Investors are looking for clarity after Friday’s session The fall of Silicon Valley Bank — the biggest failure of a U.S. bank since 2008. And as they try to predict what will happen next — possibly greater financial turmoil, more government regulation, whether the Federal Reserve pauses to raise interest rates or something else entirely — they’re looking to the past for guidance.
While the collapse of a top 20 bank is easily compared to the 2008 global financial crisis, analysts look back to 1991 – though they might just go back to last fall.
This is how they think about the state of the banking industry and the economy.
Let’s take it to 1991: Analysts are looking at the Savings and Loans crisis of the late 1980s and early 1990s as a better model for how this current crisis might play out.
Some brief background: S&Ls are like banks, but specialize in accepting savings deposits and making mortgages. In the 1980s, they deregulated and started making risky investments with depositors’ money. Those investments went bad, and the S&Ls lost money as soon as the Fed raised rates. That means many borrowers are unable to pay back their loans.
As a result, many credit unions failed and the government stepped in to rescue them.
Sound familiar?
Jaret Seiberg at TD Cowen writes: “If so, then this appears to be a typical banking failure as we saw during the Savings & Loan crisis. “The only difference is that we are dealing with a bank that is more focused on technology than real estate.”
Since the S&L crisis, regulators have pushed banks away from short-term investments, Seiberg said, “for the very reasons that seem to have led to the collapse of Silicon Valley Banks.”
So what can we learn from the crisis? Societe Generale’s Kit Juckes wrote in a note on Monday that a review of central bank regulations and policies seems certain.
“If the S&L crisis is a model for what comes next, we’re closer to where interest rates are higher than the market thinks,” he said, meaning the Federal Reserve The state may soon stop raising interest rates to fight inflation. He added that it is very likely that the US economy will fall into a mild recession next year.
