22 Mar 2023 3 min read

Knickerbocker story

By Christopher Jeffery

Are there parallels between the November 1907 Knickerbocker banking crisis and the events of the past week, or is the situation more worrying this time?


At the beginning of the 20th century, the collapse of the Knickerbocker Trust triggered concerns about bank runs across New York. John Pierpont (JP) Morgan locked his contemporaries in a library overnight until they collectively agreed to inject millions of dollars into the city’s ailing trust funds and brokerage companies. Money was put in by all sides. Confidence restored. Problem solved.

116 years’ worth of inflation and financialisation later, the millions have become billions. The company that bears his name led an effort to inject $30 billion of deposits into an ailing bank to try to stem a system-wide panic. The market’s verdict to that backstop operation can so far be described as relatively muted, with US regional bank equities and US two-year yields ending last week close to their lows, before seeing something of a bounce this week.

Why has the backstop not provided a more decisive turnaround in risk appetite so far? We can think of a couple of reasons:

  1. The banking problems on the US West Coast are competing with the banking problems on the shores of Lake Zurich for headlines. Nobody knows the long-term consequences of a globally systemically important bank (G-SIB) being pushed into resolution, but it’s clearly an event we need to take seriously. There’s also the uncertain consequences of the takeover by UBS and the writing down of additional-tier-one (AT1) debt
  2. The draw on the Federal Reserve’s discount window hit $153 billion in the week ending 15 March, a record high. Discount window borrowing is for a term of up to 90 days against a range of eligible collateral, but it is not particularly cheap funding at 17 basis points above the effective Federal Funds rate. The implication is that someone, somewhere in the US banking system is willing to pay up for liquidity
  3. There’s feedback between weakness in the banking sector and weakness in the broader economy. If there is an interruption to the flow of credit because banks’ lending officers are nervous, it makes distress in the real economy more likely. If so, it means the flow of credit is more likely to be interrupted

When the Knickerbocker banking crisis struck, the US economy had already been in recession for nearly half a year, and the equity market was down 50% from its peak. Beaten-up economies and equity markets tend to bounce back. But neither of those conditions seems particularly true today. We worry that today’s banking crisis is the symptom, not the cause, of a cycle nearing the end of its life.

To learn more, see recent contributions from Chris Teschmacher and Franklin on the US banking troubles, and Dan Lustig on the brewing European problem.

Christopher Jeffery

Head of Inflation and Rates Strategy

Chris works as a strategist within LGIM’s asset allocation team, focussing on discretionary fixed income and systematic risk premia strategies. He coordinates global rates and inflation strategy across LGIM’s asset allocation and fixed income capabilities. He joined LGIM in 2014 from BNP Paribas Investment Partners where he worked as a senior economist and strategist within the Multi-Asset Solutions group. Prior to that, he worked as an economist within monetary analysis at the Bank of England with a focus on the UK domestic economy. Chris graduated from University College, Oxford in 2001 with a first class degree in philosophy, politics and economics. He also holds an Msc in economics (research) from the London School of Economics and is a CFA charterholder.

Christopher Jeffery