Banking Crises - repeat behaviour

In the Market, to understand the present and define characteristics of the future, it is critical to review the past.

The Savings and Loan crisis of the 80’s has incredible similarities to the 2008 Great Recession, primarily caused by lax lending standards, along with a host of other deleterious behaviours such as incorrect bond ratings and so on. There was so much talk about “Moral Hazard” during this period, as there was in 1980’s during the S&L crisis, and repeats again in 2008 and again in 2023.

As well, the S&L collapse mirrors similar behaviour in the recent banking failures such as Silicon Valley Bank...

SVB owned long-term Treasuries with low interest rates, and when interest rates rose quickly, the value of these bonds dropped significantly. This created a mismatch between the bank's assets and liabilities, leading to a liquidity crisis and ultimately its failure.

SVB's situation was similar to a key issue in the Savings and Loan (S&L) crisis: both involved a duration mismatch where banks held long-term, low-yield assets (like mortgages or Treasuries) while relying on short-term funding. When interest rates rose sharply, the value of those long-term assets dropped, creating significant financial strain and ultimately leading to insolvency.

These themes below are not unique to the S&L crisis, in fact they form a reoccurring pattern of the financial system and the stock market..

Deregulation

Inflation

Thin Government oversight

Legislative changes

Weakened Accounting standards

Interest rate mismatch

Moral Hazard

Reduced Capital requirements (capital-to-risk-weighted assets ratio)

Loan fees -  up-front fee structure

Gresham’s Law “bad money drives out good”

The website below is a tremendous resource..

History of the Eighties - Lessons for the Future - Volume 1

Volume 1: An Examination of the Banking Crises of the 1980s and Early 1990s

https://www.fdic.gov/publications/history-eighties-lessons-future-volume-1