{"id":147950,"date":"2023-03-23T12:43:17","date_gmt":"2023-03-23T18:43:17","guid":{"rendered":"https:\/\/www.biggerpockets.com\/blog\/?p=147950"},"modified":"2023-08-10T14:10:45","modified_gmt":"2023-08-10T20:10:45","slug":"are-banking-failures-going-to-cause-another-2008-like-crash","status":"publish","type":"post","link":"https:\/\/www.biggerpockets.com\/blog\/are-banking-failures-going-to-cause-another-2008-like-crash","title":{"rendered":"Are Banking Failures Going To Cause Another 2008-Like Crash?"},"content":{"rendered":"\n\n      <iframe loading=\"lazy\" frameborder=\"0\" height=\"200\" scrolling=\"no\" src=\"https:\/\/playlist.megaphone.fm\/?e=BIGPOC8309821618\" width=\"100%\"><\/iframe>\r\n  \n\n\n\n\n<p><span data-preserver-spaces=\"true\">It goes without saying that investors of all stripes have been spooked&nbsp;<\/span><a class=\"editor-rtfLink\" href=\"https:\/\/www.youtube.com\/watch?v=-iXX5zdYtSw\" target=\"_blank\" rel=\"noopener\"><span data-preserver-spaces=\"true\">by the recent collapse of Silicon Valley Bank and Signature Bank<\/span><\/a><span data-preserver-spaces=\"true\">, as well as the Swiss National Bank facilitating UBS\u2019&nbsp;<\/span><a class=\"editor-rtfLink\" href=\"https:\/\/www.axios.com\/2023\/03\/19\/credit-suisse-buyout-banking-crisis-ubs\" target=\"_blank\" rel=\"noopener\"><span data-preserver-spaces=\"true\">$3.2 billion purchase<\/span><\/a><span data-preserver-spaces=\"true\">&nbsp;of Credit Suisse, First Republic Bank\u2019s stock&nbsp;<\/span><a class=\"editor-rtfLink\" href=\"https:\/\/www.cbsnews.com\/news\/first-republic-bank-stock-price-silicon-valley-bank-signature-bank\/\" target=\"_blank\" rel=\"noopener\"><span data-preserver-spaces=\"true\">falling more than 70%<\/span><\/a><span data-preserver-spaces=\"true\">&nbsp;and bank stocks, on the whole, being hammered. Many seem to think a 2008-like financial crisis is beginning.&nbsp;<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">While it\u2019s important not to understate the precarity of our current situation, there are major differences that make these two events, more or less, incomparable.<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">For one, Lehman Brothers was an investment bank, and both Silicon Valley Bank and Signature Bank were commercial banks. The size was also quite different despite Silicon Valley Bank being the second biggest bank failure in American history. Lehman Brothers had $600 billion in assets in 2008. Silicon Valley Bank had $198 billion. Adjusting for 15 years of inflation, Silicon Valley Bank was maybe 20% the size of Lehman Brothers.<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">Even more important, the assets that caused the runs on Lehman Brothers and Silicon Valley Bank are about as different as could be. For Lehman Brothers, it was a series of highly leveraged derivatives secured against highly leveraged mortgages given to unqualified buyers that were going delinquent en masse. With Silicon Valley Bank, the asset in question were fully performing bonds, supposedly some of the safest assets around.<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">While that may sound odd, the decisions made by Silicon Valley Bank were about as head-scratching as those made by Lehman Brothers, given the circumstances once you dig into the details.&nbsp;<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">So let us start there\u2014by digging in and explaining what exactly happened to them.<\/span><\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><span data-preserver-spaces=\"true\">Why Silicon Valley Bank and Signature Bank Collapsed<\/span><\/h2>\n\n\n\n<p><span data-preserver-spaces=\"true\">What set the stage for Silicon Valley Bank and Signature Bank\u2019s demise was the most dramatic interest rate tightening in history after a prolonged state of interest rates being as low as they had ever been. But moreover, particularly with regards to Silicon Valley Bank, it was actually believing what the Fed said in 2021. When Jerome Powell said that&nbsp;<\/span><a class=\"editor-rtfLink\" href=\"https:\/\/www.cnbc.com\/2021\/12\/13\/el-erian-says-transitory-was-the-worst-inflation-call-in-the-history-of-the-fed.html\" target=\"_blank\" rel=\"noopener\"><span data-preserver-spaces=\"true\">\u201cinflation would be transitory,\u201d<\/span><\/a><span data-preserver-spaces=\"true\">&nbsp;they somehow believed it.&nbsp;<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">Since the 2008 financial crisis, the Fed has consistently kept rates at or near zero. They finally started to bring them up ever so slightly, and then Covid hit, and the Fed pushed them right back down. They proceeded to keep rates near zero throughout 2021 despite the government injecting trillions of dollars into the economy through multiple stimulus packages. The signs of inflation beginning to take hold were as plain as day.&nbsp;<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">Low interest rates can spur economic activity and increase productivity, but they can create a range of other problems, including&nbsp;<\/span><a class=\"editor-rtfLink\" href=\"https:\/\/www.investopedia.com\/ask\/answers\/12\/inflation-interest-rate-relationship.asp\" target=\"_blank\" rel=\"noopener\"><span data-preserver-spaces=\"true\">inflation<\/span><\/a><span data-preserver-spaces=\"true\">,&nbsp;<\/span><a class=\"editor-rtfLink\" href=\"https:\/\/www.npr.org\/2023\/02\/26\/1159615312\/interest-rate-hikes-widen-the-wealth-gap-an-economist-argues\" target=\"_blank\" rel=\"noopener\"><span data-preserver-spaces=\"true\">economic inequality<\/span><\/a><span data-preserver-spaces=\"true\">, and what\u2019s keenly important here: a desperate&nbsp;<\/span><a class=\"editor-rtfLink\" href=\"https:\/\/seekingalpha.com\/article\/4519540-warning-do-not-chase-yield\" target=\"_blank\" rel=\"noopener\"><span data-preserver-spaces=\"true\">chase for yield<\/span><\/a><span data-preserver-spaces=\"true\">.<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">What I mean by a chase for yield is that when interest rates are so low, any \u201crisk-free\u201d asset (such as money market accounts, treasury bonds, etc.) has a return near zero. In 2021, banks were offering around a 0.1 % return to have money in a savings account. It was around 0.5 % in a money market account. You might as well have stored your money under a mattress.&nbsp;<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">Silicon Valley Bank was the go-to bank for tech startups and Silicon Valley firms, who&nbsp;<\/span><a class=\"editor-rtfLink\" href=\"https:\/\/www.bbc.com\/news\/business-57979268\" target=\"_blank\" rel=\"noopener\"><span data-preserver-spaces=\"true\">saw an enormous boom<\/span><\/a><span data-preserver-spaces=\"true\">&nbsp;during Covid. This led to&nbsp;<\/span><a class=\"editor-rtfLink\" href=\"https:\/\/www.nytimes.com\/2023\/03\/10\/business\/silicon-valley-bank-stock.html\" target=\"_blank\" rel=\"noopener\"><span data-preserver-spaces=\"true\">a massive increase<\/span><\/a><span data-preserver-spaces=\"true\">&nbsp;in depositors for Silicon Valley Bank. The bank\u2019s deposits went from $49 billion in 2018 to $102 billion in 2020 to $189.2 billion in 2021 and peaked at $198 billion.<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">This is when Silicon Valley Bank made its critical mistake. They chased yield. They bought $80 billion in mortgage-backed securities of over 10 years in duration with a weighted average yield of&nbsp;<\/span><a class=\"editor-rtfLink\" href=\"https:\/\/twitter.com\/jamiequint\/status\/1633956163565002752\" target=\"_blank\" rel=\"noopener\"><span data-preserver-spaces=\"true\">1.56%<\/span><\/a><span data-preserver-spaces=\"true\">.<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">1.56% may sound low, but remember what options were available in 2021 for \u201clow-risk\u201d bonds.<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">Then we had&nbsp;<\/span><a class=\"editor-rtfLink\" href=\"https:\/\/www.visualcapitalist.com\/comparing-the-speed-of-u-s-interest-rate-hikes\/\" target=\"_blank\" rel=\"noopener\"><span data-preserver-spaces=\"true\">the fastest interest rate increase<\/span><\/a><span data-preserver-spaces=\"true\">&nbsp;in history, and&nbsp;<\/span><a class=\"editor-rtfLink\" href=\"https:\/\/www.mortgagenewsdaily.com\/mbs\" target=\"_blank\" rel=\"noopener\"><span data-preserver-spaces=\"true\">this happened<\/span><\/a><span data-preserver-spaces=\"true\">&nbsp;to the yield on 10-year mortgage-backed securities:<\/span><\/p>\n\n\n\n<figure class=\"wp-block-image size-full\"><img loading=\"lazy\" decoding=\"async\" width=\"996\" height=\"755\" src=\"https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2023\/03\/Screenshot-2023-03-23-at-2.22.27-PM.png\" alt=\"10 year treasury yield\" class=\"wp-image-147954\" title=\"\" srcset=\"https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2023\/03\/Screenshot-2023-03-23-at-2.22.27-PM.png 996w, https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2023\/03\/Screenshot-2023-03-23-at-2.22.27-PM-300x227.png 300w, https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2023\/03\/Screenshot-2023-03-23-at-2.22.27-PM-768x582.png 768w\" sizes=\"auto, (max-width: 996px) 100vw, 996px\" \/><figcaption class=\"wp-element-caption\"><em>10-Year Treasury Yield (2018-2023) &#8211; <a href=\"https:\/\/www.mortgagenewsdaily.com\/mbs\" target=\"_blank\" rel=\"noreferrer noopener\">Mortgage News Daily<\/a><\/em><\/figcaption><\/figure>\n\n\n\n<p><span data-preserver-spaces=\"true\">So, the returns of these \u201clow-risk\u201d assets were less than half of the market value. Needless to say, the value of such bonds plummeted. But there was one more key factor about these bonds. They are what\u2019s called&nbsp;<\/span><a class=\"editor-rtfLink\" href=\"https:\/\/www.investopedia.com\/terms\/h\/held-to-maturity-security.asp\" target=\"_blank\" rel=\"noopener\"><span data-preserver-spaces=\"true\">\u201cheld-to-maturity.\u201d<\/span><\/a><span data-preserver-spaces=\"true\">&nbsp;The point of which is, quite obviously, to hold to maturity.<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">But what this means, in actual fact, is that these bonds do not need to be revalued unless and until they are sold. Thereby, Silicon Valley Bank was sitting on a huge pile of unrealized losses that amounted to a house of cards. Just look at&nbsp;<\/span><a class=\"editor-rtfLink\" href=\"https:\/\/seekingalpha.com\/article\/4461969-svb-financial-robust-tailwinds-supporting-growth\" target=\"_blank\" rel=\"noopener\"><span data-preserver-spaces=\"true\">their own report from 2021<\/span><\/a><span data-preserver-spaces=\"true\">&nbsp;before any grey clouds appeared on the horizon to see how many of these HTM bonds they were holding (in purple).<\/span><\/p>\n\n\n\n<figure class=\"wp-block-image size-full\"><img loading=\"lazy\" decoding=\"async\" width=\"1462\" height=\"870\" src=\"https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2023\/03\/balancesheetsvb.jpeg\" alt=\"\" class=\"wp-image-147956\" title=\"\" srcset=\"https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2023\/03\/balancesheetsvb.jpeg 1462w, https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2023\/03\/balancesheetsvb-300x179.jpeg 300w, https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2023\/03\/balancesheetsvb-1024x609.jpeg 1024w, https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2023\/03\/balancesheetsvb-768x457.jpeg 768w\" sizes=\"auto, (max-width: 1462px) 100vw, 1462px\" \/><figcaption class=\"wp-element-caption\"><em>Silicon Valley Bank&#8217;s Balance Sheet &#8211; <a href=\"https:\/\/seekingalpha.com\/article\/4461969-svb-financial-robust-tailwinds-supporting-growth\" target=\"_blank\" rel=\"noreferrer noopener\">Seeking Alpha<\/a><\/em><\/figcaption><\/figure>\n\n\n\n<p><span data-preserver-spaces=\"true\">Then in late 2022, the tech boom burst. Facebook laid off over 10,000 workers on two separate occasions, Amazon laid off 9,000 after having laid off 18,000 earlier, Twitter laid off almost 4,000, and a bunch of other tech firms did as well. The Covid-fueled tech boom was over, and thereby a tech-reliant bank saw significant pressure on its deposits.<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">Adding to this\u2014inflation is pinching people\u2019s savings and thereby diminishing bank deposits in general.<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">This pressure on Silicon Valley Bank\u2019s deposits required them to raise capital. But selling those HTM bonds forced them to realize those unrealized losses, as once you sell one, you have to revalue the whole portfolio.&nbsp;<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">Then Silicon Valley Bank CEO Greg Becker had&nbsp;<\/span><a class=\"editor-rtfLink\" href=\"https:\/\/nypost.com\/2023\/03\/09\/silicon-valley-bank-ceo-to-investors-stay-calm-and-dont-panic\/\" target=\"_blank\" rel=\"noopener\"><span data-preserver-spaces=\"true\">a disastrous call<\/span><\/a><span data-preserver-spaces=\"true\">&nbsp;with investors that amounted to this meme:<\/span><\/p>\n\n\n\n<figure class=\"wp-block-image size-full\"><img loading=\"lazy\" decoding=\"async\" width=\"1216\" height=\"613\" src=\"https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2023\/03\/thisisfine.jpeg\" alt=\"\" class=\"wp-image-147957\" title=\"\" srcset=\"https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2023\/03\/thisisfine.jpeg 1216w, https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2023\/03\/thisisfine-300x151.jpeg 300w, https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2023\/03\/thisisfine-1024x516.jpeg 1024w, https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2023\/03\/thisisfine-768x387.jpeg 768w\" sizes=\"auto, (max-width: 1216px) 100vw, 1216px\" \/><\/figure>\n\n\n\n<p><span data-preserver-spaces=\"true\">In the call, Greg Becker said Silicon Valley Bank would book a&nbsp;<\/span><a class=\"editor-rtfLink\" href=\"https:\/\/www.wsj.com\/articles\/bond-losses-push-silicon-valley-bank-parent-to-raise-capital-125e89d4\" target=\"_blank\" rel=\"noopener\"><span data-preserver-spaces=\"true\">$1.8 billion after-tax loss<\/span><\/a><span data-preserver-spaces=\"true\">&nbsp;on the sale of many of these bonds and needed to raise $2.25 billion.<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">As one might expect from a \u201cdon\u2019t panic\u201d call, it caused a panic, and a run on the bank ensued.&nbsp;<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">Silicon Valley Bank, like virtually all banks, does&nbsp;<\/span><a class=\"editor-rtfLink\" href=\"https:\/\/www.investopedia.com\/terms\/f\/fractionalreservebanking.asp\" target=\"_blank\" rel=\"noopener\"><span data-preserver-spaces=\"true\">fractional reserve banking<\/span><\/a><span data-preserver-spaces=\"true\">, which means a bank does not need to hold all of the deposits it takes on hand, but only a fraction of them\u2014usually 10%. It can lend out the other 90%. (Although now it\u2019s technically&nbsp;<\/span><a class=\"editor-rtfLink\" href=\"https:\/\/mishtalk.com\/economics\/fed-policy-its-not-fractional-reserve-banking-its-zero-reserve-banking\" target=\"_blank\" rel=\"noopener\"><span data-preserver-spaces=\"true\">zero reserve banking<\/span><\/a><span data-preserver-spaces=\"true\">, but that\u2019s another story).&nbsp;<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">So, for example, if there is a 10% reserve and a bank holds $100 in deposits, they can make about $900 in loans. Thus, if everyone asks for their money back at the same time, they don\u2019t have it, and the bank collapses. There have been&nbsp;<\/span><a class=\"editor-rtfLink\" href=\"https:\/\/en.wikipedia.org\/wiki\/List_of_bank_runs\" target=\"_blank\" rel=\"noopener\"><span data-preserver-spaces=\"true\">many such bank runs<\/span><\/a><span data-preserver-spaces=\"true\">&nbsp;in American history.&nbsp;<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">Signature Bank also had a whopping&nbsp;<\/span><a class=\"editor-rtfLink\" href=\"https:\/\/www.fool.com\/investing\/2023\/03\/16\/why-did-regulators-close-signature-bank-its-not-en\/\" target=\"_blank\" rel=\"noopener\"><span data-preserver-spaces=\"true\">$762 million in unrealized losses<\/span><\/a><span data-preserver-spaces=\"true\">&nbsp;from the same HTM bonds that sunk Silicon Valley Bank. But they also had some more obvious problems.<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">Other&nbsp;<\/span><a class=\"editor-rtfLink\" href=\"https:\/\/www.bloomberg.com\/news\/articles\/2023-03-15\/signature-bank-faced-criminal-probe-ahead-of-firm-s-collapse?leadSource=uverify%20wall\" target=\"_blank\" rel=\"noopener\"><span data-preserver-spaces=\"true\">than facing a criminal probe<\/span><\/a><span data-preserver-spaces=\"true\">&nbsp;before they collapsed, something like&nbsp;<\/span><a class=\"editor-rtfLink\" href=\"https:\/\/www.wsj.com\/articles\/signature-banks-crypto-execution-c707bb48\" target=\"_blank\" rel=\"noopener\"><span data-preserver-spaces=\"true\">20% of Signature Bank\u2019s depositors<\/span><\/a><span data-preserver-spaces=\"true\">&nbsp;were made up of crypto customers. Here\u2019s what happened&nbsp;<\/span><a class=\"editor-rtfLink\" href=\"https:\/\/www.coindesk.com\/price\/bitcoin\/\" target=\"_blank\" rel=\"noopener\"><span data-preserver-spaces=\"true\">to Bitcoin over the last couple of years<\/span><\/a><span data-preserver-spaces=\"true\">&nbsp;for those who may have forgotten.<\/span><\/p>\n\n\n\n<figure class=\"wp-block-image size-full\"><img loading=\"lazy\" decoding=\"async\" width=\"859\" height=\"846\" src=\"https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2023\/03\/Screenshot-2023-03-23-at-2.36.01-PM.png\" alt=\"bitcoin price\" class=\"wp-image-147960\" title=\"\" srcset=\"https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2023\/03\/Screenshot-2023-03-23-at-2.36.01-PM.png 859w, https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2023\/03\/Screenshot-2023-03-23-at-2.36.01-PM-300x295.png 300w, https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2023\/03\/Screenshot-2023-03-23-at-2.36.01-PM-768x756.png 768w\" sizes=\"auto, (max-width: 859px) 100vw, 859px\" \/><figcaption class=\"wp-element-caption\"><em>Price of Bitcoin (2021-2023) &#8211; <a href=\"https:\/\/www.coindesk.com\/\" target=\"_blank\" rel=\"noreferrer noopener\">CoinDesk<\/a><\/em><\/figcaption><\/figure>\n\n\n\n<p><span data-preserver-spaces=\"true\">Even despite these obvious problems, there is still&nbsp;<\/span><a class=\"editor-rtfLink\" href=\"https:\/\/www.fool.com\/investing\/2023\/03\/16\/why-did-regulators-close-signature-bank-its-not-en\/\" target=\"_blank\" rel=\"noopener\"><span data-preserver-spaces=\"true\">some ambiguity<\/span><\/a><span data-preserver-spaces=\"true\">&nbsp;about what exactly caused Signature Bank to be closed by regulators.<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">Some have floated the idea that a&nbsp;<\/span><a class=\"editor-rtfLink\" href=\"https:\/\/www.vox.com\/policy-and-politics\/2018\/3\/6\/17081508\/senate-banking-bill-crapo-regulation\" target=\"_blank\" rel=\"noopener\"><span data-preserver-spaces=\"true\">2018 bank deregulation<\/span><\/a><span data-preserver-spaces=\"true\">&nbsp;bill precipitated this crisis. The bill removed certain oversights, particularly regarding stress tests, to so-called regional banks with under $250 billion in assets.<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">This deregulation may have made things worse, but it seems highly dubious as a root cause. I\u2019ve seen little evidence that Silicon Valley Bank held insufficient cash reserves. Nor did it have what people think of as \u201ctoxic assets,\u201d like the collateral debt obligations with piles of delinquent loans from 2008. What killed these banks were holding large numbers of supposedly safe, fixed bonds in a highly inflationary environment. The rapid increase in interest rates and the peculiar way HTM bonds are valued were the prime causes in my judgment. And it was Silicon Valley Bank and, to a lesser degree, Signature Bank\u2019s poor risk management and inability to foresee the inevitable increase in rates that doomed them.&nbsp;<\/span><\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><span data-preserver-spaces=\"true\">What Does This Mean for the Economy?<\/span><\/h2>\n\n\n\n<p><span data-preserver-spaces=\"true\">Unlike Lehman Brothers, neither Silicon Valley Bank nor Signature Bank were investment banks, nor were they key intermediaries. Silicon Valley Bank was heavily connected to tech, and Signature Bank to crypto. But moreover, broadly speaking, there are two ways a bank can collapse: insolvency and illiquidity.<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">Insolvency means the bank\u2019s assets are worth less than its liabilities. This was the case with Lehman Brothers.<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">Illiquidity means there is a&nbsp;<\/span><a class=\"editor-rtfLink\" href=\"https:\/\/www.investopedia.com\/terms\/m\/maturitymismatch.asp\" target=\"_blank\" rel=\"noopener\"><span data-preserver-spaces=\"true\">\u201cmaturity mismatch,\u201d<\/span><\/a><span data-preserver-spaces=\"true\">&nbsp;which, as Investopedia defines it,&nbsp;<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">\u201c\u2026commonly alludes to situations involving a company&#8217;s balance sheet. A business cannot meet its financial obligations if its short-term liabilities outweigh its short-term assets and will likely run into problems, too, if its long-term assets are funded by short-term liabilities.\u201d<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">Both SVB and Signature are illiquidity bankruptcies, which are less destructive as the bank\u2019s assets aren\u2019t entirely toxic. They just can\u2019t meet their short-term obligations. Indeed, when Silicon Valley Bank\u2019s assets are auctioned off, it won\u2019t come close to a total loss.&nbsp;<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">For this reason, it is unlikely these bank failures are the beginning of an economy-wide collapse like 2008. Unfortunately, it does create an enormous problem for the Federal Reserve and likely signifies we will be in an economic malaise for some time.&nbsp;<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">Before either of these failures or the buyout of Credit Suisse, the FDIC had announced that there were $620 billion in unrealized losses being held on the bank\u2019s balance sheets from the same type of HTM bonds that brought down Silicon Valley Bank.&nbsp;<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">These losses were caused by interest rates spiking. That was done to quell inflation. And while inflation has moderated some, it\u2019s still high at over 6%. And thus, the Fed finds itself between a rock and a hard place.<\/span><\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><span data-preserver-spaces=\"true\">The Fed\u2019s Catch-22<\/span><\/h2>\n\n\n\n<p><span data-preserver-spaces=\"true\">If you could write a hypothetical scenario of how a central bank could mishandle the economy as badly as feasibly possible, it would be hard to think of one worse than how the Federal Reserve acted between 2021 and the end of 2022.&nbsp;<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">First, they kept rates at all-time lows throughout 2021 while the economy was doing well and real estate prices were skyrocketing. Then they completely misjudged inflation and then jacked rates up faster than any time in history to quell the inflation they didn\u2019t anticipate, which has created this massive glut of unrealized bank losses and other economic discombobulations.&nbsp;<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">The goal of any central bank should be to maintain stability, and it\u2019s hard to see how they could have failed to keep things stable more so than they have over the past few years.<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">Now, due to their own incompetence, they are facing a horrible catch-22. Even before these recent bank failures, the Fed&nbsp;<\/span><a class=\"editor-rtfLink\" href=\"https:\/\/www.bloomberg.com\/news\/articles\/2023-02-01\/fed-to-slow-rate-hikes-signal-work-not-over-decision-day-guide?leadSource=uverify%20wall\" target=\"_blank\" rel=\"noopener\"><span data-preserver-spaces=\"true\">had signaled they would slow down<\/span><\/a><span data-preserver-spaces=\"true\">&nbsp;their rate hikes. Now, they may be rethinking&nbsp;<\/span><a class=\"editor-rtfLink\" href=\"https:\/\/www.ft.com\/content\/5e444ba2-0afc-49e8-bfec-5fc17ef7ee39\" target=\"_blank\" rel=\"noopener\"><span data-preserver-spaces=\"true\">their entire policy in that regard<\/span><\/a><span data-preserver-spaces=\"true\">.<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">As I\u2019ve noted&nbsp;<\/span><a class=\"editor-rtfLink\" href=\"https:\/\/www.biggerpockets.com\/blog\/inflation-is-not-going-away\" target=\"_blank\" rel=\"noopener\"><span data-preserver-spaces=\"true\">in other articles<\/span><\/a><span data-preserver-spaces=\"true\">, all other things being equal, the more money injected into the economy, the more inflation there will be. This is one reason that increasing interest rates tends to lower inflation. It reduces economic activity and the number of bank loans. And because of fractional reserve banking, bank loans add money to the economy, whereas paying them off (or loans going delinquent) removes money from the economy. (See&nbsp;<\/span><a class=\"editor-rtfLink\" href=\"http:\/\/www2.harpercollege.edu\/mhealy\/eco212i\/lectures\/ch13-17\" target=\"_blank\" rel=\"noopener\"><span data-preserver-spaces=\"true\">here<\/span><\/a><span data-preserver-spaces=\"true\">&nbsp;for a more detailed explanation).<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">Unlike TARP from 2008, Silicon Valley Bank and Signature Bank were not bailed out. But the depositors&nbsp;<\/span><a class=\"editor-rtfLink\" href=\"https:\/\/www.businessinsider.com\/why-silicon-valley-bank-customers-were-bailed-out-2023-3\" target=\"_blank\" rel=\"noopener\"><span data-preserver-spaces=\"true\">were entirely bailed out<\/span><\/a><span data-preserver-spaces=\"true\">&nbsp;despite FDIC insurance ostensibly capping deposit insurance at $250,000.&nbsp;<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">A lot of businesses would have been unable to make payroll had the FDIC not done this. Whether it\u2019s acceptable to make the rest of us pay for their deposits is another question. But what\u2019s clear is doing so injected a lot of money into the economy. JPMorgan expects the Fed\u2019s emergency actions, in this case, to have added&nbsp;<\/span><a class=\"editor-rtfLink\" href=\"https:\/\/watcher.guru\/news\/feds-emergency-loan-may-bring-2t-into-banking-system-jpmorgan?fbclid=IwAR0_fnwlNS6qFJRJePLmJJJXerb7-Gbluv875O7CrxKaY1GngGQ1DVa12-k\" target=\"_blank\" rel=\"noopener\"><span data-preserver-spaces=\"true\">$2 trillion to the banking system<\/span><\/a><span data-preserver-spaces=\"true\">.<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">In the middle of last year, I predicted inflation would be with us for quite some time. In part, it was because I did not believe that the Fed had the courage (gall?) to raise rates enough to break inflation as it would likely throw the economy into a recession. I have been surprised to see how aggressive they have been. But in doing so, they inevitably created major problems that the collapse of Silicon Valley Bank and Signature Bank, the buyout of Credit Suisse, and the huge amount of unrealized HTM losses make crystal clear.<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">If they keep raising rates, those unrealized losses will increase proportionally, and more banks will likely fail. If they don\u2019t, any progress thus far on fighting inflation will stall and likely reverse, and high inflation will probably be with us for the foreseeable future.&nbsp;<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">The Fed already blinked once by bailing out the depositors.&nbsp;<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">Will they blink further by halting the rate increases? Or will they actually lower them?&nbsp;<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">Either way, they\u2019ve been backed into a corner of their own making, and the economy will suffer in one way or another. Investors should not expect a 2008-style collapse. But, in my humble judgment, they absolutely should expect continued volatility and a protracted economic malaise.<\/span><\/p>\n\n\n\n<div id=\"hero-block_62ee867235a1c\" class=\"first:mt-0 hero-block py-4    has-background has-slate-300-background-color has-text-color has-slate-800-color\">\n    <div\n        class=\"gap-10 lg:gap-20 flex flex-wrap lg:flex-nowrap max-w-screen-xl mx-auto px-4 relative lg:items-center \">\n\n        <div class=\"relative z-30 lg:w-2\/3 \">\n            <main class=\"py-4\">\n                \n\n<p class=\"has-theme-slate-color has-text-color has-large-font-size\" style=\"font-style:normal;font-weight:800\">Prepare for a market shift<\/p>\n\n\n\n<p class=\"my-3 md:my-5 lg:my-8 has-theme-slate-color has-text-color\" style=\"font-size:16px\">Modify your investing tactics\u2014not only to survive an economic downturn, but to also thrive! Take any recession in stride and never be intimidated by a market shift again with <em><a class=\"rank-math-link\" href=\"https:\/\/store.biggerpockets.com\/products\/recession-proof-real-estate-investing?utm_source=blog&amp;utm_medium=blog%20banner\" target=\"_blank\">Recession-Proof Real Estate Investing<\/a><\/em>.<\/p>\n\n\n\n<div id=button-custom-event-block_64138705d4d27 class='button-custom-event'>\n      <a href=\"https:\/\/store.biggerpockets.com\/products\/recession-proof-real-estate-investing?utm_source=blog&#038;utm_medium=marketing_block\" x-on:click=\"window.analytics.track(&#039;Blog Block | Publishing: Recession Proof Book&#039;, {\n      referrer: &#039;https:\/\/www.biggerpockets.com\/blog\/are-banking-failures-going-to-cause-another-2008-like-crash&#039;,\n    });\" class=\" btn-shape inline-block no-underline has-background has-theme-blue-background-color has-text-color has-white-color\" target=\"_blank\">Get Yours Now<\/a>\n  <\/div>\n\n            <\/main>\n        <\/div>\n\n                <div class=\"lg:w-1\/3 first:mt-0 relative h-full lg:flex lg:items-center\">\n            <img decoding=\"async\" class=\"object-cover w-full relative z-20 my-0  rounded-md hidden lg:block\" src=\"https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2021\/04\/recession-proof.png\" alt=\"\" title=\"\">\n        <\/div>\n            <\/div>\n<\/div>","protected":false},"excerpt":{"rendered":"<p>It goes without saying that investors of all stripes have been spooked&nbsp;by the recent collapse of Silicon Valley Bank and Signature Bank, as well as the Swiss National Bank facilitating [&hellip;]<\/p>\n","protected":false},"author":1689,"featured_media":147962,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[4433,7119],"tags":[],"class_list":["post-147950","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-opinion","category-biggerpockets-daily"],"acf":[],"comment_count":0,"_links":{"self":[{"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/posts\/147950","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/users\/1689"}],"replies":[{"embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/comments?post=147950"}],"version-history":[{"count":0,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/posts\/147950\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/media\/147962"}],"wp:attachment":[{"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/media?parent=147950"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/categories?post=147950"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/tags?post=147950"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}