WASHINGTON – The lightning speed at which the banking industry descended into turmoil has shaken global markets and governments, reviving eerie memories of the financial crisis. Like 2008, the effects may be long-lasting.
In the space of a week, two US banks have collapsed, Credit Suisse Group needed a lifeline from the Swiss and America’s biggest banks agreed to deposit US$30 billion (S$40 billion) in another ailing firm, First Republic Bank, in a bid to boost confidence.
Evoking recollections of the frenzied weekend deals to rescue banks during the 2008 financial crisis, the turmoil prompted monumental action from the United States Federal Reserve, US Treasury and the private sector. Similar to 2008, the initial panic does not seem to have been quelled.
“It does not make any sense after the actions of the Federal Deposit Insurance Corporation (FDIC), the Fed and the Treasury (last) Sunday that people are still worried about their banks,” said Mr Randal Quarles, a former top banking regulator at the Fed. He now faces renewed criticism over his agenda at the Fed, where he oversaw efforts to reduce regulations on regional banks.
“In an earlier world, (the actions) would have calmed things by now,” he said.
The collapse of Silicon Valley Bank (SVB), which held a high number of uninsured deposits beyond the US$250,000 FDIC guaranteed limit, shook confidence and prompted customers to withdraw their money. US bank customers have flooded banking giants, including JPMorgan Chase, Bank of America and Citigroup, with deposits. This has led to a crisis of confidence and a steep sell-off in smaller banks.
“We do a lot of contingency planning,” said Mr Stephen Steinour, chief executive of Huntington Bancshares, a lender based in Columbus, Ohio. “We started to do the ‘what-if scenario’ and looked at our playbooks.”
As banks grapple with short-term shocks, they are also assessing the long term.
The swift and dramatic events have fundamentally changed the landscape for banks. Now, big banks may get bigger, smaller banks may strain to keep up and more regional lenders may shut. Meanwhile, US regulators will look to increase scrutiny on mid-sized firms bearing the brunt of the stress.
US regional banks are expected to pay higher rates to depositors to keep them from switching to larger lenders, leaving them with higher funding costs.
“People are actually moving their money around; all these banks are going to look fundamentally different in three months to six months,” said Mr Keith Noreika, vice-president of Patomak Global Partners and a former US comptroller of the currency.
2008 all over again?
The current crisis may feel frighteningly familiar for those who experienced 2008, when regulators and bankers huddled in closed rooms for days to craft solutions.
Last Thursday’s bank-led US$30 billion boost to First Republic also reminded people of the 1998 industry-led attempt to rescue Long-Term Capital Management, where regulators brokered a deal for industry giants to pump billions into the ailing hedge fund.
With this latest panic, there are differences.
“For anyone who lived through the global financial crisis, the past week is feeling hauntingly familiar,” Mr Josh Lipsky, senior director of the Atlantic Council’s GeoEconomics Centre and a former adviser at the International Monetary Fund, wrote in a blog post. “If you look past the surface, it is clear that 2023 bears little similarity to 2008.”