A Storm of Bankruptcies Hit US Banks: Will the 2008 Financial Crisis Repeated?

Concerns about the banking sector in the United States are still at the forefront of the scene, which once again shook Wall Street and affected the prices of the dollar, oil, and stocks, prompting U.S. President Joe Biden to intervene and reassure investors.

With the third banking collapse in a week, the U.S. authorities announced the bankruptcy of Signature Bank, to join the crypto-friendly Silvergate Capital Bank, and tech companies-friendly Silicon Valley Bank (SVB) amid fears of new banking turmoil.

Biden’s attempts to reassure markets and depositors came after emergency U.S. measures to support banks—by granting them additional financing—failed to dispel investor concerns about the possibility of contagion to other banks around the world.

The effects of the collapse of the three banks that sparked on March 8, 2023, caused continued losses in the stocks of global banks after depositors withdrew their balances (about $42 billion at once), which marks the largest bank failure since the closing of Washington Mutual Savings Bank in 2008, as well as the second-biggest failure in U.S. history.

 

Big U.S. Failure

U.S. regulators closed SVB, ranked No. 16 among the largest banks in the United States, and took control of customer deposits—the largest collapse of a U.S. bank since the global financial crisis in 2008, as described by the media.

SVB was also a bank to more than 2,500 venture capital firms, including Lightspeed, Bain Capital, and Insight Partners.

A report by Euro News agency says that, in light of the huge wave of withdrawals, the bank faced a liquidity crisis represented in its inability to continue paying interest on the remaining deposits amid the decline in bank lending operations due to the rise in interest rates at the global level.

According to an analysis by Commerzbank economists Christoph Balz and Bernd Weidensteiner, narrow interest rate increases by the Federal Reserve have put pressure on U.S. banks’ balance sheets.

Investments in U.S. startups dropped 31% last year to $238 billion, according to PitchBook.

Fears of the consequences of the collapse of the SVB caused global financial stocks to incur losses of $465 billion of their market value within two days, in conjunction with the tendency of investors to reduce their exposure to the risks of lenders from New York to Japan, according to Bloomberg.

Amid investor fears of additional collapses, U.S. banks lost about $90 billion of their value in the stock market in trading on Monday, March 13, 2023, bringing their losses during the past three trading sessions to about $190 billion.

Meanwhile, the problems the bank has faced are unique. The New York Times said that financial contagion has begun to spread through parts of the banking sector, which prompted Treasury Secretary Janet Yellen to publicly reassure investors that the banking system was resilient.

In turn, Economics Professor Mohamed Marei explained in a statement to Al-Estiklal that “the bankruptcy of some U.S. banks is completely different from the 2007/2008 global financial crisis, and the reasons that led to the collapse of the SVB are not the same as those that led to the collapse of Lehman Brothers or even close to them.”

“However, the crisis sounded alarm bells for central banks around the world due to their strict monetary measures and their negative impacts on investment,” he said.

“The Fed raised interest rates over the past year from nearly zero to about 4.5% at a rapid and successive pace, which succeeded in curbing inflation, but had a negative impact on investment,” the economist added.

Finally, Prof. Marei expected that the bankruptcy crisis of the three banks would slow down the U.S. monetary tightening policy, pointing to the possibility of the Biden administration placing new restrictions on investing in funds, especially with regard to the tech and crypto sector, which may affect many central banks around the world.

Emergency Measures

In this context, the U.S. administration rushed, on the evening of March 12, 2023, to take emergency measures to boost confidence in the banking sector in an attempt to avoid triggering a systematic crisis on a larger scale, similar to what happened in the 2008 financial crisis.

Regulators also moved quickly to shut down New York-based Signature Bank, which has been under pressure over the past few days.

CNN referred to a rescue plan estimated at $200 billion to guarantee deposits of collapsing banks.

The network reported that the Fed agreed to lend record amounts to other banks last week.

Banks have taken in about $153 billion in recent days, surpassing the previous total of $112 billion recorded during the 2008 crisis, according to a Bloomberg analysis of Federal Reserve data.

On March 16, 2023, the Fed revealed that it had lent about $12 billion to banks since March 12 through a new lending program, approved by the Treasury Department, that allows these banks to avoid liquidity problems and respond to their customers’ requests for deposit withdrawals, according to Agence France-Presse.

The $318 billion the Fed has loaned in total to the financial system is about half what was extended during the global financial crisis.

However, the intervention of the Biden administration to save the situation angered some lawmakers in Congress and some economists as well, according to what was reported by the American Axios website in its report on March 13, 2023.

As they see that the intervention of the U.S. administration only serves the owners of tech companies and bank owners, who gamble with the money of depositors, which may open the door for everyone to follow in the same footsteps, and in the end, the taxpayers will bear the exorbitant bill.

A senior U.S. Treasury official told Reuters that the new policies approved by regulators regarding the closure of Silicon Valley and Signature banks were taken to stabilize the financial system and protect depositors and did not constitute a financial rescue plan for either of them.

It is noteworthy that the United States had witnessed a financial crisis that suddenly appeared in 2007 and continued until 2008, and it was triggered at the beginning by the rush of banks to grant high-risk loans to low-income people who could not repay, which prompted the banks to foreclose on their homes and put them up for sale, driving down the value of real estate and creating a subprime mortgage crisis.

The crisis began to grow at that time to threaten the real estate sector in the United States, then the banks and global financial markets, to pose a threat to the global financial economy. It ended with the intervention of the U.S. government to save major U.S. banks and financial companies and to develop new policies to prevent the recurrence of this crisis.

 

Fears and Worries

Days after the collapse of the SVB, the shares of a number of regional banks, led by the First Republic, fell due to concerns about their long-term financial situation.

The dollar also fell recently as the shares of Credit Suisse and First Republic Bank continued to decline, which raised market concerns about contagion to other banks and increased fears of a recession due to tightening monetary policies.

However, the markets responded positively after a group of 11 of the largest U.S. banks, including Bank of America, Citigroup, JP Morgan, and Goldman Sachs, announced on March 16, 2023, that it deposited $30 billion in the First Republic bank, in an effort to allay fears that he will be the next after the collapse of the two major banks.

Despite this, there are no indications, so far, that there is a global financial crisis looming on the horizon.

“The collapse of SVB will not endanger the global financial market,” the German financial expert and president of the Bavarian Finance Center, Wolfgang Gerke, told Euro News, noting that the “banking sector has not previously recorded risks from startup financing for startups.”

On the other hand, the factors that led to the collapse of the three banks still worry the Europeans, despite the U.S. authorities taking decisive measures to prevent the matter from worsening, especially measures to protect depositors’ funds.

Credit Suisse’s share value fell again on March 17, 2023, despite the massive financial support announced by the Swiss Central Bank to revive the second-largest bank in the country and reassure the markets.

Paschal Donohoe, the head of the group of eurozone finance ministers known as the Eurogroup, said on Monday that Europe had no direct exposure to SVB.

In turn, the European Union’s economic commissioner, Paolo Gentiloni, confirmed on March 13, 2023, that “the U.S. bank’s collapse did not pose a serious threat to Europe’s financial stability,” in light of investor fears of the possibility of contagion.

“I don’t think we have a real risk of contagion at the moment in Europe,” Paolo Gentiloni told reporters in Brussels, adding that the EU was “monitoring the situation in close contact with the European Central Bank.”

Antonio Fatas, Professor of Economics at INSEAD business school, said he didn’t see a systemic risk in Europe yet either from SVB’s collapse.

In Britain, HSBC acquired the British branch of the American SVB for a symbolic amount of one pound sterling.

As for the money markets, credit risk indicators rose in the banking systems in the United States and the Eurozone, and the price of gold, which is a popular safe haven, stabilized above the $1900 level.

Oil also ended last week’s trading lower, giving up early gains that exceeded the dollar per barrel, as concerns about the banking sector prompted the two benchmarks (Brent and West Texas crude) to record their biggest weekly losses in months, according to Reuters.

Meanwhile, investors and banks are waiting for the Fed’s monetary policy meeting on March 22, which is expected to result in a quarter-percentage-point increase in interest rates, according to Reuters.

In turn, Goldman Sachs expected the Fed not to raise interest rates in light of the recent pressures on the U.S. and global financial sector.