Robert Bruner and Sean Carr laid out 7 reasons in their book The Panic of 1907 why 1907 was a perfect storm for bank runs and a massive financial crisis:
1. Complexity. Complexity makes it difficult to know what is going on and establishes linkages that enable contagion of the crisis to spread.
2. Buoyant growth. Economic expansion creates rising demands for capital and liquidity and the excessive mistakes that eventually must be corrected.
3. Inadequate safety buffers. In the late stages of an economic expansion, borrowers and creditors overreach in their use of debt, lowering the margin of safety in the financial system.
4. Adverse leadership. Prominent people in the public and private spheres wittingly and unwittingly may implement policies that raise uncertainty, thereby impairing confidence and elevating risk.
5. Real economic shock. An unexpected event (or events) hit the economy and financial system, causing sudden reversal in the outlook of investors and depositors.
6. Undue fear, greed, and other aberrations. Beyond a change in the rational economic outlook is a shift from optimism to pessimism that creates a self-reinforcing downward spiral. The more bad news, the more behavior that generates bad news.
7. Failure of collective action. The most well-intended responses by people on the scene prove inadequate to the challenge of the worst crises.
from Ben Carlson - A Wealth of Common Sense
Can we say that this is another perfect storm? Perhaps there is no such thing as perfect storm, but this is close.
1. Complexity - This should be simple, but the accounting for banks is not simple. There is Hold to maturity (HTM) and available for sale (AFS) that have made studying bank risk more difficult.
2. Buoyant growth - The deposit growth for the three years before mid 2022 was very strong, much stronger than loan growth which created an investment problem.
3. Safety buffer - Many banks have reached for yield with longer duration which changes the safety buffers.
4. Leadership - We are moving from a period of zero interest rates and QE to higher rates and QT. The guidance from the Fed has been mixed which has added to uncertainty. Bank leadership has followed strategies that have created more ALM risk.
5. Shocks - Between the pandemic and rising rates, the markets have suffered from an uncertain environment.
6. Fear and greed - Concerns or fear has caused a run on deposits.
7. Collective action - The funding of new equity failed. The panic was not stopped, and buyers of the bank could not be found.
SVB is not a unique situation. It is more of the same from over 100 years ago.
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