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Schwab's Take on "Why This is Not 2008 Again" Thumbnail

Schwab's Take on "Why This is Not 2008 Again"

Below is an excerpt from a Schwab article titled "Another One Bites the Dust: Banking Saga Continues", which was just released yesterday (3/20/2023). Because Schwab has acquired TD Ameritrade, we find this information to be very helpful. 

This is not 2008 again

The GFC (global financial crisis) was a more significant and contagious event given the messy combination of under-capitalized/over-leveraged financial institutions, flimsy capital-markets-based funding, prior laughable lending practices, and the alphabet soup of toxic/opaque/impossible-to-value derivatives. Solvency was the primary issue during the GFC, while it's more about liquidity today. Today's largest banks are well-capitalized and are already benefiting from deposit flight from the weaker banks. In addition, our country's capital-markets-based financial system is not intricately linked with its regional banks.Regulators have tools and have been quick to act, while they were much slower to act during the GFC. The failure of SVB and SB were tied to problems unique to those banks, including largely unhedged interest rate risk and outsized exposure to the venture capital/startups/crypto world. The main channel of contagion so far is more psychological than systemic. The U.S. and global banking system has significant liquidity buffers, in addition to regular stress tests. On that note, courtesy of the 2018 rollback of some Dodd-Frank regulations, SVB was not subject to stress tests.Banks' balance sheets have been under heightened scrutiny over the past week, but it's the liabilities side that bears the risk. The assets side, for most banks, remains in good health. As a percentage of total loans, noncurrent loan balances held by banks are near historical lows—and could likely deteriorate without a significant impact on bank capital. In addition, nearly half of the value of U.S. bank deposits is insured. Quantitative and fiscal tightening over the past year have reduced aggregate deposit balances in the system, which has helped push up the percentage of insured deposits.Yes, the more than $600 billion of unrealized losses—per the FDIC's Quarterly Banking Profile—on which U.S. commercial banks are sitting is staggering. However, those unrealized losses are due to the increase in interest rates, not a significant deterioration in credit quality. Leading into the GFC, commercial banks' holding of Treasuries and Agencies was just north of $1 trillion; today they are nearly $4.5 trillion (more than double what they were then as a share of total bank assets).As noted, U.S. banks do not have a discomfortingly high uninsured deposit ratio or unrealized losses on HTM (held-to-maturity) securities in excess of capital. In the event of a need to raise cash, the Fed's facilities are at the ready, minimizing the need to realize HTM losses. This does not mean the crisis is over, as other smaller banks could face liquidity mismatches; there could also be risks lurking in the "shadow" banking system, which typically consists of lenders, brokers, and other credit intermediaries who fall outside the realm of traditional regulated banking.

Scott Arnold, CFP®  is co-founder of IMPACTfolio®, a wealth management firm that specializes in IMPACT investing and holistic financial planning for one flat-fee.