Study: Vast Majority of Bank Interventions Turn Into Systemic Distress

There is a familiarity to the current banking crisis if you think back to the Great Recession or the S&L meltdown of the 1980s. There is some move of deregulation and then, within a few years, more or less, some group of banks gets hit hard and the US government goes into overdrive to control contagion.

But if you think you have a sense of déjà vu, imagine how Andrew Metrick of the Yale School of Management and Paul Schmelzing of Boston College’s Carroll School of Management felt when looking at almost 750 years of banking crises.

“This paper contextualizes events using a new long-run database on banking-sector policy interventions over the last eight centuries,” they wrote in the abstract. “On that basis, recent actions have already been unusual in their policy mix and size—in the database, the vast majority of events with the same pattern of interventions ultimately evolved into ‘systemic’ bank-distress episodes.”

Countries acted in various ways over the centuries, but starting in 1873 with Walter Bagehot’s book, Lombard Street: A Description of the Money Market, the reaction to banking crises developed in significant part with central banks acting as a lender of last resort. But that has been only part of the cure. “Instead, crisis-fighting finds central bankers joining fiscal authorities, deposit insurers, and other regulators while using multi-pronged interventions that target every region of banks’ balance sheets,” the researchers wrote.

They broke responses down into seven major categories—asset management, guarantees, lending, restructuring, capital injections, rules, and other—each with multiple secondary categories.

The response to the Silicon Valley Bank collapse used account guarantee and lending interventions, as have 57, or 6.5% of all crises. Add the use of private-sector involvement and it brings the selection down to 12 cases.

The major point the researchers raise is that the particular combinations of responses that we’re seeing turns out to be a predictable sign of a systemic banking crisis.

To be clear, this is a case of association, not necessarily of causation. However, the observation suggests that the country is facing a systemic banking challenge, which will require caution in how it’s treated, and a measure of care by those in the CRE industry, to keep an eye on the banks they use and use existing strategies to keep capital safe by avoiding unnecessary concentrations and employing safety strategies to maximize the available amount of coverage.