Researchers analyzed 800 years of banking crises. They concluded, ‘We are already in the midst of a systemic event’
Story by Andrew Keshner, Marketwatch, 3/27/23
Banking-sector jitters are on the minds of depositors, investors and policy makers, but how do the current problems compare with bank troubles through history? Over the past eight centuries, researchers say, there are few direct parallels for the particular twists and turns of recent weeks.
But when past bank troubles were most similar to current events, the financial pain ended up being widespread most of the time, according to researchers at the Yale School of Management and Boston College’s Carroll School of Management.
Taking the very, very long view, Andrew Metrick at Yale and Paul Schmelzing at Boston College have spent several years compiling the ways governments and markets have responded when banks looked shaky and anxiety ran high during the past eight centuries.
Out of 880 crises affecting 138 countries, they found 57 events echoing the current moment, where account guarantees and emergency lending were the tools regulators and banks used to calm nerves.
That’s 6.5% of the sample size, they noted in a Monday study released by the National Bureau of Economic Research. It’s a “relatively rare occurrence to see such a particular policy mix deployed,” the study said.
Just over half of all the 880 crises turned out to be systemic and far-reaching, they noted. But of the 57 similar historical episodes — which include America’s financial turmoil in 2008-2009 — nearly 80% turned out to be widespread and systemic, they noted.
“The combination and size of interventions in March 2023 strongly suggest that we are already in the midst of a systemic event,” they wrote.
What happens next is unknown. Markets are mostly up Monday afternoon after the Federal Deposit Insurance Corp. announced that First Citizens Bancorp had agreed to assume all the deposits and loans from the bridge bank the FDIC set up after the collapse of Silicon Valley Bank. The bank’s final days were the digital-age equivalent of an old-fashioned bank run.
But the finding that of the 57 episodes that are similar to the current situation, roughly 20% “turn out to be relatively benign is not exactly confidence-inspiring,” Schmelzing told MarketWatch.
Although there’s some overlap in the responses now and during the Great Recession, there are differences, too, he said. Both included account guarantees.
For example, FDIC coverage temporarily climbed to $250,000 from $100,000 in October 2008, and that limit became permanent in 2010. But the Great Recession also prompted efforts like asset-management programs for mortgage-backed securities with subprime loans cooked in, Schmelzing noted.
Confidence is something that’s needed now. Two-thirds, or 66%, of Americans are confident that large national banks are safe, according to a YouGov poll released last week, and 68% are confident that smaller regional banks are safe.
Almost 6 in 10 people (59%) said a lot of the blame for Silicon Valley Bank’s failure is due to bad decisions by the bank’s executives. This week, some of the federal government’s top financial regulators will testify before Senate and House committees about the recent bank failures.
Read: National banks vs. regional banks: Here’s one instance when smaller is better
The researchers have paying close attention to the chain of events over the past few weeks.
That includes the failures of Silicon Valley Bank and Signature Bank of New York and regulators’ announcements that customers at those banks would get access to all their deposits, not just deposits under the $250,000 FDIC threshold.
The Federal Reserve also announced an emergency loan program allowing banks to pledge Treasurys and mortgage-backed securities for cash.
And the country’s 11 biggest banks deposited $30 billion at First Republic Bank while the Swiss government brokered the sale of Credit Suisse to rival UBS in a deal that writes down some of Credit Suisse’s bonds.
Looking more closely into which of the 57 historical events have the most overlap with today’s, including the bond debt write-downs, the researchers found three analogues. None occurred in the U.S. and none happened in the past three decades.
Schmelzing said his and Metrick’s next step will be to look deeper at the three situations they identified — Australia in 1893, Colombia in 1982 and Denmark in 1987 — to see what lessons can be learned and applied today.