This banking crisis is different from the GFC: Moody’s Zandi

  • There are four differences between the current banking crisis and the global financial crisis, says Moody’s chief economist.
  • These include the scale of the crisis and the US government’s response, Mark Zandi tweeted.
  • Zandi told CNN Monday Americans shouldn’t worry about their bank deposits.

The collapse of Silicon Valley Bank and Signature Bank, New York, has rattled the banking sector and raised fears of contagion that could lead to the next global financial crisis.

Both banks were shut down following a rush for deposits, prompting fears that the panic could also trigger a run on other regional banks.

Zandi’s comments add to views that the current banking crisis is different from the situation in 2008.

In a series of tweets Monday, Mark Zandi, the chief economist at Moody’s Analytics, said the current banking crisis differs from the global financial crisis, or GFC, in four key ways.

1. All financial institutions were affected in the global financial crisis

The problems now emerging are evident in a handful of small to mid-sized banks caught in the tech sector downturn and crypto market meltdown. Zandi tweeted.

“In the GFC, almost all financial institutions, large and small, were caught in the downwind,” the economist added.

The financial crisis that triggered the Great Recession was one of the worst economic downturns in US history. The collapse of the US subprime mortgage market led to a liquidity crunch in the global banking system and a sharp decline in bank lending.

2. Massive post-GFC financial sector reforms

To avert another major shock to the banking system, the US enacted massive financial system reforms — like the Dodd-Frank Act, which was introduced to “prevent the excessive risk-taking that led to the financial crisis,” according to White House Archives .

There are many more regulatory requirements for banks today than there were during the global financial crisis, Zandi said.

He said that “these reforms require banks to hold a lot more capital, be a lot more liquid, and conduct stress tests to determine how much capital they need to weather very dark economic scenarios.”

3. The US government has responded quickly to this crisis

The US government is reacting quickly to the crisis this time by insuring all deposits. On Sunday, just days after the Silicon Valley bank crisis erupted, the Federal Reserve unveiled a new bank lending facility — “which is in stark contrast to the decision that Lehman Brothers will fail during the financial crisis,” Zandi added added. He told CNN on Monday The deposit guarantee means Americans shouldn’t have to worry about their bank deposits.

During the global financial crisis, Lehman Brothers, a then-major Wall Street bank, collapsed on September 15, 2008, acting as the final trigger for the global financial crisis – but the economy had been in a real estate bubble for months.

And while Congress legislated the Troubled Assets Relief Program — essentially a $700 billion bailout — on October 3, 2008, other major regulations like the Dodd-Frank Act were not enacted until July 2010 by the then-President Barack Obama enacted.

4. The economic background is different this time

Zandi also said that the current economic background is very different from that of the Great Financial Crisis.

“The economy is currently growing strongly, there are many jobs and unemployment is very low. When the financial system collapsed in the global financial crisis, the economy had already been in a major recession and housing crisis for 9 months,” Zandi tweeted.

US GDP grew strongly in the second half of 2022, growing at an annual rate of 2.9% in the last quarter of 2022. Third quarter GDP grew at an annual rate of 3.2%. The job market remains hot, with non-farm payrolls up 311,000 in February from the previous month. The unemployment rate was 3.6%.

During the Great Recession, US GDP fell 4.3% from its peak in the fourth quarter of 2007 to its low in the second quarter of 2009. The unemployment rate in October 2009 reached 10%.

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