What’s Next After America’s Worst Bank Collapse Since 2008

(CNN) — Global banking has just suffered its worst week since 2008. Now what’s next?

The fallout from this month’s banking turmoil — the stunning bank runs and the collapses of Silicon Valley Bank and Signature Bank — have been widespread. As a consequence, the global banking system has been shaken.

More volatility is expected for the next week. But that doesn’t mean this is a repeat of the global financial crisis of 15 years ago. Deposits from daily customers are guaranteed and regulators around the world say the banking system remains healthy.

Credit Suisse and First Republic: two more benches wobbled but remained upright throughout the week. The beleaguered megabank Credit Suisse announced last week that up to $53.7 billion in support offered by the Swiss central bank will be needed to stay afloat. Meanwhile, First Republic Bank received a $30 billion lifeline on Thursday from some of America’s biggest banks.

However, those life preservers might not be enough to keep them afloat. US-listed shares of Credit Suisse fell nearly 7% and shares of First Republic plunged about 33% on Friday. JPMorgan analysts wrote this week that UBS looks likely to acquire Credit Suisse.

Profits at US commercial banks have come under pressure from deteriorating asset quality, slowing loan growth and rising deposit rates, said Seema Shah, Principal’s global chief strategist. Asset management.

But SVB and Signature Bank were unique in that much of their deposit bases came largely from the technology sectors and a struggling crypto. These banks also held an unusually large proportion of their clients’ deposits in Treasury bonds, the value of which declined when the Fed began raising interest rates, he said.

First Republic doesn’t have the same problems as Silicon Valley Bank. Long-term Treasury bonds made up 55% of all SVB assets and only 15% of First Republic’s.

“Ultimately, investors must decide whether these individual/idiosyncratic crises add to growing concerns or usher in crisis contagion,” Shah wrote in a note last week.

Another red flag: these collapses may not be entirely idiosyncratic.

Before its collapse, SVB had become the biggest borrower of the Federal Home Loan Bank in San Francisco. Fed staff have called the FHLB a “lender of last resort”. Silvergate Bank, another recently collapsed bank that heavily supported the cryptocurrency sector, also borrowed heavily of the FHLB system, according to Brookings Institution.

First Republic has also been a large borrower of the FHLB. The bank had about $14 billion in loans from them at the end of 2022, up from just $3.7 billion in 2021.

Another bank that has obtained major FHLB loans in San Francisco is Western Alliance. Shares of the regional bank were also tumultuous this week and ended Friday down more than 15%.

That doesn’t mean the banks taking money from the FHLB and participating in the Federal Reserve’s emergency Term Bank Loan Program, which loaned $12 billion to banks this week, are in big trouble.

“There is nothing wrong with using lender-of-last-resort tools to deal with an overheated economy,” Bank of America economists Ethan Harris and Shruti Mishra wrote Friday.

But it raises red flags. There has been a sharp increase in Fed discount window lending to $153 billion from $5 billion last Wednesday. That is the largest sum in recorded loans.

“The sharp increase in emergency lending by banks from the Fed discount window speaks to liquidity and funding stresses at banks, driven by weakening depositor confidence following a bank liquidation and two collapses. banks,” Moody’s analysts wrote last week. The data, they pointed out, are “in line with Moody’s negative outlook on the US banking system.”

Stay alert, but don’t panic: So what’s a concerned investor or bank customer to do? Stay calm, but watchful, analysts say. “Looking ahead, investors will need to keep an eye on what happens at regional banks with deposits and lending to consumers and lending to businesses,” said Torsten Slok, chief economist at Apollo Global Management.