Why the US central bank is in trouble 1 million Swiss suffer from high rents – the Sunday news

The lockdown has led people to rescue and disrupt supply chains. As a result, inflation exploded after the lockdown was lifted. The central bankers initially reassured them that there was no cause for concern and no reason to raise interest rates, that this inflation was temporary and that everything would be all right soon.

However, inflation should prove persistent. With unemployment at an all-time low and more job creation than expected, wage pressures are high. That is why the US central bank, the Fed, has long since changed course and within a year raised the policy rate in several steps to 4.75 percent.

Rate hikes have so far been in vain

But even these drastic measures are still not paying off. In the US it is currently – as has just been announced – still around six percent. For this reason, until recently it was widely expected that the Fed would raise interest rates again by at least half a percentage point at its next meeting on March 21 and 22.

Now, however, market forecasters still expect a rate hike of 0.25 percentage point, if any. The situation has changed dramatically in recent days. A crash of US regional banks is imminent, and it was triggered by the bold actions of Fed President Jay Powell. But one after the other:

Banks actually like higher interest rates, which have a positive effect on their earnings. It is therefore surprising at first sight that several American banks have run into problems as a result. Three of them, Silicon Valley Bank (SVB), Signature Bank and Silvergate Capital Corp., have already had to close their doors.

In doing so, these three banks played what was supposedly the safest card: they bought long-term US government bonds on a large scale, so-called Treasury Bonds (T-Bonds). However, they failed to account for the fact that these bonds could become time bombs if interest rates rise. When interest rates rise, the value rises, because the interest on the new T-Bonds is more attractive than the old ones and the price of the old ones falls as a result.

As long as a bank does not have to sell these T-Bonds, it has a negative impact on profits, but it is not life-threatening. That changes quickly and radically when the bank urgently needs money and has to sell the T-Bonds with large losses. Exactly this case has occurred at the mentioned financial institutions, and with violence. The SVB lost more than two billion dollars in a short time. This, in turn, alarmed its customers. They raised their money in a big way, at the SVB it was more than 40 billion dollars within a day.

The bank couldn’t handle it. To prevent worse, the authorities had to close the bank, and to reassure customers, the Fed and Treasury stated that the money of the customers of the closed banks was safe. Only investors should expect a loss. With this measure, the authorities want to prevent a repeat of the savings and credit crisis. This crisis caused a number of regional banks to fail in the 1980s, resulting in losses of approximately $150 billion.

If it stays with the three banks mentioned, then the crisis is over. But it is feared that many more financial institutions are in a similar situation. Despite several suspensions of trading with them, the shares of some of these banks fell by more than 60 percentage points. Overall, the KBW banking index lost nearly 12 percentage points.

At the same time, investors’ nerves are tense. The VIX volatility index — also known as the fear index — is currently at its highest level since 2019. “Traders seem to be expecting regional bank stocks to rattle even further,” reports the “Wall Street Journal.”

Back to the Fed: The question is whether President Powell will stick to his hard line and raise interest rates in view of the looming banking crisis. The assurance that customer deposits over $250,000 will retain their full value has calmed things down, but the crisis is not over.

This also has to do with the fact that the regulators have apparently failed. They should have realized that SVB is sitting on a time bomb with their T-Bonds. The Fed’s rate hikes came as no surprise. What caused this failure?

On the one hand, this helped relax the Dodd-Frank Act, a law introduced after the 2008 financial crisis to encourage banks to be more cautious, which was partially reversed by President Trump.

“But the other problem is that investors and regulators – like generals – are being trained to fight the wars of the past,” notes Gillian Tett in the Financial Times. In concrete terms, this means that the financial community has long since become accustomed to low interest rates. The last time rising interest rates led to losses was in 1994.

No one under 50 can remember that. In addition, this generation was brought up with the young spoon that government bonds in particular are super safe and therefore do not even have to be covered with equity.

Are we now threatened with a new crisis like that of 2008/2009? At the time, the collapse of the investment bank Lehman Brothers created a domino effect that nearly brought the international financial system to collapse. This danger does not currently exist. The big banks have a lot more fat than they did then and should be able to absorb any shock. But that cannot be ruled out at the moment. In the financial world, black swans – totally unexpected events – have become almost commonplace.