Wed, Mar 15, 2023 page10

• SVB collapse causes headaches for Fed

  TOUGH ECONOMIC LESSONS: While bank customers would be made whole, investors ‘knowingly took a risk’ and lost their money, which is ‘how capitalism works,’ Biden said

  • AFP, WASHINGTON
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  The dramatic implosion of Silicon Valley Bank (SVB) last week could bring the US Federal Reserve’s cycle of interest rate hikes to an end far sooner than many analysts expected.

  Traders and analysts who had previously predicted that the Fed would increase the pace of hikes to tackle inflation have dialed back their expectations, with some saying the US central bank would hold its benchmark rate next week due to the troubles in the banking sector.

  Last week’s collapse of SVB and New York-based Signature Bank marked the biggest banking failures since the 2008 global financial crisis.

  

  Security guards and Federal Deposit Insurance Corp representatives open a Silicon Valley Bank branch for customers at the company’s headquarters in Santa Clara, California, on Monday.

  Photo: AFP

  It has left the Federal Open Market Committee (FOMC) in an unenviable position as it looks to tackle above-target inflation and hot economic data without adding to the ongoing rout of some banking stocks.

  Analysts at Goldman Sachs Group Inc and Wells Fargo & Co predict the Fed will end its hiking cycle on Wednesday next week, while economists at JPMorgan Chase & Co and Oxford Economics Ltd said the FOMC would vote for a smaller quarter-percentage-point hike.

  The US’ top finance officials unveiled a series of measures over the weekend aimed at restoring confidence in the banking sector and settling turbulent markets.

  The US Department of the Treasury, Fed and Federal Deposit Insurance Corp set out plans to ensure SVB’s customers would be able to access all their deposits in the bank.

  Signature Bank would also be “made whole,” they said in a joint statement on Sunday.

  The Fed also introduced a new lending tool for banks to try and prevent a repeat of SVB’s swift collapse, when a bad financial report led concerned customers to rapidly withdraw their funds, causing a liquidity crisis.

  The Fed on Monday said it was launching a review of the supervision and regulation of SVB.

  The review is to be led by Fed Vice Chair for Supervision Michael Barr, and would be released by May 1, the Fed said in a notice.

  While the US has moved to protect customers’ deposits, it would not bail out the bank’s investors, US President Joe Biden told reporters on Monday.

  “Americans can have confidence that the banking system is safe,” Biden said in a brief White House address. “Your deposits will be there when you need them.”

  “They knowingly took a risk and when the risks didn’t pay off, investors lose their money. That’s how capitalism works,” he added.

  Sunday’s announcement was well received by the financial markets, with the NASDAQ closing up 0.45 percent on Monday.

  However, investors continued to shun banking stocks on Monday, and analysts remain concerned about the broader fallout from SVB’s collapse.

  “The rapid tightening in financial conditions alongside the uncertainty of the situation makes us lean toward the FOMC taking a pause from its hiking campaign at its upcoming meeting on March 22,” Wells Fargo economists wrote in a note to investors.

  Those leaning toward a 25-basis-point hike next week, such as JPMorgan chief US economist Michael Feroli, said the Fed should be able to tackle the uncertainty in the financial markets and above-target inflation.

  “If they indeed have used the right tool to address financial contagion risks (time will tell), then they can also use the right tool to continue to address inflation risks — higher interest rates,” Feroli wrote to clients on Sunday.

  The Fed’s sharp interest rate hikes, which sought to tame inflation, helped provoke SVB’s collapse as the prices for securities on its books fell below their purchase price — and that could be a problem for other banks.

  “The Fed is now in question over even a 25-point hike at the next meeting,” Strategic Alpha Ltd CEO Maurice Pomery said.

  “The issue for me is that many businesses were constructed on zero interest rates, leverage and debt model — which with rising rates is no longer viable,” he said.
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