Investing
Quick shot: How is today's market different from 2008?
The recent banking turmoil seems to be, at least in part, a symptom of the rapid monetary policy tightening seen over the last year.
The recent banking turmoil seems to be, at least in part, a symptom of the rapid monetary policy tightening seen over the last year. As the effects of higher interest rates continue to feed through the economy, it likely won't be the last shoe to drop.
Rate hikes are meant to slow growth and inflation, but they often leave some unintended damage along the way. For months, different parts of the economy have sputtered in the face of these challenges (housing market activity, manufacturing, and the tech sector have all gone through their own reckonings over the last year). Now, the banking sector is the latest to stumble.
To be clear, we didn’t expect three regional banks to fail, and it seems the breakdown from higher rates is happening faster than we expected. The good news, though, is that policymakers are taking the risks seriously and responding with support.
While the contagion, wealth destruction and job loss experienced during the Global Financial Crisis are etched into memory, we have confidence that policymakers developed a powerful playbook 15 years ago and are deploying it more rapidly this time around. The quick and sweeping moves from U.S. authorities (to make depositors at SVB and Signature Bank whole) and the Swiss National Bank's liquidity support for Credit Suisse demonstrate this commitment. Peers are stepping in to help restore confidence, too - for example, a handful of U.S. banks announced they would be putting some deposits of their own with First Republic at the end of last week.
What’s more, the banking sector as a whole is in a different place today. The largest and systematically important banks are more regulated, tend to have diversified deposits, maintain fortress balance sheets and, as a result, are much better capitalized now. And, while that’s not to say that there won’t be further stress, that does make comparisons to 2008 an incomplete analogy.
For more on the market-moving events from last week, be sure to read our most recent Top Market Takeaways.
All market data from Bloomberg Finance L.P., 3/19/23
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