Investors are searching for clarity in the wake of Silicon Valley Bank’s (SVB) collapse on Friday — the biggest US bank failure since 2008. As they attempt to predict the future implications of the collapse, they are looking to the past for guidance. Two lay lines of comparison have emerged: 2008’s global financial crisis and the Savings and Loans crisis of the late 1980s and early 1990s.
2008 Crisis vs. Current Bank Saga
The 2008 crisis was caused by opaque assets, such as mortgage-backed securities, making it hard for banks to determine their worth. This time around, the assets causing trouble for banks (US Treasuries and bonds) are much easier to value and sell. That has allowed the US federal government to step in earlier, guaranteeing all customer deposits and restoring confidence in the US banking system.
The Federal Deposit Insurance Corporation (FDIC) insures depositors up to $250,000 and large US banks have the money to weather storms — they’re regularly stress-tested by the Federal Reserve to make sure of that. But, it does not mean that US bank shareholders are not in for some pain. The hit was felt strongly on Monday, as shares of both regional and large banks plummeted.
Analyzing the Savings and Loans Crisis
Analysts believe the Savings and Loans crisis of the late 1980s and early 1990s is a better model for understanding the impact of the current crisis. In the 1980s, Savings and Loans were deregulated and began making risky investments with depositors’ money. This led to much of the debt not being able to be paid back when the Fed was raising interest rates. As a result, many Savings and Loans failed and the government had to step in with a bailout.
Since the S&L crisis, regulators have pushed banks away from short-term investments. This banking failure appears to be a typical banking failure like during the Savings & Loan crisis, but with today’s focus being on technology rather than on real estate.
Looking to the UK
Investors may only need to go back to last fall to understand what might happen next. In September of 2019, former Prime Minister Liz Truss announced a package of tax cuts, spending, and increased borrowing to help get the economy moving. This raised fear of inflation and caused investors to sell government bonds, driving yields up and putting pressure on many pension funds. The Bank of England was able to intervene quickly, working through the night to restore control.
The Fed’s Role
Former banking regulators, economists, and Wall Street analysts are increasingly calling for the Federal Reserve to pause its inflation-fighting interest rate hikes due to the current banking sector chaos. The Fed’s aggressive tightening policy has created a surge in Treasury yields, which lead to the downfall of Silicon Valley Bank.
Prior to the SVB collapse, the February Consumer Price Index (CPI) was viewed as a factor for the Fed to decide whether to stick with a quarter-point or half-point hike. Now, it appears more likely that the Fed will go with a quarter-point hike, or even no hike at all.
The Fed is likely to review regulation and central bank policy. EY chief economist, Gregory Daco warns that while it may be difficult to analyze the inflation and interest rate discussion independently of current banking sector pressure, the February CPI report may still play an influential role in the Fed’s policy decision.