I’ve said it before, 2023 has been a heck of a year. In just five months, four large regional banks and one major global financial institution shuttered, marking the second-worst year for bank failures. Only the Great Financial Crisis of 2007 to 2009 (GFC) was worse. Understandably, many have tried to draw comparisons between the two periods in an attempt to contextualize today’s investment landscape. Yet, I find most to be unsatisfying. The concrete causes and potential effects of bank stress today are quite different from the GFC’s. They share only broad, systemic commonalities often omitted from discussions.
“History doesn’t repeat itself but it often rhymes.” Mark Twain’s famous quote infers that general principles hold across different concrete scenarios. Today’s market landscape is significantly different from the GFC. Banks that failed this year did so differently than in the GFC’s. Yet, they do share a broad cause. Banks in both periods suffered from breakdowns in asset liability management (ALM). However, in neither case were they individualized. Rather, system-wide centralization created the ALM problems.
Today is not the GFC
Popular comparisons of today’s bank failures and the GFC’s are, in many ways, superficial. Banks and market turmoil, alone, are not sufficiently common. They often occur together. Financial markets depict the interconnections of financial firms. The former reflects the latter’s various buying and selling activities as changes in asset prices. Thus, market volatility and financial company stress go hand in glove. They cannot be separated.
Many incorrectly blame the GFC on subprime housing. To be sure, it played a role. However, realized losses from housing-related investments did not cause the crisis. Rather, it was the broad role that housing-related investment securities played in the financial system that created the GFC. Liability surprises—not misjudged asset risks—caused the GFC.