Recently, Silicon Valley Bank has collapsed and there are concerns about potential financial challenges faced by Credit Suisse. Are we seeing a repeat of the 2007/2008 banking crisis? Let's take a look at some of the significant collapses during that period and explore why we continue to experience similar challenges.
Northern Rock, a British bank, had rapidly expanded by aggressively seeking funding from international money markets in the years leading up to the financial crisis. However, when the US sub-prime mortgage market crisis spread to Europe in the summer of 2007, the bank's source of funding dried up, and Northern Rock found itself in a severe liquidity crisis. On September 14, 2007, Northern Rock's precarious position became public, and it faced a run on the bank, which was the first in the UK in over 140 years. Despite receiving liquidity support from the Bank of England, the bank's situation continued to worsen. On September 17, the Chancellor of the Exchequer, Alistair Darling, announced that the government would guarantee all existing deposits. At the time of Northern Rock's failure, the legal framework for dealing with failing banks was deficient in two important ways. Deposits over £2,000 would not be fully reimbursed, and if Northern Rock were to be declared insolvent and put into administration, deposits would have been frozen, with a long wait for even partial reimbursement.
The US Government took over two significant mortgage finance agencies, namely Fannie Mae (Federal National Mortgage Association) and Freddie Mac (Federal Home Loan Mortgage Corporation), during the financial crisis. This massive bailout amounted to $187.5 billion, making it one of the largest in US history. Fannie Mae and Freddie Mac primarily packaged home loans into mortgage-backed securities and sold them to investors. However, as the US housing market started to weaken and ultimately crash, so did these agencies.
Lehman Brothers was heavily involved in the sale of collateralized debt obligations (CDOs), which are complex financial products based on mortgage-backed securities. As a result, the bank was significantly exposed to the US sub-prime mortgage crisis. On September 10 2008, Lehman Brothers announced a net loss of $3.9 billion for Q3, adding to the Q2 loss of $2.8 billion. The president of the Federal Reserve Bank of New York, Timothy Geithner, held a meeting of senior bankers on September 13 to discuss the future of Lehman Brothers. Although the British bank Barclays emerged as a potential buyer, concerns over the deal caused Barclays to back out.
AIG faced a worsening liquidity crisis and the Federal Reserve Board declared that the US Government had intervened to provide a bailout package to the insurance company, amounting to an $85 billion credit facility. The commitment from the US Treasury and Federal Reserve towards the rescue reached $182.3 billion by March 2009. The decision was made on the basis that AIG was deemed too big and interdependent to fail, with the company's consolidated total assets exceeding $1 trillion as of 30 June 2008, and was considered the largest conventional insurance provider globally.
The day after its share price experienced significant fluctuations, it was announced that HBOS, which was Britain's largest mortgage provider and the sixth-largest bank, would merge with Lloyds TSB, which was the fifth-largest bank in Britain. As the crisis continued to escalate, the fallout from Lehman Brothers meant that already vulnerable banks like HBOS became even weaker.
Bank of England provided emergency liquidity to the financially struggling British banks, HBOS and RBS, with a peak assistance of £25.4 billion and £36.6 billion respectively. To ensure financial stability, the assistance was kept confidential until November 2009, when the Governor of the Bank of England at the time, Mervyn King, revealed information about the operation to the Treasury Committee.
The financial crisis of 2008, also known as the subprime mortgage crisis, caused a liquidity contraction in worldwide financial markets. The crisis originated in the United States with the collapse of the U.S. housing market and posed a threat to the global financial system. In response, the U.S. Presidents George W. Bush and Barack Obama signed into law several legislative measures, such as the Dodd-Frank Wall Street Reform and Consumer Protection Act and the Emergency Economic Stabilization Act (EESA), which created the Troubled Asset Relief Program (TARP), to combat the financial crisis. A decade later, the global financial system has become more secure and robust, thanks to the implementation of post-crisis reforms at both international and domestic levels. However, it is crucial to note that new financial stability risks have emerged in the past ten years and will continue to surface, making it unlikely that the next crisis will resemble the previous one.
References: https://express.adobe.com/page/DAlRb7HdWiHqA/
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