Central banks may slow rate hikes due to US banking crisis

The collapse of California’s Silicon Valley Bank (SVB) – the second largest in US banking history – and the closure of another bank by regulators forced market participants to reconsider their forecasts of monetary policy tightening. Although inflation in Western countries has not yet been overcome, interest rates have risen to such a level that the first cracks have gone through the banking system.

Bank shares on global markets collapsed in fear of a deepening crisis, although according to analysts, the problems of SVB, closed on Sunday, and Signature Bank, specializing in financing technological start-ups, should not spread to other banks. Even more so as the Federal Reserve, the Treasury Department and the US Federal Deposit Insurance System announced over the weekend that savers will be able to access all of their funds on Monday, even if they are not insured, as an exception. The Fed has also stepped up its anti-crisis lending program to provide liquidity to financial institutions that may be under pressure from recent events: they can borrow money from the central bank instead of urgently selling assets.

“SVB is marginal in many respects, but it’s too early to leave the sector,” ING analysts wrote in the report. “Risks from aggressive rate hikes remain.”

Expectations for a 0.5 percentage point Fed rate hike at the March 22 meeting dissipated. Now, according to Refinitiv, participants in the interest rate futures market have a probability of an increase of 0.25 percentage points. percent estimate at 85%, and keeping the rate at the current level of 4.5-4.75% at 15%. Among the latter are Goldman Sachs analysts who previously expected an increase of 0.25 pp to 0.25 pp at each of the meetings in May, June and July.

ING analysts explain the change in sentiment:

One of the reasons the Fed has been able to raise interest rates quickly and significantly over the past year is because of this [банковская] the system could handle it. Although the stock and bond markets fell as long as the system remained strong, the Fed could continue tightening.

Now that the first victims have appeared, the possibilities of the central bank have narrowed: participants in the financial system will be afraid that it may overdo it, and this, according to ING, poses a threat to the banking system. Speaking to Congress last week, Fed Chairman Jerome Powell tried to prepare the public for a possible 0.5 percentage point rate hike in March by demonstrating his determination to fight inflation that, while slowing, is refusing to return to targets; now the probability of such a step is zero, ING analysts write. “The simplest solution is to raise 0.25 percentage points and let the market settle on its own in the coming weeks and months,” the report reads.

Meanwhile, the market is very nervous. The sectoral index of banks included in the European stock index Stoxx 600 fell by almost 6% on Monday. Some, such as the German Commerzbank or the Austrian Bawag Group, lost more than 10% of their shares. The decline in the banking index since the middle of last week amounted to 11%, none of the 22 banks escaped a sell-off.

The UK authorities arranged for the sale of SVB’s UK assets to HSBC for £1. HSBC has said it is interested in SVB’s start-up clients.

The European banking sector experienced a serious crisis ten years ago. But unlike the SVB, most Old World banks hold government bonds in their portfolios until maturity, so they have no interest rate risk and are not in danger of repeating the fate of a US bank, Deutsche Bank said in a report.

Silicon Valley Bank was the 16th largest bank in the US by assets ($212 billion) and the largest by deposits in Silicon Valley ($175 billion, over 85% of the funds were not covered by deposit insurance, as of December 2022). SVB specializes in financing start-ups and venture capital funds. To ensure lending, the bank not only attracted deposits, but also built up a large portfolio of government bonds, mostly long-term fixed income, which is unheard of for banks. As a result of the increase in interest rates, the value of bonds fell. SVB was forced to urgently sell bonds from its portfolio, suffering a loss of $1.8 billion. Last week it announced an attempt to raise $2.25 billion in equity funding. On Thursday, depositors took $42 billion from the bank, and on Friday, March 10, it went out of business.

Shares of US regional banks also fell on Monday (First Republic and Western Alliance Bank lost 75-80%), but some big stocks also fell – such as Bank of America by almost 8%.

However, SVB’s story is not the first sign of a crisis given the unique nature of its business, Jefferies Financial Group said in a report: “But this is not a storm in a teacup either, as it sheds light on possible unrealized losses for banks. bond portfolios.

The SVB situation was a perfect reminder that the Fed’s rate hike continues to have an effect even if the economy has not yet shown a significant slowdown, Mark Häfele, director of investment at UBS Global Wealth Management, wrote in the report: “bank earnings and balance sheets further reinforce the negative stock market sentiment.

Traders also lowered their assessment of prospects for monetary policy tightening in the euro zone. While last week they expected the European Central Bank rate to eventually rise to 4.2% from the current 2.5%, now the forecast is slightly higher than 3.5%. At its meeting in early February, the ECB raised the interest rate by 0.5 percentage points. and announced that at the next one (this Thursday) he would repeat this step and then assess the situation. Given that the collapse of the SVB occurred on the eve of the current meeting, the resulting uncertainty makes it less likely that the ECB will give a clear signal on how to proceed, said Jamie Rush, chief economist for Europe at Bloomberg Economics.


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