NEW YORK, March 26 (Reuters) – Some investors and analysts are calling for more coordinated interventions by central banks to restore financial stability, amid fears that turmoil in the global banking sector will continue amid rising interest rates.
Markets remained jittery following the collapse of two US lenders this month and last weekend’s Swiss government-orchestrated takeover of troubled Credit Suisse (CSGN.S). On Friday, Deutsche Bank (DBKGn.DE) shares fell amid concerns that regulators and central banks are yet to contain the worst shock to the banking sector since the 2008 global financial crisis.
Global central banks, including the Federal Reserve, have recently taken steps to improve the provision of liquidity through the arrangements on existing US dollar swap lines. At the same time, however, both the European Central Bank (ECB) and the Fed have continued to hike interest rates over the past two weeks, as they are determined to combat stubbornly high price pressures.
For Erik Nielsen, Group Chief Economics Advisor at UniCredit in London, at a time of heightened fears that banking problems could lead to a widespread financial crisis, central banks should not separate monetary policy from financial stability.
“The major central banks, including the Fed and the ECB, should make a joint statement that any further rate hikes are off the table, at least until stability returns to financial markets,” he said in a statement on Sunday. “Declarations like this within the next few days would most likely be needed to pull us off the brink of a much deeper crisis,” he said.
The money markets in the US are also expecting a pause from the Fed. Fed fund futures traders on Friday priced in just a 20% chance the Fed will hike rates another 25 basis points in May and an 80% chance it will leave rates unchanged at 4.75% through 5.0% is left. They also expect the Fed to cut rates to 3.94% by December.
Others, however, believe regulators will be able to ensure financial stability while continuing their campaign to fight inflation. “We observe that central banks are sticking to a ‘separation principle’ – using balance sheets and other tools to ensure financial stability while monetary policy remains focused on containing inflation,” the BlackRock Investment Institute said in a week-to-date report Communication.
For now, few investors see this year’s events as a repeat of the systemic crisis that swept through markets in 2008, but they fear another bank run could erupt if people believe US or European regulators aren’t protecting depositors will protect.
“The situation remains volatile, but we are inclined to believe that the way out of this problem could be coordinated central bank action to increase confidence in the system,” said Felipe Villarroel, partner and portfolio manager at TwentyFour Asset Management.
“The problem with European banks and big US banks right now is trust. It’s not capital,” he said in a blog on Friday. “Consumers are nervous because they are seeing banks fail and they are wondering if these problems will spread to other banks and if they should withdraw their deposits or sell their bank stocks.”
US regulators said last week the banking system has remained “solid and resilient” to calm markets and bank deposits. Treasury Secretary Janet Yellen also said Thursday she was ready to repeat measures taken in Silicon Valley and Signature Bank failures to protect uninsured bank deposits if failures threaten further deposit runs.
Still, Friday’s Fed data showed that deposits at small US banks fell by a record amount following the March 10 collapse of Silicon Valley Bank.
Meanwhile, total deposits in the banking sector have fallen by almost $600 billion since the Fed began raising interest rates last year, the largest outflow of deposits in the banking sector on record, noted Torsten Slok, chief economist at Apollo Global Management.
“The near-term risks for banks combined with uncertainty about deposit outflows, bank funding costs, asset price turmoil and regulatory issues all point to tighter lending standards and slower bank lending growth in the coming quarters,” he said.
Reporting by Davide Barbuscia and Elisa Martinuzzi; Editing by Andrea Ricci
Our standards: The Thomson Reuters Trust Principles.
Comments are closed.