The Banking Crisis Nobody Is Calling a Banking Crisis — Yet

Financial journalism has a strange tendency to hold off on calling something what it is until it is indisputable. The collapse of 2008 wasn’t considered a “crisis” until Lehman failed. The unwind of dot-com was a “correction” until it wasn’t. As regulators, analysts, and bank executives carefully avoid using the word “crisis,” it’s difficult to avoid experiencing a familiar tightness in the chest. The vocabulary is working hard. The remaining work is done by the balance sheets.

Banks are under “stress.” This is the term used in private rooms. There is a migration of deposits. Bond portfolio mark-to-market losses continue to be stubbornly high. Since no significant institution has failed in the past few weeks, none of this is technically a crisis. However, that is an odd definition. It’s similar to claiming that a building isn’t on fire because the smoke detector hasn’t gone off. Speaking with those who monitor these figures on a daily basis gives the impression that the system is under more stress than it acknowledges.

The events of March 2023 ought to have served as a warning, but they didn’t. In one afternoon, Silicon Valley Bank lost $42 billion in deposits. The signature came next. In a weekend deal that no one pretended to be elegant, UBS effectively dragged Credit Suisse, a 167-year-old institution, off the field. At the time, Arthur Dong of Georgetown claimed it was only “a momentary shake-up” rather than a worldwide crisis. That framing was successful. The markets relaxed. The discussion continued. However, the circumstances that led to the disruption never truly went away.

Bank assets that were fine in 2021 have significantly decreased in value on paper as interest rates have increased, plateaued, and then increased once more. Unless they sell, the majority of banks are not required to mark them to market. Consequently, they don’t sell. They hope and they hold. From the outside, this appears to be a slow, unfinished exhale. It was dubbed a “mini-crisis” three years ago by Paul Kupiec of the American Enterprise Institute. The label still fits awkwardly, like a coat does when you’ve put on weight you don’t want to admit.

It is more difficult to discuss the structural component. Heterodox economist Steve Keen has long maintained that private banks’ ownership of government bonds, whose value plummets each time the Fed tightens, is the fundamental problem. Mainstream economists view his suggested solution—allowing the Fed to purchase bonds straight from the Treasury—as somewhat embarrassing to talk about. The underlying observation is clear regardless of whether he is correct. SVB was broken by the same mechanism, which has not been disarmed. It was just sedated.

You can see how commonplace this appears from the street outside a regional bank branch in any midsize American city. Checks are still deposited by walk-in customers. ATMs make noise. Tellers grin. The day-to-day landscape of banking is pleasant. A slow-burning crisis doesn’t appear to be a crisis until the camera crews arrive, which is one of the reasons it’s so hard to identify. It was lines outside Northern Rock in 2008. A digital bank run in a matter of hours was sparked by a Twitter thread in 2023. If the next one occurs, it will most likely have a different appearance.

The language that regulators are currently using is difficult to ignore. Take caution. selectively. Steer clear of any verb that suggests urgency. Because panic is contagious in and of itself, there is an institutional preference for calm, which makes sense. However, safety and calm are not the same thing. As Buffett used to say, “the tide eventually goes out.” And when it does, it usually does so without first requesting permission.