What I learnt from three banking crises (2023)

A few weeks ago, I went to dinner in Manhattan with friends who work in finance on America’s East and West coasts. Nothing odd about that, you might think. But this gathering was memorable: over wine, my companions traded tales about the tactics they and their colleagues had used the previous day to yank deposits from troubled banks such as Silicon Valley Bank (SVB) and First Republic.

Some had done this on their laptops or smartphones, sitting in taxis and meetings, or while attending the South by Southwest tech conference in Austin, Texas; others had dispatched emails to their assistants instead. Either way, as the tales piled up, I kept surreptitiously glancing at my own phone for updates on the panic. Physically we were in a sushi restaurant; but in cyberspace we had a ringside, real-time view of a modern-day bank run.

In some senses, it felt wearily familiar. I have watched two financial crises unfold before: once in 1997 and 1998 in Tokyo, as an FT correspondent, when Japanese banks imploded after the 1980s bubble; then in 2007 and 2008, when I was capital markets editor in London during the global financial crisis. I wrote books on both.

We can track fevered debates via social media about troubled lenders. Bank runs have become imbued with a tinge of reality TV

Those events taught me a truth about finance that we often ignore. Even if banking appears to be about complex numbers, it rests on the slippery and all-too-human concept of “credit”, in the sense of the Latin credere, meaning “to trust” — and nowhere more than in relation to the “fractional banking” concept that emerged in medieval and early Renaissance Italy and now shapes modern finance.

The fractional banking idea posits that banks need to retain only a small proportion of the deposits they collect from customers, since depositors will very rarely try to get all their money back at the same time. That works brilliantly well in normal conditions, recycling funds into growth-boosting loans and bonds. But should anything prompt depositors to grab their money en masse, fractional banking implodes. Which is what happened in 1997 and 2007 — and what I saw unfold in the sushi restaurant last month.

However, in another respect, this latest panic was different — and more startling — than I have seen before, for reasons that matter for the future. The key issue is information. During the 1997-98 Japanese turmoil, I would meet government officials to swap notes, often over onigiri rice balls. But it was a fog: there was little hard information on the (then nascent) internet and the media community was in such an isolated bubble that the kisha (or press) club of Japanese journalists had different information from foreigners. To track the bank runs, I had to physically roam the pavements of Tokyo.

What I learnt from three banking crises (1)
(Video) 3 major banks COLLAPSED in the US. INDIAN banks next? | How serious is the banking crisis?

A decade later, during the global financial crisis, there was more transparency: when banks such as Northern Rock or Lehman Brothers failed, scenes of panic were seen on TV screens. But fog also lingered: if I wanted to know the price of credit default swaps (or CDS, a financial product that shows, crucially, whether investors fear a bank is about to go bust), I had to call bankers for a quote; the individual numbers did not appear on the internet.

No longer. Some aspects of March’s drama remain murky; there is no timely data on individual bank outflows, say. Yet CDS prices are now displayed online (which mattered enormously when Deutsche Bank wobbled). We can use YouTube on our phones, anywhere, to watch Jay Powell, chair of the US Federal Reserve, give a speech (which I recently did while driving through Colorado) or track fevered debates via social media about troubled lenders. Bank runs have become imbued with a tinge of reality TV.

What I learnt from three banking crises (2)

This feels empowering for non-bankers. But it also fuels contagion risks. Take Silicon Valley Bank. One pivotal moment in its downfall occurred on Thursday 9 March when chief executive Greg Becker held a conference call with his biggest investors and depositors. “Greg told everyone we should not panic, because the bank will not fail if we all stick together,” one of SVB’s big depositors told me.

Similar conversations took place in Japan in 1997, physically, in smoke-filled rooms. But few customers knew. Not so in 2023: reports of Becker’s words leaked into the internet, fuelling a stampede. In a few hours, some $42bn — or a quarter of SVB’s funds — departed. Back in 1984, by way of comparison, it took depositors an entire week to withdraw half their funds from Continental Illinois — in person — when that giant lender failed.

The SVB managers asked the Federal Reserve for help in meeting depositors’ claims. But unlike mobile banking, the Fed facilities are open for only a few hours a day. By Friday morning “a total of $100bn was scheduled to go out the door”, Michael Barr, Fed vice-chair for supervision, later told Congress. The bank was dead. Or as Jane Fraser, chief executive of Citigroup, noted: “There were a couple of tweets and then [SVB] went down faster than we have seen before.”

What I learnt from three banking crises (3)

And the panic did not end there: as rumours snowballed, cyber-herds targeted groups that were seen as vulnerable, be that Signature Bank (which was perceived to have mismanaged interest rate risk and had big exposures to real estate), First Republic (which, like SVB, had a high proportion of rich customers whose accounts exceeded the official $250,000 bank insurance limit, making them a potential flight risk), or Credit Suisse (which was so scandal-tainted and poorly managed that depositors were already withdrawing their funds.)

Such contagion had erupted before in finance; think of the crowd panic in the streets of London during the South Sea Bubble of 1720. But as Powell ruefully observed: “The speed of the run [is] very different from what we’ve seen in the past.” Or to cite Fraser again: social media and mobile banking today are a “game-changer” for finance — as in many other areas of our lives.

(Video) Breach of Trust: Decoding the 2023 Banking Crisis

So how should investors, regulators and bankers respond? One obvious answer would be to drag central banking processes into the 21st century, and keep them operating 24/7 in a crisis. Regulators could also bolster capital reserves, protect more deposits, or make it harder to withdraw money at such times. But ultimately, banks and investors will become more risk-aware — and risk-averse — only by doing what airline pilots do: prepare for future shocks by studying past accidents or near-disasters. And from my observations over three decades in Tokyo, London and New York, there are five key lessons to ponder.

What I learnt from three banking crises (4)

1. No bank is an island

The first lesson is that when a bank implodes, this is almost always a symptom — not a cause — of something askew in the wider financial world, affecting other institutions. Financiers rarely want to admit this. When Fraser of Citi recently appeared before the Economic Club of Washington DC, she insisted in a chirpy, no-nonsense manner that the problems at SVB and Credit Suisse were “idiosyncratic”.

Perhaps so. “Idiosyncratic sounds like idiotic — and Silicon Valley was that,” says Lawrence J White, a finance professor at New York University who formerly worked in government during the savings and loan crisis. Or as Powell observed: “At a basic level, Silicon Valley Bank management failed badly [because] they grew the bank very quickly, they exposed the bank to significant liquidity risk and interest rate risk, didn’t hedge that risk.” In plain English, the core reason a panic erupted was that SVB’s balance sheet was stuffed with long-term Treasury bonds whose value has plunged in the last year as the Fed has raised rates, creating losses.

But SVB was not entirely alone. “Other banks have substantial unrecognised losses on investments and high levels of uninsured deposits,” says White. That stems from the most crucial problem: after 15 years of ultra-loose monetary policy, many financial institutions have strategies that are designed for a low-rate world, and are ill-prepared for higher rates.

What I learnt from three banking crises (5)

I have seen this before. When banks such as Japan’s Long-Term Credit Bank failed in the late 1990s, critics wailed about idiosyncratic “scandals”, such as the fact that some LTCB managers stuffed embarrassing records of loan losses into manholes (yes, really).

But that was a symptom of a bigger problem: the Japanese banks were so flush with extra cash in the 1980s that they threw money into real estate deals that went wrong. Similarly, when Lehman Brothers failed in 2008, and politicians vilified its former head, Dick Fuld, this was part of a bigger pattern: a decade of financial engineering by banks had encouraged dangerous risk-taking. Cheap money always carries costs.

What I learnt from three banking crises (6)

2. Don’t fight the last war

The second lesson is that investors and regulators often miss these bigger structural flaws because they — like the proverbial generals — stay focused on the last war.

Take interest rate risks. These “flew under the supervisory system’s radar” in recent years, says Patrick Honohan, former central bank governor of Ireland; so much so that “the Fed’s recent bank stress tests used scenarios with little variation [and] none examined higher interest rates” — even amid a cycle of rising rates. Why? The events of 2008 left investors obsessively worried about credit risk, because of widespread mortgage defaults in that debacle. But interest rate risk was downplayed, probably because it had not caused problems since 1994.

(Video) Emergency move to avert banking crisis

The global financial crisis was similar: when I asked bankers at entities such as UBS in late 2008 why they had missed mortgage default risks in earlier years, they told me that their risk managers were too busy worrying about hedge funds and corporate loans instead. That was because a big hedge fund (Long-Term Capital Management) imploded in 1998 and the dotcom bubble burst in 2000, creating corporate loan losses. The past is not always a good guide to future risks.

What I learnt from three banking crises (7)

3. Safety is a state of mind

A third, associated, lesson is that items considered “safe” can be particularlydangerous because they seem easy to ignore. In the late 1990s, Japanese bankers told me that they made property loans because this seemed “safer” than corporate loans, because house prices always went up. Similarly, bankers at UBS, Citi and Merrill Lynch told me in 2008 that one reason why the dangers around repackaged subprime mortgage loans were ignored was that these instruments had supposedly safe triple-A credit ratings — so risk managers paid scant attention.

So, too, with SVB: its Achilles heel was its portfolio of long-term Treasury bonds that are supposed to be the safest asset of all; so much so that regulators have encouraged (if not forced) banks to buy them. Or as Jamie Dimon, head of JPMorgan, noted in his annual shareholders’ letter, “ironically banks were incented to own very safe government securities because they were considered highly liquid by regulators and carried very low capital requirements”.Rules to fix the last crisis — and create “safety” — sometimes create new risks.

What I learnt from three banking crises (8)

4. Beware blind spots

Fourth: bankers need to recognise that cultural patterns matter. They often ignore this — in themselves and others — because they are trained to focus on hard numbers. But it mattered hugely with SVB. Its culture emulated its client base, which was mostly from the tech and start-up worlds, which tend to have a “skew” in their concept of risk: they are willing to take bold bets, knowing that there is a small chance of a massive payout (say, if their brilliant idea goes viral), while thinking that they can always reinvent themselves after a downside risk (ie, their company fails). This, as behavioural economist Colin Camerer notes, is different from finance. “Risk management culture, as it’s usually practised [in banks], is antithetical to the Silicon Valley culture.”

It might imply greater information transparency accelerates consumer reaction to news, even outside crises, increasing the risk of ‘herding’

Bankers have their own tribal patterns. Another reason why banks failed to see the looming mortgage risks before 2008 was they were often detached from “real” life (ie, what subprime borrowers were doing with their loans) and different teams inside big investment banks were often fighting each other to protect their bonuses and did not share information.

And right now there is another crucial cultural issue that potentially matters even more: consumer behaviour. Torsten Slok, an economist at Apollo, notes that “the share of [US] households using mobile banking or online banking increased from 39 per cent in 2013 to 66 per cent in 2021”.

Until now, the models used in finance do not seem to have taken account of the fact that consumer behaviour online might be different from that in the old-fashioned, physical banking world. But one striking feature about American banks, even before the March panic, was that consumers were moving money out of low-paying deposit accounts into better-yielding money market funds at a dramatically faster pace than at similar points before in history.

You are seeing a snapshot of an interactive graphic. This is most likely due to being offline or JavaScript being disabled in your browser.
(Video) US Banking Crisis: Two More Banks On the Brink of Collapse? | Vantage with Palki Sharma

That might imply that greater information transparency accelerates consumer reaction to news, even outside crises, increasing the risk of “herding”. Either way, we urgently need some behavioural finance analysis, since American banks will stay healthy only if they hang on to deposits — and digital herding could increase the risks of turmoil in other markets, such as Treasury bonds, if shocks emerge there too.

What I learnt from three banking crises (10)

5. Don’t bet against bailouts

The fifth lesson is that banks are never “just” businesses. In calm times, bankers dress themselves up in free-market language and talk about their profits and business plans as if they were selling hamburgers, laptops or holidays. But that free-market mantra vanishes when panic erupts, since governments almost always step in to protect some depositors, buy bad assets or even nationalise entire banks. That happened in 1990s Japan and around the world during the global financial crisis.

So, too, last month: although deposit insurance was supposed to cover only the first $250,000 of SVB and Signature accounts, the government protected them all, at a cost of more than $20bn. And the Swiss regulators not only protected depositors when Credit Suisse imploded but — controversially — gave some (very small) value to shareholders too. On both sides of the Atlantic central banks have offered liquidity lines to banks (and in America, the Fed is letting banks exchange their holdings of Treasuries for cash at face value, as if rate rises never happened).

Governments do this partly because banking is essential to the wider economy. But also because of contagion. The dangerous weakness of fractional banking is that if nobody has a reason to panic, banks are safe; but if everyone runs, a bank can collapse, even if it previously passed tests on issues such as capital adequacy — unless a government steps in. And while the government never used to worry about smaller banks collapsing, now they fear the digital domino effect.

Maybe governments can contain such risks. After all, the “March madness” — as some journalistsand traders now call it — has died down, and the losses have been relatively small to date compared with the previous bank shocks. I can go to dinner without constantly feeling the need to check my phone.

But when I consider the last month, another lesson I learnt from Tokyo and London keeps coming to mind: the trajectory of financial crises can be lengthy, with ebbs and flows. In Japan in the 1990s, the moment of most panic (the collapse of LTCB) came months after the first ructions around Nippon Credit Bank. In the global financial crisis, Lehman Brothers collapsed more than a year after the first subprime mortgage dramas.

I desperately hope we will buck history this time — and ensure that investors and regulators around the world quickly learn from the SVB debacle and improve risk management skills. But I also fear that the past decade of quantitative easing has distorted finance so deeply that there will be unexpected chain reactions, if not in banks, then other corners of finance.

SVB might now have a place in the history books. Sadly, this story is unlikely to end here.

Gillian Tett is chair of the FT’s editorial board and US editor-at-large

(Video) The *Trillion Dollar Banking Crisis* | Worse than 2008 - Do this NOW.

Find out about our latest stories first — follow @ftweekend on Twitter


What is the lesson Learnt from the global financial crisis? ›

The Global Financial Crisis highlighted the need for banks to strengthen their capital adequacy and to maintain solid liquidity buffers, as the crisis showed that a short-term lack of liquidity can bring down a profitable bank in a matter of weeks—both hard lessons learned that have made the industry significantly more ...

What are some important lessons from the 2008 financial crisis? ›

One of the principal lessons of the financial crises is the importance of accountability. Bailouts allow people and companies to escape the consequences of bad practices, but a system without accountability will not work in the long run. Americans love sports, and accountability is an essential part of any sport.

What is one result of a banking crisis? ›

It leads to price deflation.

What are the three key characteristics of systemic banking crises how would you expect these characteristics to influence the IS curve? ›

The three main characteristics of the systematic banking crisis are: A sharp explosion in both private and public debt. Collapse of asset market (decline in housing prices) Decline in output and employment.

What were the key points of the financial crisis? ›

In a financial crisis, asset prices see a steep decline in value, businesses and consumers are unable to pay their debts, and financial institutions experience liquidity shortages.

What is the global financial crisis summary? ›

During the GFC, a downturn in the US housing market was a catalyst for a financial crisis that spread from the United States to the rest of the world through linkages in the global financial system. Many banks around the world incurred large losses and relied on government support to avoid bankruptcy.

What are 3 lessons Americans learned from the Great Recession of 2008? ›

Stackhouse concluded with three main lessons learned from this crisis: High levels of debt, uncertain ability of borrowers to repay debt and an expectation that housing prices will always increase (among other factors) created a comfort level that was misguided.

How can we solve the financial crisis? ›

In this article:
  1. Identify the problem.
  2. Make a budget to help you resolve your financial problems.
  3. Lower your expenses.
  4. Pay in cash.
  5. Stop taking on debt to avoid aggravating your financial problems.
  6. Avoid buying new.
  7. Meet with your advisor to discuss your financial problems.
  8. Increase your income.
Aug 26, 2022

What lessons can be learned from the 2008 recession? ›

A lesson that has been re-learned often, even in times of prosperity, is that diversification is essential in managing your wealth. Extreme wealth can be created from concentrated positions, but more often than not, wealth can be destroyed in the same manner.

How will the banking crisis affect the economy? ›

The fallout from the recent banking crisis is likely to push the US economy into a mild recession later this year, according to notes from the Federal Reserve's March policy meeting, released on Wednesday.

What are the main causes of a banking crisis? ›

Common causes of banking crises include economic recessions, poor lending practices, excessive risk-taking, lack of regulation or oversight, and external shocks like pandemics or natural disasters.

What is banking crisis easy? ›

More specifically, a systemic banking crisis is a situation when a country's corporate and financial sectors experience a large number of defaults and financial institutions and corporations face great difficulties repaying contracts on time.

What are the three significant characteristics of a crisis? ›

Three basic elements of a crisis are: A stressful situation, difficulty in coping, and the timing of intervention. Each crisis situation is unique and will require a flexible approach to the client and situation.

What are the 3 primary risks that banks face? ›

When handling our money, the three largest risks banks take are credit risk, market risk and operational risk.

What are the three stages of a financial crisis? ›

According to Hyman Minsky, an economy experiences three credit lending stages with risk levels increasing in each subsequent stage, which ultimately leads to a market crash:
  • Hedge Phase. ...
  • Speculative Borrowing Phase. ...
  • Ponzi Phase.
Jan 19, 2023

What were the main factors leading up to the crisis and what were the main factors that led to the recession? ›

The collapse of the housing market — fueled by low interest rates, easy credit, insufficient regulation, and toxic subprime mortgages — led to the economic crisis. The Great Recession's legacy includes new financial regulations and an activist Fed.

What caused the financial crisis and when and why it ended? ›

The analysis shows that the financial crisis was caused by a large reduction in mortgage lending standards which was primarily due to Congresses' mandate to increase homeownership. The paper provides evidence that the financial crisis was abating by January 2009 and ended when the recession ended in June 2009.

What are the three causes of economic crisis? ›

Here are three common causes of recession.
  • Oversupply. In an economic boom, companies tend to increase production to meet consumer demand. ...
  • Uncertainty. Not knowing how the economy will change makes business decision-making riskier. ...
  • Speculation.
Aug 26, 2022

What is the impact of the global financial crisis? ›

Some of the most significant impacts of the global financial crisis on the world's economy include: The economic global recession brought forth by the crisis was defined by a sharp decline in economic activity, dropping output and rising unemployment.

How did the global financial crisis affect us? ›

The housing market was deeply impacted by the crisis. Evictions and foreclosures began within months. The stock market, in response, began to plummet and major businesses worldwide began to fail, losing millions. This, of course, resulted in widespread layoffs and extended periods of unemployment worldwide.

Is the banking crisis over? ›

The crisis seems to have abated with the government's aggressive response, and the broader banking system remains well capitalized. But the system remains under significant pressure as interest rates continue to rise and the economy's growth slows.

What has changed since the financial crisis? ›

The global financial system is less interconnected—and less vulnerable to contagion. One of the biggest changes in the financial landscape is sharply curtailed international activity. Simply put, with less money flowing across borders, the risk of a 2008-style crisis ricocheting around the world has been reduced.

What can you learn from past recessions? ›

What Can We Learn From Recessions Past?
  • Resist the urge to take drastic action. ...
  • You may have to improvise. ...
  • Beware the get-rich-quick schemes. ...
  • Don't be afraid to seize the moment. ...
  • Remember that the economy will recover.
Jul 14, 2022

What are the 3 things the Fed could do to get us out of a recession? ›

To help accomplish this during recessions, the Fed employs various monetary policy tools to suppress unemployment rates and reinflate prices. These tools include open market asset purchases, reserve regulation, discount lending, and forward guidance to manage market expectations.

How do you understand the 2008 financial crisis? ›

The 2008 financial crisis began with cheap credit and lax lending standards that fueled a housing bubble. When the bubble burst, the banks were left holding trillions of dollars of worthless investments in subprime mortgages. The Great Recession that followed cost many their jobs, their savings, and their homes.

What is the most important thing to strive during a recession? ›

The Bottom Line

Build up your emergency fund, pay off your high interest debt, do what you can to live within your means, diversify your investments, invest for the long term, be honest with yourself about your risk tolerance, and keep an eye on your credit score.

How did we recover from the 2008 financial crisis? ›

The United States, like many other nations, enacted fiscal stimulus programs that used different combinations of government spending and tax cuts. These programs included the Economic Stimulus Act of 2008 and the American Recovery and Reinvestment Act of 2009.

How does the banking crisis affect interest rates? ›

Torsten Slok, the chief economist at investment manager Apollo, estimated that the recent disruptions have produced tightening equivalent to the Fed raising interest rates 1.5 percentage points, twice the size of the biggest single increase by the Fed last year.

Why did the banking crisis lead to the Great Recession? ›

Housing prices started falling in 2007 as supply outpaced demand. That trapped homeowners who couldn't afford the payments, but couldn't sell their houses either. When the values of the derivatives crumbled, banks stopped lending to each other. That created the financial crisis that led to the Great Recession.

What caused the 2023 banking crisis? ›

Abstract. The 2023 banking crisis was the worst crisis in the US and Europe since the 2007-2008 global financial crisis. This banking crisis was caused by aggressive interest rate hikes by the US Federal Reserve. The increase in interest rates led to huge losses on the portfolios of government bonds held by US banks.

What is an example of a banking crisis? ›

Great Recession in Russia. 2008–2009 Ukrainian financial crisis. 2008–2014 Spanish financial crisis. Post-2008 Irish banking crisis.

How do you prepare for a bank crisis? ›

If you want to weather the next storm, there are a few key steps to better prepare for an unexpected crisis.
  1. Maximize liquid savings. ...
  2. Make a budget. ...
  3. Cut back on unneeded expenses. ...
  4. Commit to closely managing your bills. ...
  5. Take inventory of your non-cash assets. ...
  6. Pay down your credit card debt.

What was the biggest banking crises? ›

Biggest Financial Crises
  • The Credit Crisis of 1772.
  • The Mexican Peso Crisis Of 1994.
  • The Asian Currency Crisis Of 1997.
  • The Great Depression Of 1929–39.
  • The Suez Crisis Of 1956.
  • The OPEC Oil Price Shock Of 1973.
  • Great Recession of 2007-08.
  • The US Savings & Loan Crisis Of 1980s.
Apr 4, 2023

How long did the banking crisis last? ›

August 1931–January 1933. Bank panics in 1930 and 1931 were regional in nature, but the financial crisis spread throughout the entire nation starting in the fall of 1931.

What are the 3 P's of crisis management? ›

3Ps of Effective Emergency Response
  • People – Protect your people. They are your most valued asset.
  • Perception – Ensure your response aligns with your number one priority – your people.
  • Participation – Participate in the investigation. Protect your interests and confirm best practices are in place.

What are the 3 models of issues and crisis management? ›

In 1998, John Burnett proposed a crisis management model with three broad stages — identification, confrontation, and reconfiguration — which each consist of two steps.

What was the outcome of the global financial crisis? ›

Some of the most significant impacts of the global financial crisis on the world's economy include: The economic global recession brought forth by the crisis was defined by a sharp decline in economic activity, dropping output and rising unemployment.

What can we learn from the European debt crisis? ›

One important lesson from the European sovereign debt crisis, well-known in emerging markets, is that borrowing on international markets is a delicate matter. There can be benefits of such borrowing in some circumstances, but too much can erode credibility and lead to a crisis in the borrowing country.

What is the advantage of global financial crisis? ›

One positive of today's situation is increased quality of products and services. Every company's objective is to make profit and the financial crisis has made the global market even more competitive than it already was.


1. US Banking Crisis: Two More Banks On the Brink of Collapse? | Vantage with Palki Sharma
2. Why the 2023 Banking Crisis is Just Getting Started
(EPB Research)
3. As another bank collapses, US regulators race to prevent spread of crisis I DW News
(DW News)
4. Math mechanics of Thai banking crisis | Foreign exchange and trade | Macroeconomics | Khan Academy
(Khan Academy)
5. US bank failures: What is being done to avoid another 2008 financial crisis? | DW News
(DW News)
6. Falling stocks in Europe and US stoke banking crisis fears | DW News
(DW News)


Top Articles
Latest Posts
Article information

Author: Fredrick Kertzmann

Last Updated: 20/08/2023

Views: 5915

Rating: 4.6 / 5 (66 voted)

Reviews: 89% of readers found this page helpful

Author information

Name: Fredrick Kertzmann

Birthday: 2000-04-29

Address: Apt. 203 613 Huels Gateway, Ralphtown, LA 40204

Phone: +2135150832870

Job: Regional Design Producer

Hobby: Nordic skating, Lacemaking, Mountain biking, Rowing, Gardening, Water sports, role-playing games

Introduction: My name is Fredrick Kertzmann, I am a gleaming, encouraging, inexpensive, thankful, tender, quaint, precious person who loves writing and wants to share my knowledge and understanding with you.