Years after the housing crash, the specter of "too big to fail" still haunts the banking industry
During the 2008 financial crisis, so-called too-big-to-fail banks were deemed too large and too intertwined with the U.S. economy for the government to allow them to collapse despite their role in causing the subprime loan crash.
Yet 15 years later, the forced sale of 166-year-old Credit Suisse — one of 30 banks around the world designated by regulators as "globally significant," as well as the startling failure of regional lender Silicon Valley Bank (SVB) — are rekindling concerns about the risk of financial institutions defined as too big to fail.
One thing that's changed in the intervening years since the housing bust: The nation's largest banks have only grown larger. JPMorgan Chase now has $2.6 billion in assets, a 16% increase from 2008, while Bank of America's assets have jumped 69% to $3.1 trillion. At the same time, lawmakers in 2018 weakened the post-crisis regulations enacted in what came to be known as Dodd-Frank, a sweeping law passed in 2010 aimed at ensuring the safety of the U.S. banking systems.
The "too big to fail" banks "are still incredibly risky, and they are bigger and more concentrated than before," said Mike Konczal, the director of macroeconomic analysis at the Roosevelt Institute, a liberal-leaning think tank.
To be sure, the 2008 financial crisis involved issues including complex financial instruments, such as mortgage-backed securities, credit default swaps and derivatives, along with lax lending standards. Such issues aren't playing a part in the recent banking turmoil.
Instead, Switzerland's Credit Suisse was hamstrung by a number of other problems, including a $5.5 billion loss on its dealings with private investment firm Archegos in 2021 and a spying scandal. When its biggest investor, Saudi National Bank, last week declined to put up more money, investors and depositors headed for the exits, paving the way for UBS' takeover of the bank on Sunday.
According to the Financial Stability Board, the U.S. banks considered "global systemically important banks" are:
- JPMorgan Chase
- Bank of America
- Citi
- Goldman Sachs
- Bank of New York Mellon
- Morgan Stanley
- State Street
- Wells Fargo
"Very boring banking" but still risky
Investors cast a more skeptical look at Credit Suisse in the aftermath of SVB's March 10 collapse, when U.S. regulators took over the regional bank and declared it insolvent. Unlike the 2008 crisis, SVB's problems stemmed from what Konczal calls "very boring banking, all things considered."
SVB was hit by a double-whammy of higher interest rates, which lowered the value of its U.S. government and mortgage bond holdings, and a faster cash-burn rate by its tech-heavy customers due to the slowing economy. With depositors withdrawing money at a faster clip, SVB had to sell its bonds to shore up its capital, but took a $1.8 billion loss on the sale because of the decline in the value of those investments.
SVB also had a significantly higher share of uninsured depositors than other banks, which meant that much of their assets wouldn't be protected by the FDIC's $250,000 insurance if the bank failed. As a result, spooked depositors rushed to withdraw their funds, creating a classic "run on the bank."
Experts say Congress opened the door to such problems five years ago when it loosened parts of Dodd-Frank, which among other changes forced the nation's biggest banks to adopt safer lending and investing practices. Under that law, banks with more than $50 billion in assets became subject to stringent requirements including a stress test, which examines whether a bank has enough capital to survive when financial conditions sour.
The 2018 law blunting Dodd-Frank lifted that threshold from $50 billion in assets to $250 billion. That meant SVB, with just over $200 billion in assets, didn't have to undergo a stress test.
"[T]here would have been increased scrutiny" Konczal said, noting the move to weaken the banking laws.
"It certainly was the case that Congress and regulators really did believe that banks in this [midsize] range would have less of a problem and it would be mitigated," he said.
"Contagion" risks
Senator Elizabeth Warren, a Democrat from Massachusetts, introduced a bill on March 14 that would roll back the 2018 law weakening Dodd-Frank. Other lawmakers are proposing an overhaul of FDIC insurance in order to protect a greater share of deposits.
Warren noted in a statement that she had warned that rolling back parts of Dodd-Frank would cause banks to "load up on risk to boost their profits and collapse, threatening our entire economy — and that is precisely what happened."
Asked if one of the "too big to fail" banks could falter, Konczal noted the banking problems aren't as bad as in 2008, while adding, "We just don't know."
"Everyone thought it was fine with when the Fed bailed out Bear Stears, and five months later Lehman [Brothers] failed," he said.
Meanwhile, part of the issue impacting the banking industry boils down to something that's hard to address through regulation: "contagion," or the potential for depositors' fears about bank safety to migrate to other institutions, causing more bank runs and additional failures.
"Bank runs are a crisis of confidence," said Gary Cohn, the former top economic adviser in the Trump White House who is now vice chairman of IBM, told CBS News' "Face the Nation."
He added, "There are thousands of small and regional banks in the United States — this usually doesn't stop after two [banks]."
