Weekly comic: deja vu, all over again

Weekly comic: deja vu, all over again

Weekly comic: deja vu, all over again
© Investing.com

By Geoffrey Smith 

Investing.com — Don’t be fooled. This is not 2008. Heck, it probably isn’t even 2007.

That’s the good news. The bad news is – that doesn’t mean there won’t be a crisis. It just won’t be the one you were expecting.

Of course there are similarities with 2008: the dramatic reversals of fortunes caused by sharp rises in interest rates; titans of finance reduced to begging for taxpayer bailouts, the sense of an overdue reckoning at the end of a long period of financial indiscipline; the reassurances of regulators and politicians eerily echoing those of Ben Bernanke, Hank Paulson and Tim Geithner. The list is long.

But too much is different for comparisons with the last great financial crisis to hold. First and foremost, the banking system really is in much better shape than 15 years ago, much more able to withstand shocks thanks to higher levels of capital and liquidity.

As such, it is a lot harder to see real systemic risk, and a lot easier to blame a few badly-run individual institutions. There is no rotten asset class festering on the books of the financial system the way that subprime mortgage debt did in the 2000s. True, all three banks to fail this month were exposed, in one form or another, to cryptocurrency, but that cannot touch the top tier of U.S. banks, who have largely kept it at arm’s length. It certainly doesn’t explain what has happened at Credit Suisse in the last couple of days.

Much has been made of the losses made by Silicon Valley Bank on its bond portfolio, but these were down to a quite stupefying lack of wit in management, rather than to the underlying credit quality of its paper. There is no analog here to the garbage dressed up in AAA ratings that brought down Lehman Brothers and others.

Nor are highs concentrations of corporate deposits at the failed institutes – especially Silicon Valley Bank and Silvergate – a big enough problem to be systemic. Yes, corporate deposits are less sticky than retail ones. Yes, there is a whole tier of banks in the U.S. that is disproportionately built on such deposits. But the Fed and other central banks are still hyper-attuned to liquidity crisis risks, and have been much faster to react to contain such risks than 15 years ago.

Central banks to stem liquidity risks has been another important difference with 2007/8. Both the reaction of the Fed, in setting up the Bank Term Funding Program, and the Swiss National Bank, in offering a $54 billion credit line to Credit Suisse, have acted quickly to stop contagion, just as the Bank of England did in October in dealing with the brief crisis in the U.K. pensions market. That decisiveness has been particularly commendable, and particularly risky, given the ongoing risk of inflation across developed economies.

Yet another difference is clear in the decision on Thursday by a handful of tier one banks to plow back into First Republic enough money to compensate for the deposits it has lost in the recent panic. This suggests that the window for private-sector solutions to any problems that arise is still wide open.

No amount of reasoning, though, will stop a self-fulfilling spiral of panic if it takes hold. And some details from the last week have been ominous enough to invite fears that this could be the start of something much more serious.

For one, there is the evidence of the system being gamed, so that risks which should have been caught remained outside the regulatory perimeter. SVB had lobbied hard to be exempted from regular stress-testing, getting its wish in 2018.

And just as U.S. resistance to the Basel II regulations ensured that U.S. banks were under-capitalized in 2008, the non-implementation of the Basel III regulations on capital and liquidity has put regional U.S. banks in the position they find themselves in today.

Not that Basel III will be enough to save European banks if confidence in U.S. ones start to fray. Confidence effects count for much more than accounting ratios, and suspicions are rife that solid-looking numbers are hiding the underlying weakness of many loan books.

As Winston Churchill said, those who fail to learn from history are doomed to repeat it – but watch what history you want to learn from.  For now, far too much is uncertain to approach today’s markets with conviction that they will behave as they did 15 years ago.  

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