/ world today news/ After the collapse of the Silicon Valley Bank, there was a panic in the US financial sector. During the week, market players borrowed a record $300 billion from the Federal Reserve. So much was not wanted even in 2008. Has a chain reaction started and what is the probability of a global crisis?
Emergency measures
The bankruptcy of the Bank, one of the top 30 in the United States, shook the entire industry and the stock market. Shares of many credit institutions fell sharply. Just in case, they also closed “Signature Bank” with a similar portfolio of assets. The financial authorities took a package of emergency measures. These are in particular payments to affected depositors through the Deposit Insurance Corporation.
In order to avoid greater losses and maintain liquidity in the banking system, a special term financing program is being developed. The funds will be taken from the Federal Reserve, which acts as the Central Bank, and the funds of the Treasury Department. Troubled market participants are granted special purpose loans for the return of deposits.
“It is important that this money is secured by bank assets, mainly government and mortgage bonds. In addition, the papers are accepted at face value, not at a fallen market price,” explains Vladimir Kovalev, analyst.
Toxic assets
Banks, terrified by the collapse of Silicon Valley Bank, have already borrowed a record $300 billion from the Federal Reserve.
For comparison: during the crisis of 2008, they were limited to 111 billion.
As analysts explain, the US financial sector is under severe pressure due to the sharp increase in interest rates by the Federal Reserve. The problem is also in the toxic assets in the balance sheets – this is not news for the market participants.
“Commercial banks, during the monetary frenzy of 2020-2021 and on the path of rising interest rates in 2022, have priced in the risks of both rising rates and the potential for bond falls, hiding losses.” This made it possible to evaluate investments in securities by amortization value,” explains Yevgeny Shatov, analyst.
Federal Reserve borrowing will continue. However, not all will be saved. First of all, they will support those whose collapse could cause a domino effect.
“Most likely, small and medium-sized regional organizations will go under the knife, and large ones will receive help from the Federal Reserve and benefit from industry consolidation,” the analyst concluded.
I like the method
In general, the US financial sector, led by the Federal Reserve, is quite stable. Another thing is that in order to stop the crisis, the regulator quickly increased the balance – by 300 billion in a week.
After allocating funds to the banks to increase liquidity, the authorities resorted to their favorite method – they released a “printing press”, notes Andrey Loboda, an economist.
This does not bode well for the economy: an increase in the money supply will inevitably lead to further unwinding of the inflationary spiral.
“In addition, it is already extremely difficult to stop the usual increase in interest rates for the Federal Reserve. In the end, the increase in the price of loans further devalues the assets of the banks – shares, bonds, raw materials,” Kovalev points out.
Panic factor
Economists emphasize that the situation is greatly aggravated by the panic.
“The difficulty in overcoming a liquidity crisis is that it reproduces itself, it expands by itself according to the principle “the eyes of fear are big”. As soon as there is danger to the deposits, customers seek to urgently withdraw them, multiplying the demand for cash. Here and now there is a shortage of funds even from the most reliable organizations,” Kovalev notes.
But some of the deposits flow from small banks to large ones. That is, a certain amount of liquidity remains in the system. Anyway, the crisis will be delayed by all means.
America’s problems spread to Europe. Shares of “Credit Suisse” fell by a quarter – it was announced that they will borrow 50 billion Swiss francs from the Central Bank.
As a result, Credit Suisse will become the first global bank to receive an emergency government bailout since the 2008 financial crisis.
“The next candidates are “Deutsche Bank”, “Societe Generale”, “Unicredit”. However, if the European regulator reacts quickly and quells the panic, the situation will stabilize”, believes Shatov.
Back to 2008?
Economists agree that, despite US and European concerns, a repeat of 2008 is unlikely.
“Now banks have higher capitalization, better risk management. It is significant that 11 American credit institutions agreed to invest 30 billion in the troubled First Republican Bank, promising to keep money there for at least 120 days,” says Sergey Chevrichkin , a financial analyst.
The European Central Bank stated: there is no threat of a financial crisis, Credit Suisse’s problems are local.
As for Russia, the country is isolated from the Western system due to sanctions, and their difficulties do not concern us much.
Translation: V. Sergeev
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