Fears that another rate hike will hasten more bank failures will loom over the Federal Reserve’s meeting this week, after a new study found nearly 200 banks are at risk of the same kind of collapse as Silicon Valley Bank.
There are fears that another Federal Reserve rate hike to curb inflation would hurt the value of bank assets such as Treasuries and mortgage-backed securities. That would leave them vulnerable to a rush of depositors – just as SVB went bust.
“The recent decline in bank assets has very significantly increased the vulnerability of the US banking system to uninsured depositors,” wrote economists at the Social Science Research Network. “Our calculations suggest that without further government intervention or recapitalizations, these banks are certainly at potential run risk.”
The network’s study estimates that 186 banks in the US are at risk if only half of their depositors withdraw their funds.
Fed Chair Jerome H. Powell will announce on Wednesday whether the central bank will raise interest rates again after eight interest rate hikes last year to combat chronically high inflation. Mr Powell signaled earlier this month that the Fed could hike rates by more than the expected quarter-point jump because inflation hasn’t eased off fast enough and the job market remains strong.
But that was before the March 10 collapse of Silicon Valley Bank and Signature Bank, the second and third largest bank failures in US history. And last week, California’s First Republic Bank received a $30 billion emergency infusion from 11 of the country’s largest banks in a Biden administration-brokered bailout.
SEE ALSO: Elizabeth Warren: Fed Chair Powell wants to “put millions of people out of work” to fight inflation
The banks’ problems were attributed in part to the Fed’s rapid series of rate hikes, which reduced the value of their long-term debt. Banks were unable to meet withdrawal demands from depositors looking for higher returns elsewhere.
Bank stocks have taken a significant hit. On Wall Street, shares of First Republic Bank fell 32% on Friday. In Switzerland, shares in troubled lender Credit Suisse fell 8%.
SVB Financial Group said Friday it had filed for Chapter 11 bankruptcy protection to seek buyers for its assets, a week after its former Silicon Valley Bank division was acquired by regulators.
The company said it has about $2.2 billion in liquidity after ending last year with $209 billion in assets. On March 9, depositors attempted to withdraw $42 billion in one day amid fears the bank was on shaky financial footing.
Treasury Secretary Janet Yellen, who helped broker that deal and shut down the SVB, told lawmakers Thursday that the entire US banking system “remains healthy” and that Americans don’t have to worry about their money in the banks. But even as she testified, major banks banded together to prop up First Republican Bank with the $30 billion bailout.
The Republican chairman and top Democrat on the House Financial Services Committee announced Friday that the panel will hold the first of “several” hearings on the collapse of Silicon Valley Bank and Signature Bank, failures that have rocked the banking industry and financial markets. Chairman Patrick McHenry, Republican of North Carolina, and Rep. Maxine Waters, Democrat of California, said they would question federal regulators Martin Greunberg, chairman of the Federal Deposit Insurance Corp., and Michael Barr, vice chairman of the Federal Reserve. The hearing will take place on March 29th. They said the committee “is striving to get to the bottom of the failures of Silicon Valley Bank and Signature Bank.”
SEE ALSO: House panel takes bipartisan move to hold series of bank failure hearings
Despite widespread fears for the banking industry, a leading research firm said on Friday western central banks should keep raising interest rates to curb high inflation. The Organization for Economic Co-operation and Development said central banks should remain focused on bringing down inflation.
The group, which provides policy advice to governments including the US, said the Fed should raise interest rates to a range of 5.25% to 5.5% from the current 4.5% to 4.75%.
The European Central Bank raised its key interest rate from 2.5% to 3% on Thursday, contradicting expectations. The Bank of England will also hold a meeting this week to announce its latest rate decision.
A key inflation indicator in the US moved in the right direction last week. The Producer Price Index, which measures what American producers are getting paid for their goods and services, fell to an annual pace of 4.6% in February, the Labor Department reported. That was a notable improvement from January’s downwardly revised annual rate of 5.7%.
Republicans blame the government for much of the banking troubles.
“The reckless tax and spending agenda being forced by Congress” contributed to record inflation, which the Fed is fighting through rising interest rates, said Senator Mike Crapo, an Idaho Republican.
Senator Tim Scott, a Republican from South Carolina, told Ms. Yellen that the government’s “handling of the economy helped.”
“I plan to hold regulators accountable,” he said.
Virginia Democrat Sen. Mark Warner also wondered, “Where were the regulators in all of this?”
President Biden asked Congress to allow regulators to impose tougher penalties on executives of failed banks, including recovering compensation and facilitating their ban from working in the industry.
Mr Biden said the Federal Deposit Insurance Corporation should be able to force executives from a wider range of banks to pay back compensation if their banks fail.
“Strengthening accountability is an important deterrent to prevent future mismanagement,” Biden said in a statement. “Congress must act to impose tougher penalties on senior bank executives whose mismanagement has contributed to the failure of their institutions.”
Source : www.washingtontimes.com