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 AG needed a lifeline from the Swiss and America's biggest banks agreed to deposit $30 billion in another ailing firm, First Republic Bank, in a bid to boost confidence.
Evoking recollections of the frenzied weekend deals to rescue banks in the 2008 financial crisis, the turmoil prompted monumental action from the US 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 FDIC and the Fed and the Treasury (last) Sunday, that people are still worried about their banks," said Randal Quarles, the former top banking regulator at the Federal Reserve. 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, it would have calmed things by now," Quarles said.
The collapse of Silicon Valley Bank, which held a high number of uninsured deposits beyond the $250,000 Federal Deposit Insurance Corporation (FDIC) guaranteed limit, shook confidence and prompted customers to withdraw their money. US bank customers have flooded banking giants, including JPMorgan Chase & Co, Bank of America Corp and Citigroup Inc with deposits. That has led to a crisis of confidence and steep selloff in smaller banks.
“We do a lot of contingency planning," said Stephen Steinour, chief executive of Huntington Bancshares Inc, 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 midsize 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, six months," said Keith Noreika, vice president of Patomak Global Partners and a former Republican 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. Thursday's bank-led $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," Josh Lipsky, senior director of the Atlantic Council’s GeoEconomics Center and a former IMF adviser wrote in a blog post. "If you look past the surface, it’s clear that 2023 bears little similarity to 2008."
In 2008, regulators had to contend with billions of dollars in toxic mortgages and complex derivatives sitting on bank books. This time, the problem is less complex as the holdings are US Treasuries, writes Lipsky.
And this time, the industry is fundamentally healthy.
While Congress and regulators whittled away at safeguards for regional banks over the years, there are tougher standards for the biggest global banks, thanks to a sweeping set of new restrictions from Washington in the 2010 Dodd-Frank financial reform law.
That stability was on display Thursday, when the biggest firms agreed to place billions in deposits at First Republic, effectively betting the firm would remain afloat. Even so, the firm remains under pressure, with its stock price falling 33% the day after the capital infusion.
"Banks are actually healthier than they were pre-[2008 crisis] because they haven't really been allowed to do virtually anything in terms of actually taking true underlying credit risks in their assets," said Dan Zwirn, CEO of Arena Investors in New York.
Now bankers and regulators are grappling with an unexpected set of challenges. Deposits, long seen as a reliable source of bank cash, have now come into question.
And those who watched SVB's quick collapse wonder what role social media, now omnipresent but niche back in 2008, might have played in people pulling out money.
"$42 billion in a day?" said one senior industry official who declined to be named, referring to the massive deposit flight Silicon Valley Bank saw before its failure. "That’s just insane."
The last crisis changed the banking industry, as massive firms went under or were bought by others and Dodd-Frank was enacted. Similar efforts are now underway.
"Now the regulators know that these banks offer a greater risk to our overall economy than they thought they did. And I'm sure they will go back and increase regulation to the extent they can," said Amy Lynch, founder and president of FrontLine Compliance.
A divided Congress is not likely to advance any comprehensive reforms, according to analysts. But bank regulators, led by the Fed, are signaling they are likely to tighten up existing rules on smaller firms at the center of the current crisis.
Currently, regional banks below $250 billion in assets have simpler capital, liquidity and stress testing requirements. Those rules could increase in intensity after the Fed concludes its review.
"They definitely must, it’s not even should, they must reconsider and change their strategies and the rules that were adopted," said Saule Omarova, a law professor who President Joe Biden once nominated to lead the Office of the Comptroller of the Currency.
The recent crisis has also put big banks back on Washington's radar, possibly erasing years of work by the industry to escape the tarred reputation it carried from the 2008 crisis.
Prominent big bank critics like Senator Elizabeth Warren are criticizing the industry for pushing simpler rules, in particular a 2018 law allowing midsize banks like Silicon Valley Bank to avoid the most vigorous oversight.
Other policymakers are reserving ire for regulators, wondering aloud how SVB could have ended up in such a dire position while watchdogs were on the job.
The Federal Reserve plans to conduct an internal review of its supervision of the bank. But there are growing calls for an independent look. On Thursday, a bipartisan group of 12 senators sent a letter to the Fed, saying it was "gravely concerning" supervisors did not identify weaknesses ahead of time.
"SVB is not a very complicated bank," said Dan Awrey, a Cornell Law professor and bank regulation expert. "If big and not-complex can’t get the appropriate supervision, that then raises the question: who on Earth can we regulate?"