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Banking Crisis

The world’s banks have been in crisis since several of their number have collapsed or almost collapsed in the last few weeks.

Governments and Regulators have jumped in to try and stabalise the markets and restore confidence to investors and those who keep their money in banks.

Recently one of the oldest and most stable banks in the world nearly collapsed as investors and clients began to panic. As a result, the bank has been sold to an even bigger bank.

Several American banks have totally collapsed.

Is It Over Now?

Stock markets reacted predicably with nervous investors following the usual patterns and moving money and investments to what are considered safer more conservative places.

As the initial panic subsided things are already loosening up and the US stock market (and others) has been on the rise but some experts and researchers are saying that this is not an indication that the crisis is over.

What History Teaches Us

In fact, a newly published study that looked at 800 years of different banking crises suggests that both the American economy and stock market will be below-average performers for some time to come.

The study, which was conducted by professors from Yale & Stanford, analysed close to 2,000 banking-sector interventions which have happened in 138 different countries since the 13th century conclude that the current crisis looks far more serious than is obvious.

“The study…analyzed close to 2,000 banking-sector interventions … in 138 different countries since the 13th century”

The professors based their conclusions on a comparison of the current crisis with an enormous database they constructed of what has happened before.

The database contains data not only on the severity of each crisis but also the range of policy actions that banking regulators took in response to these crisis’.

The professors were trying to reverse-engineer a conclusion about the severity of the current crisis based on the pattern of the regulators’ responses in the past. Their conclusion is that the current crisis is likely to be more severe than average.

One data point that is particularly revealing about the current crisis’ severity is the magnitude of banking regulators’ recent interventions.

 

For example, the combined value of the emergency lending that the Swiss National Bank extended to Credit Suisse and UBS is equivalent to more than 25% of Switzerland’s GDP.

Another example can be found in the US. In America the interventions so far by US banking regulators to guarantee deposits are the second-largest in US history (second only to the 2008 financial crisis guarantees). They could easily become the largest guarantee operation in US history, assuming that deposit guarantees in excess of the $250,000 FDIC limit are extended to the US banking sector more broadly. That’s still been debated. We will soon find out.

Systemic Distress

The professors believe it’s most unlikely that interventions of these magnitudes would have been undertaken if the banking system were not already in the early stages of what they term a “systemic” distress event.

That’s an event that could collapse the entire system. And it means governments are worried that a collapse could happen or they would not have gotten so involved, so quickly.

How Bad Is It?

Knowing the current crisis is particularly severe or above average doesn’t really tell us much or how things will play out, but the professors caution that serious banking crises tend to “play out over many months, if not years”.

They say that “It’s far too early for investors to say that the crisis is over.”