Lessons from the 2023 Financial Crisis

David Soanes

30 years: Capital Markets

In this video, David explains the 2023 banking crisis's impact compared to the 2008 financial crisis. He discusses the reasons behind the limited market confidence restoration from the 2008 bailout and why banks were unprepared.

Financial Crises

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Lessons from the 2023 Financial Crisis

17 mins 28 secs

Key learning objectives:

Understand how the 2008 bailout package stabilised the system but failed to restore full market confidence
Understand why banks were so underprepared in 2008
Understand how lemon mortgages contributed to the 2008 financial crisis
Understand the cause of the banking crisis at the start of 2023
Outline how developments within financial regulation prevented a financial meltdown in 2023

Overview:

The 2023 banking crisis' impact was less severe than the 2008 financial crisis due to the lessons learned. The 2008 bailout hastily stabilised banks without fully restoring market confidence, prompting measures like quantitative easing. It was partially caused by Lemon Theory applying to the mortgage market, creating a wave of 'lemon' mortgages. The 2023 crisis, on the other hand, was met with regulatory provisions for loss-absorbing equity and planned resolutions. Despite Credit Suisse's strong finances, a confidence crisis forced a UBS takeover, highlighting the importance of robust regulatory frameworks. It showed that crises of confidence can rival financial insolvency in destructiveness, underscoring the need for vigilant oversight.

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Summary

Why did the 2008 bailout package stabilise the system, but fail to restore full market confidence?

The 2008 bailout package stabilised the system by providing liquidity to banks, supporting their short-term borrowing, and guaranteeing new liabilities. However, it didn't fully restore market confidence because the financial markets' trust had evaporated, causing the interbank market to seize up and counterparties to stop trading. More measures such as rate cuts, an asset protection scheme, and quantitative easing were needed to gradually rebuild confidence, indicating the initial bailout package's limited effect on market sentiment.

Why were banks not prepared in 2008?

Banks were unprepared for the 2008 crisis as they had not foreseen the closure of the wholesale debt market or banks ceasing unsecured lending. They lacked detailed plans for a large bank's potential collapse and didn't have sufficient loss-absorbing equity due to high leverage. The emergency decisions made in the first week of October 2008 were more reactionary, influenced by immediate threats and available tools rather than thorough contingency planning, highlighting the lack of comprehensive foresight.

How did ‘lemon’ mortgages contribute to the 2008 financial crisis?

‘Lemon’ mortgages contributed to the 2008 financial crisis by degrading the quality of the mortgage market. Because of the concept of securitisation, mortgage lenders were incentivised to originate poor-quality, unaffordable loans, or lemons, for higher fees. These were then packaged into mortgage-backed securities and bought by banks. When the US economy faltered, doubts about these bad mortgages spread, eroding confidence as banks couldn't determine the quality of others' assets. This systemic uncertainty, spurred by a surge of bad loans, significantly disrupted the financial system.

What caused the banking crisis at the start of 2023?

The 2023 banking crisis, marked by the forced takeover of Credit Suisse by UBS, was primarily caused by a fast crisis of confidence. Unlike the 2008 financial crisis, regulatory improvements and planning mechanisms limited the impact, preventing a cascade of crises despite the initial market panic.

What developments within financial regulations and lessons learned prevented a complete financial meltdown in 2023?

The prevention of a total financial meltdown in 2023 was largely due to developments within financial regulations and lessons learned from the 2008 crisis. The implementation of Basel III standards resulted in a stronger capital base and stricter liquidity and funding requirements, which improved banks' resilience to shocks and downturns. Enhanced supervision ensured better adherence to these regulations, while routine stress tests helped identify vulnerabilities early. Additionally, improved internal governance within banks, promoting a culture of risk awareness and accountability, played a crucial role in managing potential crises.

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David Soanes

David Soanes, who has recently retired after 31 years with UBS, highlights the firm's resilience in overcoming significant challenges. He is proud of UBS's financial and reputational strength in merging with Credit Suisse. David held various roles, including managing equity and debt capital markets businesses, investment banking activity in EMEA, and being the group's country head in the UK. He was involved in designing the UK's 2008 bailout plan for the banking system.

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