The causes of financial crises aren't repeated in practice, but their impact on banks is often identical. One unexpected outcome of the 2008 crisis was the bailout of banks with criminal funds. That's why it's important to avoid old mistakes in a new wrapper in 2024.
The banking system is going through a difficult period, with the Federal Reserve's benchmark interest rate at its highest level in 22 years. High rates make lending difficult and exacerbate bank liquidity problems, so
In a financial crisis, banks may turn to the Fed for additional liquidity. U.S. banks borrowed a record $165 billion from the Fed on March 16, 2023 (50% more than the maximum of the 2008 crisis) and repeated the 2008 record of $110.2 billion just a week later. The correct decision for banks to request liquidity from the Fed is a signal to the regulator about the systemic errors of management. President Joe Biden warned that management of bankrupt banks will not only be fired, but also involved in investigations at the federal level. This prospect doesn't suit bank managers, who will look for other solutions.
An alternative route is to find liquidity yourself to maintain the reputation of a successful manager. Banks have had an unusually difficult year in 2023 with the biggest deposit drop in U.S. history ($872 billion). According to
International criminal organizations have the financial resources and need banks' assistance in money laundering. The annual volume of the world drug market could exceed $1 trillion, which is only 30% of the total income of transnational crime. It's also necessary to take into account the huge criminal resources of the crypto market, which can exceed $70 billion. An important feature of the criminal crypto market is a large concentration of resources, which allows their owners to offer substantial liquidity to banks in trouble. For example, the U.S. Department of Justice
Payments fraud is the most expensive kind, at $450B; anti-financial-crime execs are the most worried about real-time payments, a survey from Nasdaq and Oliver Wyman found.
Summarizing the experience of previous financial crises makes it possible to predict the immediate prospects for U.S. banks.
The easiest and cheapest way is to reduce compliance procedures. The Bitzlato crypto exchange could exist in 2018-2022 only because it attracted customers with lax know-your-customer procedures and the possibility of criminal money laundering.
Banks also often resort to cost minimization. U.S. banks cut 20,000 positions in 2023. Compliance doesn't bring profit to banks and doesn't make money, so this department may be one of the first to face budget cuts. An unreasonable reduction in compliance staff will increase the burden on employees, which in the current "perfect sanctions storm" will inevitably lead to errors and turn into a violation of the law. The losses from regulatory fines and reputational damage can be much larger than the savings from downsizing the compliance department.
The position of the government is the third factor that has a direct impact on banks. Joe Biden
Thus, the criminal economy has liquidity, which is currently missing in the modern banking sector. Bankers must be vigilant about their clients' sources of funds. Client rights shouldn't outweigh U.S. goals and banking stability shouldn't promote money laundering. That's why it will be necessary to pay special attention to compliance issues and sources of liquidity for banks as the financial crisis grows.
Modern crises will differ in both depth and scope, affecting the whole world. "A lost decade could be in the making for the global economy,"
