Analysis-Bank panic raises specter of 2008, could bring lasting change According to Reuters

By Pete Schroeder and Saeed Azhar

WASHINGTON (Reuters) – The lightning speed with which the banking industry has descended into turmoil has shaken markets and governments around the world, reviving eerie memories of the financial crisis. Like 2008, the effects could be long-lasting.

Within a week, two US banks had collapsed, Credit Suisse Group AG needed a bailout from Switzerland’s biggest banks, and the US agreed to deposit $30 billion in another ailing company, Bank of the First Republic (NYSE:), to boost confidence.

Reminiscent of frenetic weekend deals to bail out banks during the 2008 financial crisis, the turmoil prompted monumental action from the US Federal Reserve, US Treasury Department and private sector. Similar to 2008, the initial panic does not seem to have been extinguished.

“It doesn’t make sense after the actions of the FDIC, the Fed and the Treasury (the other day) last Sunday that people are still worried,” said Randal Quarles, former top banker of the Federal Reserve. worry about their bank.” Now, he faces renewed criticism over his agenda at the Fed, where he oversaw efforts to ease regulations on regional banks.

“In a previous world, it would have softened things up now,” says Quarles.

The collapse of Silicon Valley Bank, which held large amounts of uninsured deposits in excess of the Federal Deposit Insurance Corporation’s (FDIC) guaranteed $250,000 limit, shook trust and get customers to withdraw money. U.S. bank customers have been flooded with banking giants, including JPMorgan Chase & Co (NYSE:), Bank of America Corp (NYSE:) and Citigroup Inc (NYSE:) by deposit. That has led to a crisis of confidence and a sharp sell-off in smaller banks.

“We do a lot of contingency planning,” said Stephen Steinour, chief executive officer of Huntington Bancshares (NASDAQ:) Inc, a lending company based in Columbus Ohio.

As banks grapple with short-term shocks, they are also assessing the long-term.

Rapid and dramatic events have fundamentally changed the landscape of banks. Now, big banks could get bigger, smaller banks could strain to keep up, and many regional lenders could close. Meanwhile, US regulators will consider increasing scrutiny of mid-sized companies that are bearing the brunt of the strain.

U.S. regional banks are expected to pay higher interest rates to depositors to prevent them from turning to larger lenders, exposing them to higher funding costs.

“People are actually moving their money around, all these banks back,” said Keith Noreika, vice president of Patomak Global Partners (NYSE:) and former Republican Controller of Money. will look fundamentally different in the next three, six months.”

2008 ALL BACK?

The current crisis can feel frighteningly familiar to anyone who lived through 2008, when regulators and bankers gathered in closed rooms for days to come up with solutions. Thursday’s bank-led $30 billion raise for the First Republic also reminded everyone of the 1998 industry-led Long Term Capital Management rescue effort, where regulators brokered a deals for industry giants to pump billions of dollars into ailing hedge funds.

With this latest panic, there is a difference.

Josh Lipsky, senior director of the Center for Geoeconomics at the Atlantic Council and a former IMF adviser wrote in a blog post: “For anyone who has experienced the global financial crisis, bridge, the past week has felt hauntingly familiar. “If you look at it from the outside, it’s clear that 2023 bears little resemblance to 2008.”

In 2008, regulators faced billions of dollars in malicious mortgages and complex derivatives sitting on bank books. This time, Lipsky writes, matters are less complicated because the holdings are US Treasuries.

And this time, the industry is basically healthy.

While Congress and regulators have eased protections for regional banks over the years, there are stricter standards for the largest global banks, thanks to a a series of new restrictions from Washington in the 2010 Dodd-Frank financial reform law.

That stability was evident on Thursday, when the largest companies agreed to put billions of dollars in deposits at First Republic, effectively betting that the company would continue to operate. Even so, the company remains under pressure, with its share price falling 33% a day after the funding.

“Banks are actually healthier than before[2008 crisis] Because they’re really not allowed to do anything about actually taking on real potential credit risk to their assets, said Dan Zwirn, CEO of Arena Investors in New York. me.

Now, bankers and regulators are grappling with a host of unforeseen challenges. Deposits, long seen as a reliable source of cash by banks, have now come under suspicion.

And those who watched SVB’s rapid demise wonder what role social media, now ubiquitous but niche in 2008, might play in people’s withdrawal. money.

“42 billion dollars in one day?” said a senior industry official, who declined to be named, referring to the massive deposit flight that Silicon Valley Bank saw before it failed. “That’s crazy.”

ADJUSTABLE LENS

The last crisis changed the banking industry, as large companies went bankrupt or were bought out by others and the Dodd-Frank Act was enacted. Similar efforts are currently underway.

“Regulators now know that these banks pose a greater risk to our overall economy than they thought they would,” said Amy Lynch, founder and president of FrontLine. I’m sure they’ll come back and increase regulation to the extent they can.” Compliance.

According to analysts, a divided Congress is unlikely to push through any comprehensive reforms. However, banking regulators, led by the Fed, are signaling that they are likely to tighten existing regulations on the smaller companies at the heart of the current crisis.

Currently, regional banks with assets under $250 billion have simpler capital, liquidity, and stress-testing requirements. Those rules could increase in intensity once the Fed finishes its review.

Saule Omarova, a law professor who was once nominated by President Joe Biden to lead the Office of the Comptroller of the Currency, said: “They definitely have to do, or even shouldn’t, they have to rethink and change their strategy. strategy as well as the rules that have been applied”.

The recent crisis has also put major banks back on the radar of Washington, possibly erasing many of the industry’s attempts to escape the bad reputation it brought from the 2008 crisis.

Prominent big-bank critics like Senator Elizabeth Warren are criticizing the industry for pushing for simpler rules, especially a 2018 law that allows mid-tier banks like Silicon Valley Bank to avoid under the strictest supervision.

Other policymakers are taking their anger out on regulators, wondering aloud how the SVB could have gotten into such a bad situation while the watchdogs were at work. .

The Federal Reserve plans to conduct an internal review of banking supervision. But there are increasing calls for an independent view. On Thursday, a group of 12 bipartisan senators sent a letter to the Fed, saying it was “deeply concerned” that supervisors failed to identify weaknesses in advance.

“SVB is not a very complicated bank,” said Dan Awrey, a Cornell Law professor and banking regulation expert. “If large and unsophisticated companies can’t get the right oversight, that raises the question: who on Earth can we manage?”