The 2023 Banking Crisis has Surpassed The 2008 Banking Crisis

Since my last newsletter on First Republic Bank (A Third Major Bank Collapse (beehiiv.com)), there have been multiple banks facing the same pressure First Republic Bank faced the week prior. This pressure surfaced after the Fed decided to raise interest rates by .25%, the highest level since early 2007. In the Fed meeting, Powell (chairman) said the US banking industry is “sound and resilient”.

However, on Wednesday afternoon after the rate hike, PacWest Bancorp announced it was exploring all options (including a sale), which sent the regional bank market into a frenzy. After hours (the time after the stock market closes) regional bank stock prices plummeted to new lows.

The 2023 Bank Crisis is Now Bigger than the 2008 Banking Crisis.

Below is a re-cap of the bank collapses we have seen since March.

With the recent news of PacWest Bancorp (and a few others), when compared by total assets lost, the 2023 banking crisis has surpassed the 2008 banking crisis. This is pretty remarkable given that we’ve only just begun the 2023 crisis. In regard to interest rate hikes, the general rule of thumb is that they aren’t felt in an economy until 12-16 months after they are implemented. The fed started hiking rates in April of 2022 and didn’t start really ramping them up till the fall of 2022. This means we are still at the very beginning of what is yet to come.

Visual of the 2008 Banking Crisis Compared to 2023 Banking Crisis.

This visual helps put into perspective the kind of situation we are in. As you can see below, the circles represent banks that have failed over the past 15 years. The circles are also placed on a timeline to show when each failure occurred in chronological order.

As you can see, the biggest bank (Washington Mutual) was one of the first ones to fail in the 2008 crash. Once it failed, it dragged hundreds of other smaller banks down with it. After 2008, the total number of regional banks was slashed significantly. When compared to 2023, you can see we already have 3 major bank failures and another 3 on the horizon (who are just as big). If interest rates continue to increase (like we saw Wednesday afternoon), more of the smaller banks are likely to fail, similar to what we saw in 2008.

The issue with losing small regional banks.

There are quite a few different reasons why regional banks are important, but the two main ones are:

• They handle a lot of local real estate and can offer better services, loans, and adjustments that meet the local community.

• They help diversity and check big banks (and in return) big government, in order to prevent them from having too much power over your financials.

Without them, the government could possibly regulate (control) some of your financial decisions, the same way the Canadian government did with the protesting truckers.

Solutions.

Unfortunately, this banking crisis could have been prevented. Last summer (when the government realized it had an issue on its hands), they should have cut taxes and incentivized ways boost economic production. This would have helped settle inflation and prevented the need for massive rate hikes (which has led to these bank collapses).

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