The shutdown of several banks in the U.S. over the last week has left many in a panic and questioning whether a recession is possible. However, some have suggested that this fear may be overblown as it is unlikely to cause a significant impact on the banking industry more broadly.
According to the treasury secretary, Janet Yellen, the conditions surrounding the recent banking crisis are not the same as the 2008 financial crisis, when the fall of large institutions threatened to bring down the global financial system. Unlike the banks involved in the 2008 financial crisis, these banks had unique risk exposure to higher interest rates due to their niche markets: cryptocurrencies, startups and venture capital. Few banks have this type of risk exposure.
Some other notable differences between now and 2008 are that the 2008 crisis was caused by assets, such as mortgage-backed securities, that were difficult to value, making it challenging for banks to determine how much they were worth. This time, however, the assets causing concern for banks, U.S. Treasuries and bonds, are easy to value and sell, which makes intervention by the government more effective. And this time, the U.S. government stepped in early to guarantee all customer deposits and restore trust in the U.S. banking system.
Moreover, the current real estate market is fundamentally different from the 2008 market. Before the 2008 crash, there was an excess of homes and a growing number of homeowners who were unable to pay their mortgages. This led to many foreclosures, which further aggravated the oversupply issue. Today, there is a housing shortage, which has caused increasing prices and competition among buyers. Additionally, mortgage lending standards have become stricter since the 2008 financial crisis, resulting in fewer risky loans being issued. The financial system has also undergone significant reforms since the 2008 crisis. Regulators have implemented new rules and regulations that have made the banking system more resilient and less likely to collapse. Banks are required to hold more capital as a cushion against potential losses, and the Federal Reserve has created mechanisms to provide liquidity to the market during times of stress. The Federal Deposit Insurance Corporation (FDIC) insures depositors up to $250,000 and large U.S. banks have the money to handle these types of crises as they are regularly stress-tested by the Federal Reserve to make sure that they can.
It is unclear how this will affect interest rates, which have been rising over the past year to fight high inflation, or how Fed officials will react to the crisis. It remains to be seen how Federal Reserve Chair Jerome Powell will address interest rates at the central bank’s next policy meeting on March 22.