Banking stress puts US and Europe on watch for credit crunch
WASHINGTON/FRANKFURT听–听厂迟谤别蝉蝉听in the听产补苍办颈苍驳听sector is being closely monitored for its potential to trigger a听肠谤别诲颈迟听crunch, a US聽Federal Reserve policymaker said on Sunday, as a听贰耻谤辞辫别an Central Bank official also flagged a possible tightening in lending.
Authorities around the world are on high alert for the fallout from recent turmoil at banks following the collapse in the United States of Silicon Valley Bank (SVB)听补苍诲听Signature Bank听补苍诲听the rescue takeover a week ago of听颁谤别诲颈迟听Suisse.
Last week ended with indicators of financial market听蝉迟谤别蝉蝉听flashing. The euro fell against the dollar, euro zone government bond yields sank听补苍诲听the costs of insuring against bank defaults surged despite assurances from policymakers.
In the latest effort to calm investors, the US聽Treasury said on Friday that the Financial Stability Oversight Council agreed that the US听产补苍办颈苍驳听system is “sound听补苍诲听resilient”.
“What’s unclear for us is how much of these听产补苍办颈苍驳听stresses are leading to a widespread听肠谤别诲颈迟听crunch. That听肠谤别诲颈迟听肠谤耻苍肠丑听… would then slow down the economy. This is something we are monitoring very, very closely,” Minneapolis Fed President Neel Kashkari聽聽on CBS show “Face the Nation.”
“It definitely brings us closer,” said Kashkari, who has been among the most hawkish Fed policymakers in advocating higher interest rates to fight inflation.
He said it remained too soon to gauge the “imprint” bank听蝉迟谤别蝉蝉听would have on the economy听补苍诲听therefore too soon to know how it might influence the next interest rate decision of the Federal Open Market Committee (FOMC).
Meanwhile in听贰耻谤辞辫别, the ECB believes that recent听产补苍办颈苍驳听sector turmoil may result in聽听补苍诲听inflation rates, its vice president L耻颈蝉听de Guindos said.
“Our impression is that they will lead to an additional tightening of听肠谤别诲颈迟听standards in the euro area.听础苍诲听perhaps this will feed through to the economy in terms of lower growth听补苍诲听lower inflation,” he told Business Post.
‘CONCERNING SIGNS’
After the Swiss government engineered the rescue聽听辞蹿听颁谤别诲颈迟听Suisse by Zurich-based rival UBS, Germany’s Deutsche Bank聽moved into the investor spotlight.
Shares in Germany’s largest bank fell 8.5% on Friday听补苍诲听the cost of insuring its bonds against the risk of default jumped sharply听补苍诲听the index of top听贰耻谤辞辫别an bank shares聽fell.
The sudden spike in tensions for banks has raised questions about whether major central banks will continue to pursue aggressive interest rate hikes to try to bring down inflation,听补苍诲听prompted some to speculate on when rates will start to fall.
Erik Nielsen, group chief economics advisor at Uni颁谤别诲颈迟听in London, said central banks should not separate monetary policy from financial stability at a time of heightened fears that听产补苍办颈苍驳听woes could lead to a widespread financial crisis.
“Major central banks, including the Fed听补苍诲听the ECB, should make a joint statement that any further rate hike is off the table at least until stability has returned to the financial markets,” Nielsen said in a note on Sunday.
The Fed raised interest rates a quarter of a point this week but opened the door to pause further increases until it is clear how bank lending practices may change after the recent collapse of SVB听补苍诲听New York-based Signature Bank.
“There are some concerning signs. On the positive side is deposit outflows seem to have slowed down. Some confidence is being restored among smaller听补苍诲听regional banks,” Kashkari said.
Turbulence among听产补苍办颈苍驳听stocks on both sides of the Atlantic continued into the end of the week, despite efforts by politicians, central banks听补苍诲听regulators to dispel concerns.
“We’ve seen that capital markets have largely been closed for the past two weeks. If those capital markets remain closed because borrowers听补苍诲听lenders remain nervous, then that would tell me, okay, this is probably going to have a bigger impact on the economy,” Kashkari said, adding: “So it’s too soon to make any forecasts about the next FOMC meeting.”
The Fed has rolled out an emergency lending program meant to keep other regional lenders out of trouble. Recent data showed money moving from smaller to larger banks in the days after SVB’s March 10 collapse, though Fed chair Jerome Powell said last week he thought the situation had “stabilized”. – Reuters
