who fortunately today -according to almost all the experts- find a very different scenario from fifteen years ago.
Subprime mortgages, the proliferation of securities backed by subprime loans, and the bursting of the US housing bubble combined to spark the 2008 crisis.
Now the crisis is mainly one of liquidity, and compared to the toxic values that abounded in many investment portfolios fifteen years ago, the asset that has now caused problems for banks is, curiously, one of the safest.
The massive purchase of long-term Treasury bonds taking advantage of years of low interest rates and their sudden loss of value with the rise in the price of money decreed in recent months by the Federal Reserve (Fed) is the main problem for US banks in a hurry.
For entities in a position to wait for these bonds to mature, the situation is not a problem, but the SVB was forced to sell a large part of that portfolio with great losses in order to face the withdrawals of money from its clients, mainly companies technological and emerging companies that are going through more difficult times after the boom of recent years.
From there, its collapse was due to a classic bank runaccelerated by the interconnection of the technological world and the fact that almost all the deposits that the bank had exceeded 250,000 dollars guaranteed by the Government in the United States.
After the fall of the SVB, the next domino was Signature Bank, another private firm, in this case also exposed to the cryptocurrency sector, but also characterized by serving businesses and having a majority of uninsured deposits.
Panicked, many of his clients rushed to withdraw their funds after the fall of the SVB and the authorities were forced to intervene the entity.
Despite that quick decision by regulators, concern has continued to spread to other regional US banks, which have gone public, and to some outside the country, such as Credit Suisse, which has had to receive support from the Swiss Central Bank.
In the US, the most striking case has been that of First Republic Bank, another medium-sized entity specialized in serving wealthy clients that investors identified as the next potential victim for also having many accounts not covered by the guarantee banking and difficult-to-liquidate assets, especially mortgages.
On Thursday, a group of eleven large banks came together to inject up to $30 billion dollars in the entity and try to stop the contagion in this way.
Among analysts, the general idea is that, unlike what happened in the previous crisis, now the big banks should not be affected much and the crisis should be contained.
“SVB is not Lehman and 2023 is not 2008. We are probably not looking at a systemic financial crisis,” said the Nobel Prize winner for Economics Paul Krugman in a column this week.
The reaction of the big banks, which according to various US media responded to a government appeal, is an action with few precedents and projects a sign of solidity in the sector.
Before, the US Administration had already responded decisively: in addition to immediately intervening in the SVB and Signature, guaranteed all your deposits and it offered the rest of the banks a line of liquidity to avoid having to get rid of long-term bonds with losses.
With the experience of the chaotic collapse of Lehman Brothers, Washington has moved quickly to try to put out the fire, although last Friday’s stock falls show that concern continues in the markets.
The other legacy of 2008 is all the banking regulation that was established after that crisis and that currently makes banks, especially the most important ones, subject to much stricter supervision and rules.
Although not everyone agrees, several analysts and many politicians point out that a regulation approved in 2018, under the government of Donald Trump, could have contributed to this crisis by exonerating medium-sized banks from some of those regulations.
Despite this, experts agree that the rules are still much more robust today and that the banking sector is healthier.
“Compared to 2008, the system is more transparent, with a more solid base, and the government has identified the remaining problems and has put programs in place to manage them,” explains Brad McMillan, of the Commonwealth Financial firm, in a note.
McMillan, like many other analysts in recent days, calls for calm: “This situation is something to watch, but it is not the beginning of the next financial crisis. Unlike in 2008, the government has acted promptly and forcefully. Although we can expect turbulence in the market (…), the systemic effects will be limited”.
Source: La Opinion