Relax, SVB's implosion is nothing like the 2008 financial crisis, and the economy will be fine
- The federal government is bailing out Silicon Valley Bank's customers.
- But it's not a repeat of the 2008 financial crisis, when the government stepped in to support the US banking system.
The US government is bailing out a bank's customers — but that doesn't mean another Great Recession is imminent.
On Sunday, the US Treasury, Federal Reserve Board, and the Financial Deposit Insurance Corporation announced they would "fully protect" all depositors with funds in Silicon Valley Bank. The news came after the institution was shut down last Friday, and experts raised concerns that inaction could spur wider turmoil in the banking industry.
In recent days, many have drawn comparisons to the 2008 financial crisis, when the federal government doled out roughly $200 billion to hundreds of banks to support the US banking system. The size of SVB's bank failure has only been surpassed once in American history — by Washington Mutual when it collapsed in 2008.
The '08 crisis laid the groundwork for the Great Recession — when millions of Americans lost their jobs and the unemployment rate peaked at nearly 10%. But today's landscape is very different than a decade-and-a-half ago.
While the banking industry might not be out of the woods just yet, there's a good chance it — along with the broader US economy — will be just fine. Here are four reasons why.
The US has stricter banking regulations today
After the 2008 crisis, US banks were strapped with stricter regulations to help ensure the industry would avoid a similar fallout in the future. This included raising capital requirements, which was intended to ensure banks had adequate reserve levels during times of crisis. Rules were also put in place to make sure institutions had well-diversified revenue streams.
A bank of SVB's size was not subject to the same level of regulations — in part due to a law passed during the Trump administration — which some, like Sen. Bernie Sanders, have blamed for the bank's collapse.
However, these regulations still apply to roughly the twelve biggest US banks — those that have at least $250 billion in assets — and should help make a 2008-style failure less likely.
The federal government acted quickly to squash the crisis
In announcing SVB's depositors would receive full deposit protection, the federal government took steps to minimize impacts to the wider banking industry. It also announced that depositors from a second institution, Signature Bank, that was shut down on Sunday, would receive the same protection.
If these actions are successful, they will help prevent the need for additional bank bailouts by reducing the odds of more runs starting at similarly-sized banks.
"By insuring all deposits at SVB and Signature, regulators judged the risk of cascading effects to other regional banks and the broader economy to be more significant than the moral hazard of increasing FDIC limits," Rich Falk-Wallace, CEO of data analytics firm Arcana and a former portfolio manager at hedge fund Citadel, told Insider Sunday.
The bigger banks will be just fine
While SVB had $209 billion in assets at the end of last year, making it the 16th-largest US bank, it's not large enough to fuel a widespread banking crisis all by itself. The country's four largest banks — JPMorgan Chase, Bank of America, Citibank, and Wells Fargo, each have over $1 trillion in assets. And compared to SVB, which relied heavily on tech startups for deposits over the past decades, these banks' business models are much more diversified.
Given their strong financial standing, some of the US' biggest banks might help clean up the mess as well. Regulators are currently looking for an institution to purchase SVB's assets.
"Still to be determined is the fate of the assets of Silicon Valley Bank," Greg McBride, chief financial analyst at Bankrate, said in a statement. "Whether one buyer, or multiple buyers, emerge is still to be determined as of the moment."
The stock market is hanging in there
As of early Monday afternoon, the S&P 500 is slightly positive on the day, suggesting investors aren't overly concerned about SVB's collapse wrecking further havoc — though bank stocks have continued to struggle.
While the economy and markets aren't the same thing, a struggling market can be a negative leading indicator for a weakening economy.
If the US economy does enter a recession as some experts expect, SVB's failure is unlikely to be the reason why.
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