by David Barbusia
NEW YORK (Reuters) – Some investors and analysts are calling for more coordinated intervention from central banks to restore financial stability, as they fear the global banking sector will continue to be in turmoil amid rising interest rates.
After the collapse of two US lenders this month and last weekend’s troubled Swiss-government-orchestrated takeover of Credit Suisse, markets remain jittery. Deutsche Bank shares fell on Friday amid concerns that regulators and central banks have not yet dealt with the worst blow to the banking sector since the 2008 global financial crisis.
Global central banks, including the Federal Reserve, have recently taken measures to increase the provision of liquidity through standing US dollar swap line arrangements. At the same time, however, both the European Central Bank (ECB) and the Fed have continued to raise rates over the past two weeks, as they are dead set on fighting extremely high price pressures.
For Erik Nielsen, group chief economics advisor at Unicredit in London, central banks should not separate monetary policy from financial stability, as fears grow that a banking crisis could lead to a wider financial crisis.
“Major central banks, including the Fed and 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 note on Sunday. “Within the next few days, statements like this will be needed most to take us back from the brink of a deep crisis,” he said.
Currency markets in the US also expect a Fed pause. Fed funds futures traders were pricing in only a 20% chance on Friday that the Fed would hike rates an additional 25 basis points in May, and an 80% chance it would leave the rate unchanged at 4.75% to 5.0%. They also see the Fed cutting rates to 3.94% by December.
However, others believe that the regulator will be able to ensure financial stability while continuing its anti-inflationary campaign. “We see central banks sticking to a ‘separation principle’ – focusing on reining in inflation while using balance sheets and other tools to ensure financial stability,” BlackRock Investment Institute said in a note last week. Happened.”
For now, some investors see this year’s events as a repeat of the systemic crisis that hit the markets in 2008, but they are wary of what happens if they believe US or European regulators will protect depositors. If you don’t protect, another bank can run.
“The situation remains volatile, but we think the way out of this problem can be coordinated central bank actions to increase confidence in the system,” said Felipe Villarroel, partner and portfolio manager at Twentyfour Asset Management.
“Right now there is a trust issue with European banks and big US banks. It’s not capital,” he said in a blog on Friday. “Consumers are nervous as they see banks failing and they question whether these issues will spread to other banks and whether they should withdraw their deposits or sell their bank stock.”
US regulators said last week the banking system remained ‘robust and resilient’ to calm markets and bank depositors. Treasury Secretary Janet Yellen also said Thursday that she is prepared to repeat actions taken at Silicon Valley and Signature Bank if more deposit runs are expected to fail.
Still, Fed data showed on Friday that deposits at small US banks hit a record low following the March 10 collapse of the Silicon Valley bank.
Meanwhile, overall deposits in the banking sector have declined by about $600 billion since the Fed began raising interest rates last year, the largest banking sector deposit outflow on record, said Torsten Slok, chief economist at Apollo Global Management.
“The near-term risks to banks, coupled with uncertainty around deposit outflows, bank funding costs, asset price turbulence, and regulatory issues, argue for tighter lending conditions and slower bank credit growth in the coming quarters,” he said. give,” he said.
(Reporting by Davide Barbuscia and Elisa Martinuzzi; Editing by Andrea Ricci)
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