The parallels are eerie on the surface. A well-known U.S. financial institution goes belly up in March, forcing the Federal Reserve to intervene, and clients and investors fear contagion across the banking sector.
The last time it happened, in March, 2008, Bear Stearns was the one wobbling. Although Bear was an investment bank, not a retail lender, it was so well-respected on Wall Street, and so entangled in the daily mix of business, that its demise put financial markets under severe stress.
They never recovered from the trauma, and six months later Lehman Brothers filed for bankruptcy, setting off the global financial crisis.
Because that crisis was so painful, there is a natural reflex to worry that Silicon Valley Bank’s collapse will trigger a repeat spiral. It is very possible, even likely, that the current drama worsens, but the global financial system is in so much better shape today than it was in 2008, and that should do wonders for staunching contagion.
Silicon Valley Bank collapse: What’s next for banks and investors?
This time around, the assets sitting on bank balance sheets aren’t toxic – and that means the banks still trust one another, so they are still lending to each other every day.
In 2008, it was the opposite. Banks owned so many troubled assets, and these securities were so intertwined, that it was nearly impossible to know who had exposures to what. Because there was such a complex web of mortgage-backed securities – investments tied to undesirable U.S. mortgages – the trust between institutions disappeared and they stopped lending to each other. These loans are made behind the scenes every single day, and they keep the system humming.
It was as though all the oil in the financial system dried up, and financial markets froze.
It is a very different scenario today. “Unlike in 2008, this is not about assets with opaque valuations clogging bank balance sheets,” Jean Boivin, head of BlackRock Inc.’s investment institute and a former deputy governor at the Bank of Canada, wrote in a note to clients Monday. “The assets at the heart of the current bank troubles, such as U.S. Treasuries, are among the most liquid and transparent – and losses can be easily assessed.”
U.S. banks are also in much better financial health heading into this air pocket. The metrics used to measure their strength are a little technical, but in short, banks are sitting on much larger cash cushions this time around, and these piles serve as shock absorbers.
This is particularly true for major banks. The 2008-09 crisis proved that some institutions are simply too big to fail. Watchdogs spent years determining which banks fit this bill, and those that do have been labelled “global systemically important banks” or “domestic systemically important banks.” Any bank with one of these labels must hold more cash reserves than smaller peers, and they must also adhere to additional guidelines.
The watchdogs themselves have also changed how they operate in a crisis. Before 2008-09, it was almost inconceivable that a major lender could crumble. Today there’s a full playbook for it. The Federal Reserve took control of Silicon Valley Bank and Signature Bank, a New York-based lender that also failed, in a matter of days, then quickly laid out plans to insure all of their deposits.
The wrinkle is that no two crises are exactly the same, and this time around watchdogs are grappling with something that barely existed in 2008: social media. When the global financial crisis hit, Twitter, Facebook and Reddit weren’t nearly as interwoven into daily life as they are today. Chat applications such as Slack and WhatsApp hadn’t even been created.
Watchdogs must now contend with how quickly information spreads on these apps, and the digital fear-mongering was overpowering last week. In public venues such as Twitter, venture capitalists made it seem like their universe was about to implode. Multiple newspapers have also reported on private group chats with tens or hundreds of startup chief executives debating whether to pull their money from Silicon Valley Bank.
This very scenario has worried Canadian regulators. Just before the pandemic hit, Canadian Deposit Insurance Corp. started advertising in a very visible way, including airing commercials during the NFL playoffs. Some people argued it was a waste of money for a federal agency, but then-CDIC head Peter Routledge explained it was a very deliberate campaign.
At the time, CDIC’s research showed public awareness of its backstop had fallen over a number of years, especially among younger customers who are most likely to be swayed by social-media rumours of a bank’s stability. That was troublesome, he told The Globe and Mail, because on platforms such as Facebook and Twitter, “we don’t have any editorial control.” The next time a financial institution runs into funding trouble, “we should expect that there will be false rumours,” he said.
Mr. Routlege now runs the Office of the Superintendent of Financial Institutions, and the worries proved to be rather prescient. The bank run at Silicon Valley Bank caught U.S. watchdogs off guard. Whether they, and OSFI, can find a way to put out the next social-media fire may have a major impact on the extent of the current drama’s contagion.