October 3, 2023

The banking-sector panic is on the minds of depositors, investors and policymakers, but how do the current problems compare to bank troubles through history? Over the last eight centuries, researchers say, there are few direct parallels to the particular twists and turns of recent weeks.

According to researchers at the Yale School of Management and Boston College’s Carroll School of Management, when past bank problems were similar to current events, most of the time the financial pain ended widely.

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Taking the very, very long view, Andrew Metrick at Yale and Paul Schmelzing at Boston College have spent years compiling the ways in which banks’ volatility and anxiety ran high during the last eight centuries.

Of the 880 crises affecting 138 countries, they found 57 events resonating in the present moment, where account guarantees and emergency credit tools were regulatory and used to calm bank nerves.

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That’s 6.5% of the sample size, they noted in a study released Monday by the National Bureau of Economic Research. It is “a relatively rare event to deploy such a particular policy mix,” the study said.

He said that more than half of all 880 crises were systematic and far-reaching. But of 57 similar historical episodes – including the US financial turmoil of 2008-2009 – nearly 80% turned out to be widespread and systemic, they noted,

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“The combination and size of interventions in March 2023 strongly suggest that we are already in the midst of a systemic event,” they wrote.

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What happens next is unknown. Markets were mostly up Monday afternoon after the Federal Deposit Insurance Corp. announced that First Citizens Bancorp had agreed to take over all deposits and loans from the FDIC, the bridge bank set up after the collapse of the Silicon Valley bank. The bank’s final days were the digital age equivalent of running an old-fashioned bank.

But the finding of 57 episodes, which are similar to the current situation, that about 20% are “relatively benign, doesn’t really inspire confidence,” Schmelzing told Marketwatch.

Although there is some overlap in the responses now and during the Great Recession, there are also differences, he said. Both included account guarantees.

For example, the FDIC coverage temporarily increased from $100,000 to $250,000 in October 2008, and that The limit became permanent in 2010. But the Great Recession also spurred efforts such as asset-management programs for mortgage-backed securities with subprime loans, Schmelzing said.

Confidence is something that is needed right now. Two-thirds, or 66%, of Americans believe large national banks are safe, according to a YouGov Poll was released last week, and 68% are confident that small regional banks are safe.

Nearly 6 in 10 people (59%) said that much of the blame for Silicon Valley Bank’s failure lay with bad decisions by bank executives. This week, some of the federal government’s top financial regulators will testify before Senate and House committees about recent bank failures.

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Researchers have been paying close attention to the series of events over the past few weeks.

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This includes the failures of Silicon Valley Bank and Signature Bank of New York, and regulators’ announcements that customers of those banks will have access to all their deposits, not just deposits under the $250,000 FDIC limit.

The Federal Reserve also announced an emergency lending program, allowing banks to pledge Treasuries and mortgage-backed securities for cash.

and the country’s 11 largest banks deposited $30 billion in First Republic Bank FRC,
while the Swiss government brokered the sale of Credit Suisse to rival UBS in a deal that undervalued some of Credit Suisse’s bonds.

Looking more closely at which of the 57 historical events has the most overlap with today, including the bond debt write-down, the researchers found three analogies. Nothing happened in America and nothing has happened in the last three decades.

Schmelzing said that he and Metrick’s next step would be to take a more in-depth look at the three situations they identified – Australia in 1893, Colombia in 1982 and Denmark in 1987 – to see what lessons can be learned and applied today. Can