Investors are frazzled, but 2023 is not 2008. The second- and third-biggest bank failures in US history were followed by European angst regarding Swiss giant Credit Suisse.
Nevertheless, things were different in 2008, when banks were undercapitalised, under-regulated, and sitting on toxic assets. Major US banks are stronger today. Meanwhile, Credit Suisse is a one-off in many respects; investors have long been wary, following multiple well-publicised scandals.
Still, the market reaction has been noteworthy. Bespoke Investment notes that the US KBW Bank Index last week fell more than four standard deviations below its 50-day average – more oversold than any reading in 2008. London-based Capital Economics says the volatility in bank share prices resembles past periods of generalised market stress like the global financial crisis and the 2020 pandemic.
One possibility, raised by BlackRock’s Larry Fink, is the US financial system suffers a “slow-rolling crisis” resembling the 1986-95 savings and loan crisis. Maybe it won’t, but Fink notes prior tightening cycles “have often led to spectacular financial flame-outs”. As Capital Economics highlights, the number of “one-off” problems – the UK’s gilt market crisis in September, US regional bank failures, Credit Suisse – are mounting.
Things often get broken during rapid rate-hiking cycles; other problems may be coming down the road.
