Is this another Financial Crisis

To answer the question directly: No, this is not another financial crisis.

Here's why:

When SVB failed, read my article explaining what happened here; many people said this could be a Lehman Brothers moment

If you didn't know, here's a summary of what happened with Lehman Brothers

Lehman Brothers was a large investment bank that was heavily involved in the subprime mortgage market, which was a significant factor in the 2008 Global Financial Crisis (GFC).

The subprime mortgage market involved lending money to people with poor credit scores who were considered high-risk borrowers. These loans were often packaged and sold to investors as complex financial instruments called mortgage-backed securities (MBS). Lehman Brothers was a major player in this market, owning a significant amount of MBS.

As the housing market began to decline, the value of these securities began to drop, and Lehman Brothers' assets became less valuable.

Why did the housing market start to decline?

Some of the high-risk borrowers that took subprime mortgages defaulted on their mortgages.

As the number of subprime mortgages increased, so did the number of defaults and foreclosures. This led to a large number of homes on the market, which caused home prices to decline. Because remember the rules of demand and supply; if supply is high and demand is low, prices fall to attract buyers.

Many homeowners found themselves owing more on their mortgages than their homes were worth, which made it difficult or impossible for them to refinance or sell their homes.

At the same time, the market for MBS began to decline as investors became increasingly wary of these complex financial instruments. As the value of MBS fell, banks and other financial institutions that had invested heavily in the subprime mortgage market began to suffer significant losses.

Back to Lehman Brothers

Lehman Brothers had borrowed heavily to finance its investments, and when the value of its MBS declined, they could not pay back its creditors. Lehman Brothers filed for bankruptcy.

All liquidity is linked

The collapse of Lehman Brothers triggered a chain reaction throughout the financial system, as other banks and financial institutions had also invested heavily in the subprime mortgage market. The resulting panic made it difficult to lend and borrow, which caused a sharp decline in global economic activity. This, in turn, led to the GFC, which lasted for several years.

You can get a great explainer of the GFC from the movie "The Big Short".

What happened with SVB

SVB is a bank that used customers' deposits to buy long-dated bonds that lost their value when the Federal Reserve started raising interest rates last year.

Simple sidebar explainer here: Bonds and interest rates have a simple relationship. When interest rates rise, bonds that are already issued see their prices fall; because newer bonds can pay better returns, so there's less demand for old bonds. The opposite happens when interest rates fall because old bonds now pay better than new bonds, so people rush to buy them, which causes the price to rise.

As the Fed raised interest rates, those old long-dated bonds SVB bought started losing value. SVB decided to cut their losses and sold some bonds at a $1.8bn loss and told shareholders they needed to raise money. When this news came out, too many depositors rushed to withdraw their funds simultaneously, causing the bank to file for bankruptcy.

What are the similarities and differences between SVB and Lehman Brothers

Similarities

Shareholders of Lehman Brothers and SVB likely lost all the money they had invested in the companies because they were not given a lifeline. This failure to bail out shareholders meant that banks that invested in the same market as Lehman Brothers did not have sufficient assets to cover deposits and later needed government rescue.

Differences

Lehman Brothers were allowed to fail, which set off the dominoes that led to the GFC, and depositors in SVB were protected (I'm deliberately avoiding the word bailed out here because that's not really what happened).

As explained in my previous article, banks deal on trust. SVB's collapse made depositors in regional banks question if they could continue to trust their banks. So regulators had to step in to protect depositors, which signalled other depositors in other banks that may be in a similar situation that they can trust that, at worst, they will get some protection from regulators.

If that didn't happen, some other regional banks might have faced the same fate as SVB.

What about the other bank failures?

As humans, we tend to underestimate unfamiliar risk and overestimate familiar risk

While SVB was happening, Credit Suisse, a 167-year-old bank and the second-largest lender in Switzerland, came under pressure last week.

Credit Suisse's problems were very different from those that brought down SVB. The bank’s biggest backer — the Saudi National Bank — said it wasn’t prepared to put up more money to support the bank after buying a near-10% stake for $1.5 billion last year.

Why is this important?

Credit Suisse has been struggling for years. It was widely seen as the weakest link among Europe’s large banks, according to Andrew Kenningham at Capital Economics said in a note to clients.

The company has been plagued by a series of missteps and compliance failures in recent years that cost it billions and led to several overhauls of top management. And over the past decade, the Swiss bank has been hit with fines and penalties related to tax evasion, misplaced bets and other issues.

With the familiar taste of SVB's collapse from the previous week and Credit Suisse's tumultuous past, this sent their shares tumbling over 30% after the large shareholder said he wasn't going to put up more money to support the bank.

"Credit Suisse is in principle a much bigger concern for the global economy than the regional US banks which were in the firing line last week, Credit Suisse is much more globally interconnected not just a Swiss problem but a global one." According to Kenningham

The Credit Suisse (CS) stumble reignited fears of another financial crisis. However, before the end of last week, Swiss National Bank extended CS a $54bn funding line if they needed it. And now UBS has acquired Credit Suisse. So that situation seems to be under control.

Also, last week, First Republic Bank came under pressure, and some of the top US banks have come together to deposit around $30bn to help them.

What does this mean for the possibility of another Financial Crisis?

It indicates that Central Banks and regulators are doing everything possible to prevent a financial crisis by putting out flairs before they turn into fires.

A group sent a letter asking FDIC to insure all deposits (i.e. including deposits exceeding the $250,000 threshold) for the next 2 years. A temporary move like this could further improve depositors' trust in the banking system.

There is nothing more permanent than a temporary government program

If (or rather when) interest rates come down and bond prices improve, the banks can repay the FDIC for their help now.

However, this only works if inflation comes down and interest rates eventually come down. If not, if these issues proceed for longer, taxpayers could be paying for/insuring deposits.

Who are the winners and losers?

Many short sellers are making a lot of money from this; last week, some short sellers made over $2 billion from short-selling troubled regional banks. However, as a beginner investor, remember to invest in things you understand. This may not be the time to rush to "buy the dip" in banks just because you see prices have fallen, as this volatility can drag on for some time, and if you are not able to invest for the long run, you might lose some money in the process.

Final Thoughts

The response from Central Banks and regulators to recent bank failures leads me to conclude that it is unlikely for a financial crisis to happen now. However, this also means that this week when the FOMC meets to decide on what's next for interest rates, they have to consider broader financial stability alongside the fight to put inflation down. This leads many to conclude that the Fed will raise interest rates by 0.25% instead of the 0.50% many expected a few weeks ago.

Other than a financial crisis, there's a bigger question of whether a recession could be in the cards for this year and what that could look like. Find out how a recession could affect you in this article.