Mark Hulbert: SVB and First Republic failures are just the start of a lengthy banking crisis — if you believe 800 years of history

by | May 4, 2023 | Stock Market

“ The beginning stages of a ‘systemic bank-distress episode.’ ”

The banking crisis that began with the collapse of Silicon Valley Bank and now the failure of First Republic Bank is far more serious than it initially appeared. Two finance professors were warning of this six weeks ago: Andrew Metrick of Yale’s School of Management, and Paul Schmelzing of Boston College and Stanford’s Hoover Institution. In a study circulated in late March by the National Bureau of Economic Research, they argued that the FDIC bailout of Silicon Valley Bank was almost certainly not an isolated event and was instead symptomatic of a much bigger problem.

The professors reached their conclusions by comparing regulators’ behavior in the current crisis with how they reacted during almost 2,000 historical banking-sector interventions in 138 countries dating back to the 13th century. This gave the researchers insight into the likely severity of the current crisis. As Schmelzing put it when I interviewed him six weeks ago, “We don’t directly know how bad things really are right now in the banking system. But we can look at the behavior of the regulators who presumably know a lot more than we do about how bad it is. And the pattern of their responses most closely matches that of 57 prior crises that tended to more severe than average.”

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