Were any lessons learned from the 2008 bank crisis?

Current issues related to economy, (responsible) investment, pension and income: every week an APG expert gives a clear answer to the question of the week. This time: Thijs Knaap, chief economist at APG, on whether government action after the collapse of Silicon Valley Bank (SVB) proves that lessons were learned from the 2008 bank crisis.

Just under 15 years ago, the US bank Lehman Brothers collapsed. It turned out to be the harbinger of the biggest financial crisis since the 1930s. In the Netherlands, ABN Amro, Fortis and insurer ASR had to be rescued with taxpayer money. According to Knaap, the big mistake the U.S. government made in 2008 was letting Lehman go bankrupt. Now that another bank has failed, the question is whether anything has been learned from the 2008 situation. That appears to be partly the case, although not all the lessons have been learned.

Bank run
There are both similarities and differences compared to that time, Knaap says. “Interest rates are rising sharply. This means that fixed-interest securities that banks have on their balance sheets, such as bonds, are falling in value. After all, new bonds with higher interest rates are available. That sounds like a parallel to 2008: the assets that a bank has on its balance sheet are declining in value. Fifteen years ago, it was junk mortgages whose value plummeted; now it’s U.S. government bonds. Customers then become afraid that their assets are going up in smoke and want to get them out of the bank quickly: the famous bank run."

Among the differences, it is especially notable that the drop in value on banks’ balance sheets is less severe than in 2008. “Then it suddenly became clear that banks had sold a lot of mortgages that had all lost their value. And it was unclear who had sold the mortgages to whom and what the exposure to potential losses was. Now that is less of an issue. We know which parties bought the treasuries (U.S. government bonds, ed.) and how they should to deal with them. That makes it less of an issue. Also important is that after the collapse of the SVB, President Biden immediately made it clear that every customer would get their money back. That was not the case after Lehman’s fall. If all goes well, the ensuing panic is now dissipating fairly quickly. Biden’s reaction shows that lessons were learned from 2008, although the potential damage was so great then that it was harder for the U.S. government to issue a guarantee than in the current situation.”

Supervision
One lesson Knaap believes was not learned from the last financial crisis is that supervision of the SVB was minimal. “Since 2008, banks here in Europe, but elsewhere too, have had to submit much more data to supervisors and their balance sheets are checked. One way this is done is through stress tests, which look at what a possible rise in interest rates does to the balance sheet.” Stress tests are now a familiar phenomenon in Europe and the U.S., courtesy of the 2008 crisis. “This is all done with the idea of ‘never another bank crisis,’” he says. But the strictest rules are for the big system banks, known as globally systemic banks. “However, SVB is a smaller bank and therefore was exempted from those stricter regulations. If the rules for large banks had been the same as for small banks, this current situation could probably have been avoided.” Knaap also points out the difference between Europe and the US. “It seems no coincidence that this happened in America and not in Europe. We are somewhat stricter here. That is annoying to banks, but in a situation like this it does help.”

Danger of contagion
After the SVB, the smaller Signature Bank also collapsed and big brother was able to bail out the First Republic Bank just in time.  This begs the question of how such contagion can occur from one bank to another. According to Knaap, it can happen through two channels. “The first is that one bank is still owed money by the other. In fact, there is a whole circuit of banks lending money to each other. That works almost perfectly, until the mutual trust falls away. Then banks that have money left over at that moment might decide to keep it themselves instead of lending it to a bank that is in need of liquidity.” To combat this type of contagion, there is the option for banks to borrow money from the central bank. To do so, the bank in question must provide collateral, but the requirements for this are lower than before. In addition, the government can require a bank to take out a loan in order to dampen the risk of contagion. In this respect too, a lesson has been learned from the 2008 crisis, Knaap said.

The second channel through which bank contagion can occur is when consumers lose confidence in their own bank due to problems at another bank and withdraw their money en masse. This form of contagion is more difficult to combat than when trust between banks breaks down. “Still, a good remedy has been devised for this too, and that is the deposit guarantee scheme. This means that the government guarantees savings up to a certain amount. In the Netherlands, this is 100,000 euros. Often this is enough to reassure people. In the case of the SVB, the U.S. government immediately reassured private customers by guaranteeing all their savings. This ensures that the population retains confidence in banks.”