How likely is a Lehman-like crisis?

Do the almost simultaneous bank crises on the opposite sides of the Atlantic imply a disaster like the Lehman Brothers collapse? 

Let’s start from the United States. Banking crises start suddenly but they typically have long-term causes. On March 7, Silicon Valley Bank (SVB), a midsized regional US bank with $200 billion in deposits announced that it had lost about $2 billion by selling early long-term treasury bonds and that it had hired Goldman Sachs to manage a new share offering to cover the damage. This announcement did not seem disturbing, but it was clumsy in that it preceded rather than followed the new shares offering.

Many startups and venture capitalists (VCs) were banking at SVB. In the last six months, many startups and VCs had withdrawn significant amounts from SVB because of difficulties in the sector. To cover the withdrawals, SVB sold long-term treasuries at a loss of about $2 billion. On March 8, at a group chat of hundreds of executives of startups and VCs, the issue of the relative weakness of SVB was discussed, and some “leaders” in the sector said that “they counsel friendly companies to withdraw their deposits from SVB.”

Withdrawals on the next day, March 9, were above $50 billion, that is over 25% of the total deposits at SVB. The stock price of SVB fell 60%. The next day the bank closed, and there were lines outside the bank that reminded me of the Varoufakis era in Greece. The regulators closed SVB.

In the beginning, the Federal Deposit Insurance Corporation (FDIC) said that only deposits up to $250,000, guaranteed by the present law, would be available to depositors immediately, and the rest would get some cash right away and an IOU for the rest, with significant uncertainty as to what percentage of their money the uninsured would receive and when. The problem was that at SVB, only 4% of the deposits were covered by FDIC insurance.

Under pressure from the enraged startups and VCs (96% of depositors) who were likely to receive only 70% of their money and at a delay of months, the Biden administration decided to immediately provide 100% of deposits to all, irrespective of size, by ex post naming SVB as a “systemic bank.” In the 2008 crisis and later, this designation had been given only to much larger banks, such as Bank of America, Citibank and JPMorgan Chase. 

What are the lessons from the collapse of SVB? 

First, the bank managers made huge errors that created big losses.
Second, the bank inspectors who checked the books of SVB every week missed the obvious problems that had shown up months earlier. 
Third, when thousands of depositors withdraw money at the same time and so-called leaders of Silicon Valley encourage them to make panic withdrawals, a bank will collapse, no matter how solid its balance is.
Fourth, if your depositors are politically connected and donors to the party in government, they can demand and receive compensation over and above the letter of the law.
Fifth, the Fed’s extremely rapid increase of interest rates from zero to 5% cannot be expected to come without victims and damage to the economy.

What happened with Signature Bank (SB) 

At SΒ, 90% of deposits were uninsured. Most SB depositors were involved in cryptocurrency transactions, made large withdrawals because of the crisis in crypto, and, like SVB, SB was led to collapse and closure by the FDIC.

In the regional banks sector, there are only a few banks with large percentages of uninsured deposits, like First Republic Bank (63% uninsured), that are presently under pressure from financial markets. Large banks, including JPMorgan and Citibank, under pressure from the government, provided First Republic a $30 billion deposit but it remains under pressure in the stock market. It is likely that the few regional banks under pressure will be bought out by larger banks or, in the worse case, will be closed by the FDIC. Therefore, on the American side of the Atlantic, the regional banks crisis seems contained without significant danger of contagion.

Credit Suisse

In Europe, Credit Suisse (CS) is in a long-term crisis dating from the time of the Greek economic crisis over 10 years ago. CS repeatedly lost large amounts, such as the $5.5 billion loss at the bankruptcy of Archegos Capital Management in March 2021.

Its shares recently fell 25% because of its weak financial condition and then increased 20% after the $54 billion support from the Swiss central bank, but its stock price has not yet stabilized. It is likely that CS will be merged with another Swiss or European bank. The CS crisis may lead to contagion and spread in Europe, especially to weak Italian banks.

Fortunately, having sold large percentages of their nonperforming loans and having received tremendous financial help from the Greek state, the four Greek systemic banks are now in much better financial shape than during the Greek economic crisis, and it is unlikely that they will face problems as a consequence of contagion from CS.

* Nicholas Economides is a professor at the Stern School of Business, New York University.