The collapses of SVB Financial’s (NASDAQ:SIVB) Silicon Valley Bank and Signature Bank (NASDAQ:SBNY) have sparked a virtual tidal wave of speculation that the next great financial crisis is taking root within bank stocks. While these represent two of the largest bank failures in U.S. history, comparisons to 2008 are likely unwarranted.
Why isn’t this week’s banking crash a repeat of the financial crisis?
Well, according to Brad McMillan, chief investment officer at Commonwealth Financial, the first major difference lies in the federal response:
“Unlike in 2008, the government has stepped in early and stepped in hard. While we can certainly expect market turbulence—and we are seeing it this morning—the systemic effects will be limited. … Sunday night, the U.S. Treasury announced that depositors would be fully protected, in the interest of maintaining systemic confidence, and that funds were being made available to support banks under stress. Unlike in 2008, the government is getting ahead of the problem rather than trying to clean up afterward.”
In fact, much of the 2008 financial crisis was a symptom of governmental passivity in the face of a brewing debt bubble. This time around, the government has taken steps to address the structural concerns that arise when a bank the size of SVB collapses.
U.S. banks are more transparent, held to higher lending standards, and have access to more liquid assets overall than what was common in 2008. As such, the panic that ensued in 2008, encompassing major financial institutions nearly across the board, isn’t likely to take root in the same way today.
What else separates 2008 from today?
Bank Stocks Sink Amid Parallels to Financial Crisis
SVB’s current circumstances are actually more reminiscent of the Great Depression than the Great Recession. SVB essentially prompted a bank run on itself.
SVB catered toward the tech and finance crowd, holding billions in deposits from the likes of startups, venture capitalists and tech companies. Unfortunately, after revealing it was strapped for cash on March 8, investors were spooked. Hordes came to collect their money from the bank, forcing the bank into failure on March 10.
Bank runs were a common occurrence during the Great Depression, a result of investors losing confidence in the solvency of their banks. The fractional nature of the U.S. banking system means that banks only carry a small portion of their total deposits on hand at any given time. When spooked depositors find themselves unable to reclaim the money they put in, bank runs are what happen.
Compared to the bank runs of the Great Depression era, the past week’s events are quite tame. Indeed, perhaps the greatest impact of the bank failures are the monetary implications. According to Jeffrey Roach, chief economist of LPL Financial, the Fed may well be forced to slow the rate of its hikes in the face of rate-sensitive industries feeling undue burden as a result of the elevated lending costs:
“The Fed will likely hike by another 25 basis points at the next meeting. However, the rising risks to the economy could likely influence the Fed to stop raising rates by the summer time.”
On the date of publication, Shrey Dua did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
