Researchers studied 800 years of how governments and markets have reacted when banks appeared unstable and fear levels were high.
Depositors, investors, and policymakers are concerned about the banking sector, but how do the current issues compare to previous bank crises? According to academics, there are not many direct analogs to the specific twists and turns of recent weeks throughout the past eight centuries. The current mixture of challenges and eroded fundamentals seem worse than examples in the past.
Researchers at the Yale School of Management and Boston College’s Carroll School of Management found that when prior bank issues were most like current events, the financial pain ended up being broad most of the time.
Imagine studying that much history, but that is exactly what Andrew Metrick at Yale and Paul Schmelzing at Boston College did. They compiled information on how governments and markets have reacted over the course of the past eight centuries when banks appeared unstable or banks that failed, and anxiety levels were high.
They discovered 57 crises that mirror the current situation out of 880 crises affecting 138 nations. Regulators and banks employed account guarantees and emergency loans as a means of calming people down. Emergency loans proved out to not resolve any underlying issues causing the emergency. Those issues remained to only worsen over time.
Many experts point out that when banks that fail receive bailout funds the message to banks is to ignore how choices work out the government will always come to your rescue because voters bank with banks and failure needs to be avoided. Many ask when will government bailouts no longer work? Is there a time in history where the failures were larger than government bailouts? The answer is indeed yes. In past reserve currency nations, those banks and financial institutions, powerhouses in their day are mostly no longer.
They noticed that slightly more than 50% of the situations revealed to be systemic and widespread. Further, over 80% of the 57 comparable historical episodes—among which is America’s financial turbulence in 2008–2009—turned out to be widespread and systemic.
They stated in their report that “the combination and scale of interventions in March 2023 clearly suggest that we are now in the midst of a systemic event.”
Schmelzing noted that the finding that 80% of the 57 incidents that are similar to the current scenario “turn out to be rather destructive” does not exactly reassure confidence.
Although there are some similarities between the answers now and during the Great Recession, he added that there are also variances. Both came with vast account assurances from the government.
The research shows again and again that the government actions to ‘save’ banks did not resolve the issues causing the banks distress. For instance, in October 2008, FDIC coverage was increased from $100,000 to $250,000, then in 2010, that amount was made permanent. A key fact to consider is currently the FDIC holds $125 billion in available funds but must insure $18 trillion in deposits.
