The recent collapse of three major banks in the United States has raised concerns about another global financial crisis similar to the one that occurred in 2007-2008. While there are some similarities between the two events, there are also significant differences that may limit the contagion and impact of the current situation.
Similarities
Both crises were triggered by a sudden loss of confidence in some segments of the financial system that had been engaged in risky lending practices. In 2007–2008, it was subprime mortgages that were packaged into complex securities and sold to investors around the world. In 2023, it was technology loans and cryptocurrency exposure that brought down three large banks: Silvergate Bank, Signature Bank, and Silicon Valley Bank.
Another similarity is that both crises involved a run on deposits by panicked customers who feared losing their money. In 2023, Signature Bank customers withdrew more than $10 billion in deposits on Friday March 13 after learning about the collapse of Silicon Valley Bank earlier that week.
Differences
Despite these similarities, there are also important differences between the two crises that may mitigate their severity and scope. One difference is that the current crisis is more localized and concentrated than the previous one. The 2007–2008 crisis affected almost every sector of the global economy and involved hundreds of financial institutions across many countries.
In contrast, the 2023 crisis is mainly confined to a specific niche of the US banking system that caters to technology companies and crypto-related businesses. Moreover, the three failed banks are not among the largest or most interconnected ones in the US, unlike some of the institutions that failed or were bailed out in 2007–2008, such as Lehman Brothers, AIG, and Citigroup.
Another difference is that the regulatory framework and the policy response have improved since the last crisis. After the 2007–2008 crisis, many reforms were implemented to strengthen the resilience and supervision of the financial system, such as higher capital requirements, stress tests, resolution plans, and macroprudential tools. These reforms have helped reduce the vulnerability and increase the preparedness of most financial institutions to withstand shocks.
Furthermore, the authorities have acted swiftly and decisively to contain the fallout from the current crisis. The Federal Reserve has provided ample liquidity support to Signature Bank through its discount window facility, while also maintaining its accommodative monetary policy stance to support economic recovery. The Federal Deposit Insurance Corporation (FDIC) has taken over Silvergate Bank and Silicon Valley Bank and ensured that their depositors will not lose any money. The Treasury Department has announced a fiscal stimulus package to boost consumer spending and business investment. These measures have helped restore some confidence and stability in the financial markets.
Conclusion
The collapse of the three banks in 2023 may have similarities with the 2008 financial crisis, such as risky lending practices, toxic assets, and runs on deposits, but there are significant differences that limit the potential contagion and impact. The current crisis is more localized and confined to a specific niche of the US banking system, and the regulatory framework and policy response have improved since the last crisis. While there may be some short-term turbulence, the financial system is better equipped to withstand shocks and ensure the stability of the economy.
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Keywords: bank failures, 2023 crisis, 2008 financial crisis, similarities, differences, global economy, regulatory framework, policy response