Insight & Analysis

TT’s 25th anniversary: is this time different?

Published: Mar 2023

The recent rescue of Credit Suisse has treasurers wondering whether this – and the collapse of Silicon Valley Bank – are isolated incidents, or whether the banking system is on the brink of a crisis. Are things really different this time?

When banks fall like dominoes, a déjà vu feeling takes hold… haven’t we been here before? Many are wondering whether the recent collapse of Silvergate Bank, Silicon Valley Bank and Signature Bank in the US indicate a wider systemic problem. Is this similar to August 2007, when the UK’s little-known Northern Rock had a run on deposits, which pointed to problems in the US subprime mortgage market? Soon after, Bear Stearns also collapsed and was bought by JPMorgan Chase in a quick-fire sale that was arranged by the Federal Reserve. This was just a taster of troubles to come, which culminated in the failure of Lehman Brothers just a few months later in September 2008. The rest, as they say, is history.

So, when banking giant Credit Suisse was rescued in a shotgun wedding (arranged by Swiss regulators) over the weekend, was this a modern-day Bear Stearns moment? Is this bank failure a sign of more trouble to come? Or are things different this time?

Many commentators and policymakers are quick to point out the banking system is well-capitalised and there are no systemic issues at play. Credit Suisse’s problems, they argue, have been a long time coming, especially with its losses from the collapse of Archegos Capital Management, as well as the Greensill Capital scandal. The wider banking system is safe, they say, and with the actions of central banks in recent days to keep cash flowing, there is no systemic crisis on its way. But then there are the voices of doom, such as activist investor Bill Ackman who has argued such measures are a ‘fictional vote of confidence’ and warned of contagion spiralling out of control.

Treasury Today has heard such warnings before, and as the publication celebrates its 25th anniversary this year, it is a good time to reflect on the financial crises it has witnessed over the years.

Since the publication was founded in 1998, institutions have become more global, the financial system more interconnected, and information – and money – moves at a rapid pace. Today’s crises unfold quickly and are potentially more widespread.

At the time the publication started, the world was adjusting to the impact of the Asian financial crisis, which was triggered by Thailand’s inability to support its currency’s peg to the US dollar. With foreign-denominated debt which couldn’t be repaid, Thailand, and many other countries in the region soon suffered their own problems – and teaching many important lessons about foreign exchange risk in the process.

The next major crisis Treasury Today witnessed was the collapse of Long-Term Capital Management, a seemingly unconnected hedge fund that was deemed ‘too big to fail’ because of the systemic risk it posed. The company was trading pairs of bonds, and looking for wide spreads, predicting they would converge. Its financial modelling, however, hadn’t accounted for any ‘Black Swan’ events – a theory made famous by Nassim Nicholas Taleb where people don’t imagine such things exist – and Russia defaulting on its debt in August 2008 triggered a crisis at the highly-leveraged financial institution. It was rescued by 14 financial institutions in a deal that was hastily arranged by the Federal Reserve. Since then, many other financial institutions have faced crises, and we also witnessed the events of the global financial crisis unfold after the collapse of Lehman Brothers in 2008.

This time, however, things may be different. On the other hand, that kind of thinking could be the kind of folly that Carmen Reinhart and Kenneth Rogoff outline in This Time is Different: Eight Centuries of Financial Folly. These days the world is adjusting to the end of low-interest rates and central bank hikes. For banks, is this time different? Time will tell…

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