Should We Worry About 2008?

TLDR: In 2008, the Royal Bank of Scotland briefly became the largest bank in the world, with a balance sheet the same size as Germany. A few seconds later, along with storied giants like Lehman Brothers the bank imploded and became a subsidiary of the UK government. A true rags-to-riches-to-rags tale. Is another 2008-style disaster coming?

Unlikely, and we’ll get to that in a second. To be sure, there are uncomfortable echoes of that crisis. European banks are down by an average of 20 per cent over the last two weeks. US banks ditto. Fed and Treasury started putting out “it’s all fine, really, we got this” joint statement on Sunday nights and Credit Suisse just got bought by a stronger rival under diktat from the government.

The hard truth is that whenever the cost of borrowing rises, something somewhere in finance is expected to break. 1998, 2001, 2008 all witnessed a financial calamity. Why?

Because at some point someone inevitably assumes that low rates are here forever (or long enough), and makes a series of poor choices. That works well enough that others want to join in and eventually no one remembers how it all started.

Ok, but back to 2008. It’s merely the most recent relevant analogy but it looms large for the plethora of Fed acronyms (remember TALF? TARP?) it unleashed. The big problem in 2008 was a glut of poor-quality subprime mortgages that had been spread round the world via derivatives onto the balance sheets of poorly capitalized banks. The “recency effect” is making investors jittery even if the parallel isn’t perfect.

Fine, so why isn’t this like 2008?

First, credit quality remains decent across bank portfolios.

Second, bank capital is two to three times stronger than it was a decade and a half ago. The largest banks in the US and Europe are subjected to Fed and ECB stress tests that require them to hold extra buffers in capital.

The SVB and Signature bank collapse was caused primarily by poor interest rate risk management that was in part enabled by looser regulation for smaller banks. First Republic shareholders are fretting over the realization that the bank isn’t eligible for the same liquidity window that was set up for SVB.

And Credit Suisse has had a history of missteps that has seen its share price drop 70% over the 3 years PRIOR to current turmoil even as its rival UBS rose 120%.

However …

Although a repeat of 2008 is unlikely, policymakers may be far less able to deal with a full-blown financial crisis this time around. Back in 2008, rates could be slashed, and QE was launched to flood banks with liquidity.

Today, government balance sheets are still stretched from that crisis, and interest rates are set to rise to fight inflation. There is a lot less appetite for another zero-interest rate phase.

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The historical period called Antiquity holds neverending sway in our imagination and in our culture.

Broadly speaking you can split Antiquity in three parts, all eminently fascinating.

Far Antiquity is the Bronze Age – think Sumerians, Babylonians and Egyptians. Classical Antiquity is the time of the Greeks and the Romans. Late Antiquity includes the fall of the Roman Empire, Justinian in Byzantium, the rise of Christendom, etc..

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Originally Posted March 21, 2023 – Should we worry about 2008?