Assessing the Future of Interest Rates

The recent collapses of Silicon Valley Bank, Silvergate, Signature Bank, and the subsequent lifeline given to First Republic Bank have sent shockwaves through the banking industry. Central bankers and financial regulators on both sides of the Atlantic are braced for another rocky weekend, wondering whether the dramatic actions taken by the US administration are enough to prevent further contagion.

The Federal Reserve has set up a Bank Term Funding Program aimed at helping banks to re-jig their bond portfolios. What’s noteworthy is that the Fed is now offering banks the ability to access billions of cash, allowing them to offer their bond holdings and collateral based on the par value of the assets instead of the usual market price. This is critical because the par value will be higher than the current market value.

Experts are now asking whether this marks a pause in quantitative tightening, a policy that had only recently started. As a result, many believe that the Fed will tread softer and increase rates by perhaps 0.25% instead of the 0.5% that was expected.

Some are questioning who is to blame for the most recent banking collapse. Is it the banks that piled in so greedily to pack out their bond portfolios which they deemed low risk, or the regulators who encouraged them? Perhaps it is both.

Despite US Treasury Secretary Janet Yellen’s assurance that the wider banking system is safe and that no taxpayers’ money would be used for the bailouts, confidence hasn’t fully returned. Shares in First Republic fell heavily again yesterday, and shares in other regional lenders and most European banking stocks were also down, including Credit Suisse, which was also rescued.

Underwriting the banks has created a moral hazard, and the authorities have handed them a get-out-of-jail-free card. But they are not “socializing the losses, privatizing the gains,” which trader Nassim Taleb, who wrote The Black Swan, described after the 2008 crash.

Related Facts:

– The recent collapses of Silicon Valley Bank, Silvergate, and Signature Bank were the second and third biggest banking failures in US history.
– The Federal Reserve has also expanded its balance sheet by £240 billion this week alone.
– Economists are worried about the future implications of such an about-turn.

Key Takeaway:

The recent collapses of multiple banks have spooked the finance industry, and many wonders if interest rates have peaked. The Fed’s unprecedented move has increased cash availability to banks and allowed them to operate based on par value rather than market price. While the Fed is expected to tread softly and increase rates by 0.25% instead of 0.5%, economists are worried about the future implications of such a change.

Conclusion:

The authorities have created a moral hazard by underwriting the banks, and it remains to be seen whether the measures taken will be enough to lift confidence. While it is too early to say if interest rates have peaked, the recent collapses have demonstrated the need for continued vigilance in the finance industry.