Despite problems with the banks, the US Federal Reserve (FRS) on March 22 raised the policy rate by 0.25 percentage point to 4.75-5%. It was last seen in 2007, on the eve of the global financial crisis. RTVI learned from economists whether there will be a new 2008 and how the situation will affect Russia.
Recently, the financial system has experienced two shock waves. First, three banks that were systemic for venture capital firms and cryptocurrencies collapsed in a week – Silvergate cryptobank, then Silicon Valley Bank, a “startup bank”, followed by another crypto-oriented Signature Bank . Then the crisis of the American regional banks reached Europe. On March 15, the risks of the collapse of Credit Suisse, Switzerland’s second largest bank with a 150-year history, intensified. It will be swallowed up by the main competitor of UBS. Then the American First Republic Bank had to be rescued, which faced a large outflow of funds due to the collapse of SVB and Signature.
Rising rates mean that the Fed sees more serious consequences for the economy in rising prices than in a moderate banking crisis. US central bank underline that the financial system is “reliable and stable”. Serious problems only appeared in a small number of banks, declared Fed chief Jerome Powell stressing that the rate hike cycle is not over, despite the risk of a worsening banking crisis.
It’s a matter of high inflation. The regulator preferred the stability of the banking system (maintenance of the rate) to the fight against the rise in prices (rise in the rate). Inflation remains too high – 6% in February with a target of 2%. This prevents the Fed from moving towards improving financial conditions by lowering rates. The next tariff meeting will take place in May.
The situation is aggravated by the fact that investors have recently been actively investing in the banking sector in the hope of making money. They did not like the Fed’s decision and all sectors ended March 22 in the red. The worst dynamics among the S&P 500 sectors was recorded in financials (-2.3%), the best – in consumption (-0.9%).
A crisis of confidence and an outflow of deposits from banks could cause a “domino effect” even with the stability of most banks. Therefore, earlier the Fed eased access to liquidity for US banks and regulators tried to secure deposits. As a result, deposit outflows from US banks have slowed.
How will the crisis evolve?
There will surely be new medium and small insolvent banks, agree economists polled by RTVI. Deposits began to flow from “non-systemic” banks to systemic banks. “This will certainly lead to liquidity problems in a number of small and medium-sized banks, despite the measures taken by regulators to provide additional liquidity to the system,” explained Alexei Bulgakov, head of the debt market analysis department. at Renaissance Capital, at RTVI.
“But US financial authorities will do their best to keep their ‘departure’ as controlled as possible to avoid systemic problems,” said Dmitry Polevoy, chief investment officer at Loko-Invest.
“Perhaps a number of banks will have to be closed, while giving broader guarantees for deposit insurance,” admits Albert Koroev, head of the stock market experts department at BCS Mir Investments.
How is the situation different from 2008?
Then, the root of the problems was in the insolvency of borrowers in the housing market, in a banking sector that was less regulated than the situation required. Unlike in 2008, there are no issues with systemically important financial institutions.
In 2008 there were about 7,000 banks in the United States, now there are 4,200. After the 2008-2012 financial crisis, about 100-120 banks were cleaned up (sold to larger banks and less often liquidated) per year, noted Alexey Bulgakov. . In addition, since 2008, banks have issued a large volume of hybrid debt instruments. “Their cancellation will contribute to reducing the involvement of public money in the rehabilitation of the banking system”, notes the economist. In addition, banking services, unlike in 2008, are more digitized. But at the same time, a new source of risk has emerged: cryptocurrencies.
“Now there are no more reasons for a systemic crisis”, is sure Dmitry Polevoy.
The big banks are now significantly more stable than in 2007-2008 and more overregulated, underlines the economist: “The current problems are the slippages in the management of failed banks, even if one of the reasons was the rise key rates. In particular, SVB invested in long-term bonds, mistakenly believing that Fed rates would be stable. But due to the subsequent rate hike, SVB’s bond portfolio fell sharply. As it turned out later, the bank did not hedge the risk of rising rates at all. Paper losses became real after the onslaught of depositors who decided to empty their accounts as a precaution.
How will this affect the United States?
The Fed has acknowledged that the problems of regional banks will not go unnoticed. Reacting to rising rates and reduced availability of capital, banks will lend less to the real sector of the economy. Loans to businesses and citizens will become less affordable, which will affect economic activity, inflation and the labor market.
The Fed lowered its forecast for US GDP growth from 0.5% to 0.4% in 2023 and from 1.6% to 1.2% in 2024. Consumer prices, according to the agency, in 2023 could increase by 3.3%, whereas previously the benchmark was 3.1%.
“Nobody, including the Fed, is now ready to give an accurate forecast of the effects of what happened to the banks, so the regulator will act according to the situation,” said Dmitry Polevoy. “Essentially, the FRS is repeating its own actions in 2007 and is likely to continue to act reactively, depending on the development of events in the system,” said Alexei Bulgakov.
How will this affect Russia?
The Russian economy, including the banking system, is now isolated from the outside world. Everything that happens outside affects Russia through the demand and prices of natural resources, which constitute the basis of Russian exports, point out economists interviewed by RTVI.
“If the world economy slows down further or if a more serious financial crisis occurs, the fall in prices and demand will affect exports, investments, GDP, inflation and the ruble,” notes Dmitry Polevoy.
“All these events will not lead to a change in foreign investment in Russia – they no longer exist,” said Alexei Bulgakov. “It will also not result in any change to the risk limits – they are already at a very high level.”
What will happen next?
If the actions taken by the Fed are sufficient, only the rate of credit growth and, consequently, the growth of the American economy will slow down. Sanitation (financial recovery) of small banks will take place, Aleksey Bulgakov described a likely scenario.
If the measures are not enough, one or more systemically important institutions will suffer, leading to the need to rescue them, possibly using significant public funds. “This will lead to a sharp correction in the prices of all financial assets,” added the economist.
“In the base scenario, we do not expect a global financial crisis,” said Dmitry Polevoy. “Although major developed economies will continue to slow and may even briefly enter a mild recession. But China will rebound, supporting the entire Asian region. This will prevent commodity prices from falling seriously and, on the contrary, may even increase them a little.
“Under these conditions, a sharp decline in Russian exports will not occur, the ruble will remain in the range of 70-80 against the dollar, inflation will end the year at around 6%, and GDP will decline by 1-2% , while the Central Bank will be able to maintain the rate at the current level of 7.5%, ”predicts Dmitry Polevoy.
