Source: Zhong Zhengsheng's Economic Analysis
Author: Ping An Shoujing Team
The banking crisis that broke out in March 2023 is strongly similar to the American savings and loan crisis in the 1980s and 90s. Both crises were in the macro context of high inflation and high interest rates, and the “long term savings loans” business model of savings institutions was tested. This report reviews the beginning and end of the US savings and loan crisis, compares the differences and similarities between the two crises, and considers the possible direction of the US economy and monetary policy in this round.
The beginning and end of the US savings and loan crisis.The American Savings and Loan Association originated in the 1830s and once flourished after World War II due to the expansion of demand for housing. During the period of high inflation and high interest rates in the US in the 1970s and 80s, the “Q Regulations” restrictions (deposit interest rate limits) amplified the impact of interest rate fluctuations on the savings and loan industry. In the early 1980s, a large number of savings and loan associations made serious losses. The Reagan administration pursues “neoliberalism” and has given birth to a series of excessively loose financial regulation measures. The US government has successively promoted interest rate marketization, allowed bankruptcy institutions to operate, relaxed capital requirements, etc., temporarily saved the savings and loan industry. However, the good times did not last long. The sharp drop in oil prices in 1986 triggered the collapse of the “energy state” economy and real estate, and regional savings and loan associations went bankrupt and spread throughout the country.
The Federal Reserve returned to the cycle of raising interest rates in 1987-1989. The Savings and Loan Association experienced a “wave of bankruptcies” in 1988-1991.From August 1990 to March 1991, the US economy fell into a recession that lasted 8 months.
In 1989-1992, the Federal Reserve began a three-year interest rate cut cycle based on the economy.Interest rates have been cut 24 times, 6.8 percentage points in total. Although monetary policy is relaxed, the US real estate industry and banking industry are still under pressure, and coinciding with the global economic downturn, etc., it is difficult for the US economy to recover.Commercial bank credit growth bottomed out in the second half of 1991, and was only basically restored in 1994.In the 1990s, the Bush administration made a deep determination to deal with problematic institutions while strengthening financial supervision. The savings and loan crisis officially came to an end in 1995.
Implications for the current banking crisis. First, there is a strong similarity between the current banking crisis and the savings and loan crisis.They are all mainly due to the banking industry's own business risks, that is, the mismatch between deposit costs and loan returns, and “borrowing for long periods of time.” However, there were no obvious real estate bubbles and excessive financial innovation in these two crises, which were different from the context of the subprime mortgage crisis.
Second, the current banking crisis may not evolve into a systemic financial crisis like the savings and loan crisis.First, policies are more capable of blocking risk transmission. The FDIC has greater bailout powers and more timely policy responses. Second, the fundamentals of US real estate are better, and the underlying assets of banks are better. Finally, the financial supervision environment is stricter, and market players are more cautious.
Third, credit crunch reinforces the US economic recession logic, and the market may shift to “recession trading.”Historically, severe credit contraction has often been accompanied by economic recession, and the recovery of credit growth has often lagged behind economic recovery, which may slow the recovery process. We believe that the point of this round of US recession may be brought forward to the middle of the year. The market is still in the process of re-evaluating the extent and length of the US recession.
Fourth, the policy “bail out the market first, reform later”, but the currency shift still mainly depends on the economy.The Fed's interest rate cut is the end of the banking crisis, but we need to wait until the economy actually worsens. Currently, the market has high expectations for the Fed's shift, and it is difficult to say enough about pricing the recession that may arrive earlier.
Risk warning:The US banking crisis has escalated beyond expectations, the US economy has declined beyond expectations, the tightening of the US currency has exceeded expectations, economic and financial risks in non-US regions have broken out beyond expectations, etc.
Editor/Somer