As the current banking situation continues unfolding, with regional lenders like Silicon Valley Bank and Signature Bank failing in rapid succession, experts are sounding alarms over eerie parallels to these previous crises in terms of regulatory complacency and excessive risk-taking.

“We’re seeing some of the same patterns that precipitated the S&L crisis and 2008 meltdown repeating themselves,” said Dennis Kelleher, co-founder of Better Markets, a nonprofit advocating for financial reform. “Whether it was toxic commercial real estate bets, subprime lending or interest rate gambling, the common thread is ineffective oversight of emerging risks.”

Deregulation’s Unintended Consequences

A critical common thread that enabled both previous crises to brew was the bipartisan push for deregulation of the financial sector in the years and decades preceding each episode. In both cases, the well-intentioned efforts to modernize rules and increase competition produced unintended consequences of excessive risk-taking.

For the S&L crisis, this took the form of legislation like the Garn-St. Germain Depository Institutions Act of 1982, which expanded the lending powers of thrifts while removing restrictions on the asset classes they could invest in. This allowed S&Ls to rapidly pour money into speculative commercial real estate deals and other investments they had minimal prior experience with.

“We effectively gave the S&Ls a new fistful of powers and areas to invest in, but failed to implement the regulatory oversight and capital requirements to ensure they wouldn’t go hog wild,” said William K. Black, an expert on the crisis who served as a regulator.

Similarly in the 2000s, the repeal of the Glass-Steagall Act’s prohibitions on banks co-mingling with securities firms and insurers opened the door for large financial conglomerates to pursue riskier activities like proprietary trading and complex securitizations. This was coupled with a push for reduced regulation under the “market discipline” philosophy.

“The regulators were really outmatched and asleep at the wheel as these large firms rapidly built up concentrated risks and excessive leverage that ultimately blew up in 2008,” said Sheila Bair, who chaired the FDIC during the crisis.

As the latest turmoil unfolds, some experts point to the further easing of regulations under the Trump administration as a potential contributing factor.

“We’ve seen a gradual erosion of the rules put in place after 2008 to rein in excessive risk-taking,” said Lev Menand, a law professor at Columbia University. “That created an environment where banks could start piling into higher-yielding but riskier asset classes and business lines.”

Lax Underwriting and Governance Failures

In both previous crises, the combination of deregulation and new profit-seeking opportunities exposed critical lapses in risk management practices, underwriting standards and internal governance controls across the financial sector.

For S&Ls in the 1980s, this took the form of rampant underpricing of risks in new asset classes like commercial real estate, construction lending and speculative investments. With minimal oversight or underwriting expertise in these areas, S&Ls rapidly piled into overly aggressive deals that turned sour as the economic cycle turned.

“We had thrifts lending money for office towers and shopping malls based on wildly optimistic projections and with no hard analysis of supply/demand dynamics or stress testing,” said William Seidman, who led the Resolution Trust Corporation’s cleanup efforts. “It was a governance failure at every level.

In the 2000s mortgage boom, similar governance breakdowns occurred as lenders like Countrywide Financial loosened underwriting standards for new exotic loan products like subprime mortgages, no-documentation loans and investment properties. This enabled a housing bubble to inflate as unqualified borrowers secured mortgages they could not reasonably afford long-term.

“There was a race to the bottom in terms of verifying income, assets or making prudent assessments of repayment ability,” said Richard Bowen, a former business chief underwriter at Citigroup who tried to sound early alarms on the poor quality of loans being originated.

As the latest crisis unfolds, concerns are mounting about potential lax underwriting or risk management failures that may have left some banks overexposed to certain asset classes or interest rate risks.

“We’re seeing shades of what happened in 2008, where banks got caught with large concentrations of assets that rapidly lost value or became illiquid,” said Menand. “The same governance questions arise about whether risk managers and executives really understood their exposures.”

Regulatory Inaction and Insulation Failures

Compounding the excessive risk-taking and governance lapses in both previous crises was a failure of regulatory agencies to identify systemic vulnerabilities, demand corrective actions or implement substantive oversight as imbalances built up across the financial system.

In the S&L crisis, the Federal Home Loan Bank Board and other regulators turned a blind eye to institutions operating with razor-thin capital levels and making increasingly speculative bets. Insolvent “zombie” firms were allowed to continue operating, with losses ultimately requiring a $124 billion taxpayer bailout.

“Regulatory capture and political interference allowed the thrift industry to essentially dictate policy through lobbying influence and strategic campaign donations,” said Seidman. “There was a complete lack of willingness to confront the insolvencies until it was far too late.”

Similarly in the 2008 crisis, agencies like the Federal Reserve were criticized for being in the pockets of the largest banks and failing to rein in reckless mortgage lending practices, securitization abuses and the buildup of systemic leverage across the shadow banking system.

“The regulators bought into the idea that banks could self-regulate and self-monitor their risk exposures,” said Bair. “They were asleep at the wheel as a massive credit bubble inflated.”

As the current situation plays out, experts and policymakers are already raising concerns about regulatory blind spots and the risks of “capture” dynamics enabling excessive risk-taking.

“We have to be vigilant about the power of money in politics creating regulatory blind spots and captured dynamics,” said Kelleher. “The public cannot afford to foot the bill for another crisis precipitated by cozy relationships between banks and their overseers.”

Senator Elizabeth Warren has been among the most vocal in calling for tougher oversight and new safeguards in the wake of recent bank failures.

“What we’ve seen is a crop of regulators once again falling down on the job and ignoring clear risks building up in the banking system,” Warren said. “We cannot allow the same complacency and deregulatory mindset that led to the 2008 crisis to take hold again.”

Devastating Real Estate Impacts

Given their origins in real estate lending excesses, both previous crises produced devastating impacts across housing markets and property values in the hardest hit regions. This created a self-reinforcing spiral of foreclosures, price declines, reduced lending and economic contractions.

In the S&L crisis, areas like Texas, California and parts of the Northeast experienced a tidal wave of distressed commercial and residential property dispositions as failed thrifts were resolved. By 1990, over 25% of commercial properties in Dallas were in delinquency according to data from Trepp LLC.

The 2008 crisis produced a similar implosion of the housing bubble, with the S&P/Case-Shiller U.S. National Home Price Index plunging over 27% from its 2006 peak. Over 4 million families lost their homes to foreclosure according to the Federal Reserve.

While the current banking situation is still unfolding, there are already signs of tightening lending standards for commercial real estate and certain asset classes that could impact property markets if problems spread.

“Certain asset classes like offices are already facing stress from the pandemic’s impacts, and now we have the added pressure of a potential credit crunch hitting at the wrong time in the cycle,” said Victor Canacho, a real estate economist at the University of Southern California.

In both previous crises, the real estate busts triggered regional recessions, job losses and reduced economic output as the negative impacts radiated outward from the real estate sector. This underscored the critical linkages between the health of the financial system, housing markets and broader economy.

Need for New Safeguards

While the policy responses and regulatory reforms differed between the two previous crises, the shared lessons highlighted the need for vigilant oversight, robust underwriting standards, sufficient capital buffers and a recognition that excessive speculation and asset bubbles pose systemic risks that require aggressive intervention.

“We cannot allow a mindset of deregulation and complacency to take hold again,” said Bair. “The painful costs of the S&L crisis and 2008 were preventable, but we failed to heed the warnings and act decisively.”

In the wake of the current situation, calls are growing for a new round of reforms and safeguards to address regulatory gaps and curb excessive risk-taking before problems potentially metastasize.

“The fact that we’re seeing these parallels to previous crises emerge so soon after the 2008 meltdown should be setting off alarm bells,” said Kelleher. “We need updated capital rules, tougher oversight of risk concentrations and non-bank lending, and a regulatory system that is truly insulated from capture.”

Specific proposals being floated include:

• Raising capital requirements for banks above certain asset thresholds
• Granting regulators more oversight of the “shadow banking” sector like non-bank lenders
• Restricting certain commercial real estate lending practices and concentrations
• Strengthening regulatory governance and independence from industry influence
  
  

As memories fade, maintaining a balanced and proactive regulatory approach to mitigate future asset bubbles and excessive risk-taking remains an ongoing challenge for the financial sector and its overseers.

“The current crisis is exposing the same systemic vulnerabilities we’ve seen before,” said Menand. “If we fail to implement meaningful reforms and resolve the regulatory blind spots, we’re dooming ourselves to repeat history.”