The Silicon Valley Bank crisis' parallels to the 1980s
Most of the finance world is looking to the great financial crisis for parallels to what happened to Silicon Valley Bank, but perhaps a better case study lies back in a time before bank runs went viral on Twitter. Before the internet, when roller rinks, "Flashdance," and big hair were in the air — and people talked on the phone ... We're talking about the 1980s.
The big picture: The savings and loans crisis. From 1980 to 1994, nearly 1,300 of these smaller, home loan-focused banks failed.
- And they failed mostly because of at least one issue that plagues us today: high inflation that prompted big rate increases by the Fed.
- The S&Ls were in the mortgage business, and when they made these loans they held them on their books. As rates rose, those mortgages were worth less and less — a sort of corollary to the mortgage-backed and government securities sitting on SVB's books.
Also: Decades ago, the Fed's rate hikes also helped crush an oil boom, which was a big problem for a bank called Penn Square that had made some risky loans concentrated in the oil sector, as Edward Harrison writes in Bloomberg.
- When the boom went bust and as rates rose, people got nervous and pulled money out of the bank — forcing it to sell assets that were now worth less than before. The bank collapsed, leading to contagion at two other banks, Harrison writes.
- In SVB's case, it was similarly reliant on one sector — tech.
Yes, but: There are differences in the details, of course. Back then, banks were competing for deposits with money market funds that paid higher rates — and they were losing. That wasn't quite the issue with SVB.
- We've also only seen two banks fail. Not hundreds.
The bottom line: As the kids like to say, history doesn't repeat, but it does rhyme.