Lessons from 1929 Black Thursday: Future Crises Will Differ
Translated & summarized from Calcalist by baba
Ninety-seven years after the 1929 stock market crash, a financial expert warns that future crises will differ due to the vastly larger and more complex global financial system. Unlike the past, digital technology allows for rapid bank runs, and non-bank entities now hold significant financial assets. The article stresses the need for robust preparation, including digital resilience and contingency planning, to maintain essential services and public trust.
The story in 6 lines · by baba
- Future financial crises will differ from 1929 due to a vastly larger and more complex global financial system.
- The U.S. financial sector's assets have grown from $155 billion in 1929 to $148 trillion in 2024.
- Non-bank entities now hold over half of global financial assets, spreading risks beyond traditional banks.
- Digital technology enables rapid bank runs, as demonstrated by Silicon Valley Bank's $42 billion withdrawal in one day.
- Future crises could be triggered by cyberattacks, fraud, technological disruptions, or geopolitical events.
- Effective crisis preparation requires mapping dependencies and practicing scenarios like rapid deposit outflows and system outages.
Ninety-seven years ago, on October 24, 1929, a record 12.9 million shares were traded on the New York Stock Exchange, signaling the start of the Great Depression. This panic was fueled by public stock purchases on credit and an existing economic slowdown. The ensuing crisis saw approximately 9,000 of the 24,000 banks in the U.S. fail between 1930 and 1933, leading many depositors to lose their savings.
The article emphasizes that financial crises are tested by institutions' ability to function amid eroding trust. Today's financial system is vastly larger and more complex than in 1929. In 1929, U.S. financial intermediaries held assets worth about $155 billion, 1.5 times the U.S. GDP. By 2024, U.S. financial sector assets reached approximately $148 trillion, about five times the U.S. GDP. Globally, financial assets stand at about $503 trillion, compared to a world GDP of roughly $112 trillion.
The structure of the financial system has also changed. In 1929, commercial banks and savings institutions held about two-thirds of public financial assets. Currently, non-bank entities hold over half of global financial assets, according to the Financial Stability Board (FSB). This indicates that credit and risks are now spread across a wider array of entities, necessitating preparation that considers not only bank stability but also their connections with funds, insurance companies, and other financial intermediaries.
Since the 1929 crisis, regulations like deposit insurance, capital requirements, liquidity rules, and supervision have been implemented. In Israel, the banking system has shown resilience with high capital and liquidity ratios despite the ongoing war and security challenges. However, Israel lacks formal deposit insurance, with the current arrangement described by the Bank of Israel as an implied government guarantee.
The nature of bank runs has also evolved. Previously, rumors led people to physically queue at branches. Today, digital transfers via apps can move billions in hours, as seen with Silicon Valley Bank in 2023 when customers sought to withdraw $42 billion in one day. The article warns that future crises could stem from digital withdrawals, cyberattacks, widespread fraud, technological disruptions, or geopolitical escalations. The International Monetary Fund has cautioned about cyber risks to financial services and trust.
Preparation for future crises requires institutions to identify essential services, map dependencies on systems and suppliers, and practice scenarios involving rapid deposit outflows, system outages, cyberattacks, or security emergencies. Building resilience, the article concludes, involves the ability to absorb shocks, maintain essential services, recover, and preserve public trust, a process that begins long before a crisis hits.