2023: 2008 All Over Again?
During the 2008-2009 financial crisis, at least 165 U.S. banks failed as contagion from the mortgage market spread across the financial system. More than 250 failed in 2010 and 2011, but those numbers slowed in subsequent years. In fact, there were zero bank failures in both 2021 and 2022.
That streak ended last week in spectacular fashion.
Let’s take a look at what happened, how policymakers have handled the situation so far, and what they might do in the coming weeks and months.
What Happened to Silicon Valley Bank and Is It 2008 Again?
Three banks met their demise last week, including one (Silicon Valley Bank, or SVB) that is a major financial conduit to startups across a number of industries and that also is the banker of choice to popular consumer websites and services like Etsy and Roku.
Silvergate Bank in San Diego ($16 billion in assets) failed on Wednesday and SVB ($209 billion in assets) went under on Friday. And then, on Sunday, regulators announced that Signature Bank in New York City (more than $118 billion in assets) had been shuttered.
Historically, when banks fail, depositors may lose access to portions of their funds that weren’t insured, and the payment instruments issued by these institutions stop working. That meant companies that were customers of these institutions could not meet their payrolls and sites like Etsy had to halt payments to the entrepreneurs who sell goods on its site. Those repercussions are huge for individual business, but could have catastrophic implications for the entire economy, too.
So: Is this 2008 all over again?
As the Washington, D.C.-based news site Punchbowl said on Monday, “no one should be throwing around the words ‘financial crisis’ yet.” SVB was big, Punchbowl noted, but not huge. And its “unusual concentration of customers and securities on its balance sheet made it vulnerable to the Fed’s rate hikes, more so than other large banks.” Additionally, SVB and Signature Bank, “bet heavily on the crypto sector.”
There are things unique to these banks that indicate what happened last week is not indicative of systemic risk. Still, there is the threat that the failures could cause “freaked-out customers” to start to “pull their deposits from banks they think are exposed to systemic risks,” which could lead to “some real stress in the financial system,” Punchbowl said.
And that is why policymakers took swift action over the weekend.
How Policymakers Have Reacted So Far
Remember, when a bank fails, the Federal Deposit Insurance Corporation (FDIC) generally insures only $250,000 of each depositor’s assets. In addition to individual consumers, SVB’s clients were businesses, startups, and wealthy individuals. (Along with Etsy, SVB depositors included Compass Coffee, Vox Media, and Roku.) As a result, about 90 percent of its deposits were uninsured.
Federal regulators spent last weekend plotting a path to reassure these customers. On Sunday, U.S. Treasury Secretary Janet Yellen, Federal Reserve Chair Jay Powell, and FDIC Chair Martin Gruenberg announced SVB deposits would be “fully protected” regardless of whether they were insured. Interestingly, this move is represented the first time the agencies utilized a Dodd-Frank rule that allows the regulators to designate the failure of an individual institution as “systemic” and, in so doing, utilize a special fund to make depositors whole. (Under Dodd-Frank, this fund will be replenished through the assessment of special fees on the remainder of the financial institution marketplace.) The FDIC is now in control of SVB. It opened an auction over the weekend to solicit bids to purchase the bank, which ultimately did not result in a buyer. Still, the FDIC intends to sell the bank’s assets to the highest bidder, or bidders, and has launched another auction.
In New York, the FDIC and state banking regulators have closed Signature Bank, removed its executive team and board of directors (which included former Democratic Rep. Barney Frank, who spearheaded the Dodd-Frank law) and plan to set up a successor bank. The FDIC also protected Signature Bank customers’ full deposits.
While some Republicans, including current Senate Banking Committee Ranking Member (and presumed 2024 presidential candidate) Tim Scott (R-S.C.), former President Donald Trump, and former House Speaker Newt Gingrich, already have criticized the Biden administration for “bailing out” these banks, AXIOS noted Sunday’s moves are “nothing radical or new.” In fact, “uninsured depositors have been paid out in full in every bank failure in living memory, with just one exception — IndyMac, in 2008.” (Though, in fairness, depositors were generally made whole in past instances through acquisitions of the failed institutions by larger financial institutions.)
In addition to protecting depositors, the Treasury Department and Federal Reserve have established a new program, the Bank Term Funding Program (BTFP), that will “help assure banks have the ability to meet the needs of all their depositors.” Specifically, according to Politico, to make sure other banks do not “suffer the same fate, the BTFP will allow them to access loans with generous terms. Instead of having to sell off their interest-rate-ravaged treasuries, they will be allowed to use them as collateral for a loan at their original value.”
Finally, there will be investigations.
Federal Reserve Chair Jerome Powell said Fed Vice Chair for Supervision Michael Barr will conduct a “thorough, transparent and swift review” of the agency’s oversight of SVB to see what may have gone wrong. (As The Associated Press noted, critics have argued the San Francisco Fed should have provided more oversight of SVB’s rapid growth, its unusually high level of uninsured deposits, and its many investments in long-term government bonds and mortgage-backed securities, which fell in value as interest rates rose.) And, yesterday, The Wall Street Journal reported the U.S. Department of Justice and the Securities and Exchange Commission will investigate SVB’s failure, including examining stock sales by SVB executives shortly before a run on deposits caused it to collapse.
What’s To Come?
As CNN has reported, the three banks that failed last week are not the only ones that are in trouble. In fact, in remarks last week before the bank collapses, FDIC Chair Martin Gruenberg warned U.S. banks were sitting on $620 billion in unrealized losses at the end of 2022. “The current interest rate environment has had dramatic effects on the profitability and risk profile of banks’ funding and investment strategies,” Chair Gruenberg said. “Unrealized losses weaken a bank’s future ability to meet unexpected liquidity needs.”
Some lawmakers want to jump in before things get worse.
According to Politico, Democrats “plan to use SVB’s collapse as a cudgel to force reforms.” Indeed, Senate Banking Chair Sherrod Brown (D-Ohio) and House Financial Services Committee Ranking Member Maxine Waters (D-Calif.) already have said they plan to focus on “how to strengthen guardrails for the largest banks.” Rep. Katie Porter (D-Calif.), a 2024 Senate candidate, said she will introduce legislation to reverse a 2018 law that unwound some of Dodd-Frank’s stress test and capital requirements for mid-size and regional financial institutions. (Signature Bank lobbied for those changes.)
In an interview Monday, Rep. Waters said federal officials also must weigh “whether or not, in the future, everybody is going to be insured,” and that policymakers should “enter into a conversation about whether or not the premiums that are charged to banks that creates the insurance pool is going to be increased.”
Republicans are less likely to support a legislative solution. Speaker Kevin McCarthy (D-Calif.) blamed the Biden administration’s “failed” fiscal policies and rising interest rates for SVB’s demise. Two other Republicans, including Rep. Hill, blamed SVB’s failure on a lack of oversight from the San Francisco Fed.
Punchbowl said House Financial Services Committee Chair Patrick McHenry (R-N.C.), in particular, is uninterested in Rep. Waters’ plan to move the FDIC’s deposit insurance cap beyond $250,000. According to AXIOS, other top Republicans have said it is far too early to even discuss new regulations. Moderate Republican Rep. Marc Molinaro (R-N.Y.), said, “I think the Democratic response is always, ‘Let's just go find some new regulations.’ These banks did have some risk that may not be systemic … It’s important for the system to truly know what the illness is, and then we can determine what the right medicine is.” Sen. Mike Crapo (R-Idaho), who helped author the 2018 Dodd-Frank rollback as chair of the Senate Banking Committee, said, “There is no need for regulatory reform.”
Still, Rep. Blaine Luetkemeyer (R-Mo.), a top Republican on the House Financial Services Committee, told Politico the FDIC should temporarily guarantee all bank deposits.
And what about the White House?
If there is more trouble, President Joe Biden seems to be reluctant to go back to the 2008 playbook and use taxpayer funds to bail out banks. (In remarks Monday, he stressed that the FDIC’s insurance fund is built up through fees on banks.) Still, the president said his administration was willing to do “whatever is needed” to address future turbulence. President Biden also said he would ask Congress and regulators to “strengthen the rules for banks.”
The bottom line, according to the newsletter Morning Brew, is that, “While it appears that we won’t be reliving 2008 … Politically charged debates over the Fed’s decision to backstop depositors, the meaning(lessness) of FDIC insurance, regulation of mid-sized banks, and how to prevent another SVB-like collapse have already begun and will only grow louder.” And with Credit Suisse now potentially teetering, all eyes in Washington will continue to be on the banking sector.