The crisis that has unleashed the bankruptcy of Silicon Valley Bank (SVB) and Signature Bank, the latter bank intervened last Sunday, has generated reactions from the highest financial and political authorities of the largest economy on the planet, in an attempt to reduce costs in markets and finances.
Last Sunday, in an unusual and almost unprecedented action, both the Federal Reserve Bank (Fed), the central bank, as well as the Treasury Department and the Federal Deposit Insurance Corporation (FDIC), designed a mechanism to provide the country’s banking system with the necessary liquidity if required, with, among other actions, lines of credit for up to 25 billion dollars.
These actions could not avoid a highly volatile opening session of the week in the financial markets, but what threatened to turn into financial chaos and a collapse of historical magnitudes.
The president of the United States himself, Joe Biden, did his part and also in an almost unusual act, He went out to declare and ask for confidence in the financial system of his country which, he assured, is solid and solvent.
But the crisis will take longer because it originates from the upward movement, since last year, of interest rates by the Fed in particular, and by central banks in general.
This crisis comes just a few days before the Fed holds its monetary policy meeting in which it would almost certainly determine a rate hike.
However, the US banking crisis, or mini-crisis as some have defined it, has put the Fed in a dilemma.
Raise or not the interest rate
The markets and various analysts have put on the table the possibility that the Fed will not raise the interest rate at the next meeting on Tuesday, March 21 and Wednesday, March 22, with the aim of reducing the pressure on the country’s banking system.
To understand the logic of the expectation that is beginning to be handled in the market, it would be necessary to summarize the effect that the increase in interest rates had on the finances of the SVB, and that it could happen with other institutions.
The SVB had a veritable avalanche of deposits between 2020 and mid-2022product of the impulse of the technological market as a result of the pandemic.
This technological sector was the bank’s niche; but the institution did not have enough clients to lend these surpluses and, for this reason, it invested the resources in what it considered to be the safest, United States Treasury bonds.
However, rates started to go up and when that happens, bond prices go down. The SVB had no problems at first because while customer deposits started to drop, withdrawals did not grow significantly.
But the technology sector began to go through bad times before the reopening of the economies and withdrawals grew, the bank should have started selling bonds assuming losses.
The withdrawal trend continued; According to Bloomberg figures, only on March 9, withdrawal requests were registered at the SVB for 42 billion dollars.
By then the bank had already announced that it was seeking to capitalize its balance sheet with up to 2 billion dollars, which sparked panic and, given the massive withdrawal of deposits, bankruptcy was inevitable.
Something similar can happen with other banking institutions in the United States, or in other parts of the world.
So, to maintain, at least for the moment, stability in the banking system, which occurs at a difficult time for the economythe Fed should pause raising ratessome say.
Roubini warned him
This problem had already been warned a few months ago by Nouriel Roubini, an economics professor at New York University, when he pointed out that central banks, starting with the Fed, they could not keep raising interest rates much higher because there is too much debt in the global financial systemboth public, that is, governmental, and private.
What will the Fed do?
Goldman Sachs, by the way, a banking giant, said Monday that the Fed will be inclined to pause its bullish campaign and will leave your interest rate unchanged at the next meeting.
However, he emphasized that it would only be a pause and that there would be two increases of at least 25 basis points in the months of May, June and July, considering that the mini-banking crisis has ended by then.
The figures are not for less, the SVB had 209 billion dollars in assets and 150 billion in deposits, if this multiplies, a major crisis will be inevitable.
Other banks and analysts consider that a banking crisis is reason enough to stop, even for a moment, the increase in interest rates.
But the signals that the Fed has sent in the voice of its president, Jerome Powell, is that it will not tolerate high inflation and that it expects higher interest rates compared to what was forecast in December.
Speaking of inflation, this Tuesday the producer inflation rate will be known. If it exceeds expectations, the Fed will have an even more complicated scenario.
Some other expectations indicate that the Fed will have to carry out its mandate and that the financial authorities will be the ones that will take the reins of the crisis and they will make available to the banking system all the necessary resources to prevent mistrust from turning into panic.
The risk for the Fed is that a deep recession is the next scenario.
The Fed even seemed to be in favor of a recessionary context, but not derived from a banking crisis.
In summary, the inflation figure in the United States during February will largely determine the Fed’s actions, although there seem to be two scenarios: a pause by the Fed itself, or a massive intervention in the markets to stabilize the system.
One thing is certain: the world does not come out of one crisis before entering another.
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