The dramatic shift in monetary policy caused serious shocks in the financial system

The dramatic shift in monetary policy – central banks have tightened interest rates as much as they haven’t in 40 years over the past year – has caused some serious shocks. Especially in the banking sector, the situation is very turbulent after the non-systemic banks Silvergate and Silicon Valley collapsed a week ago, and some medium-sized American banks (mainly First Republic) and the Swiss bank Credit Suisse also found themselves in trouble. “Fear and mistrust caused depositors to flee, so US regulators had to act quickly. They established a rescue loan program intended for banks in liquidity straits, established a special program BTFP (Bank Term Funding Program), with which banks in distress will be offered one-year loans with a fixed interest rate in exchange for pledging bonds that banks would otherwise have to sell with loss,” Vid Pajič (Triglav funds) told us.

Are European banks also vulnerable?The core of the problem came from the fact that banks had huge inflows of deposits, which they did not lend out, but instead invested in otherwise safe but low-yielding US government bonds. As their price began to plummet (and the required return to rise), there were more and more unrealized losses. Well, also realized: “Banks in need of liquidity are forced to sell these bonds at a loss. On the other hand, technology companies in 2022 were faced with a lack of funding sources, so they started using cash deposited with banks for their operations.Pajič further explained, adding that the (otherwise unjustified) fear of the quality of bank bond portfolios and the amount of potential unrealized losses has also moved to Europe. Comparisons with the 2008 crisis are probably too severe, as the capital adequacy of banks is much better , but the fact that the Fed came to the aid of US banks with 153 billion in the week to March 15 says a lot.

Key days for Credit SuisseCredit Suisse, a Swiss bank with a 167-year history, is also going through the ordeal. For now, this is the largest bank that has found itself in the vortex of the banking storm, and its problems stem from before, as it has faced numerous scandals and risky operations in recent years. Last year, customers withdrew 123 billion francs from their accounts, most of it in the last quarter. The annual loss reached 7.3 billion francs. This weekend may be crucial for its fate (intense negotiations are now underway as to who and how could help, perhaps it will be rival UBS, but none of the banks are enthusiastic about the idea of ​​a UBS takeover), as 50 billion francs, as much as the Swiss central bank allocated for its rescue, will probably not be enough after the Saudi National Bank announced that it will not increase its stake in Credit Suisse.

Fed to another interest rate hikeThe event opens up many topics. How is it possible that banks do such a bad job with risks, why did supervision fail (again)? Who will be the next victim? Can all banks, even though they used risky moves, count on the help of the state? The issue of moral hazard is also relevant, as it seems that in the end the state or the central bank will always pay the bill. And last but not least: have the central banks gone too far with wildly raising interest rates? Over the next week, all eyes will be on the US Federal Reserve. After the ECB decided to raise interest rates by half a percentage point on Thursday, the Fed is likely to be more calm and decide on a 25-point hike. The main priority remains the fight against inflation, but it is clear that he cannot ignore the latest events. Goldman Sachs predicts that the Fed will not raise interest rates at all on Wednesday. The bond markets also indicate that the tightening cycle is coming to an end: at the beginning of March, the required yield on the American two-year bond was still above five percent, now it is well below four. There has not been such a sudden drop in profitability since the infamous October 1987.

The biggest banks with huge cash flowsIn the stock markets, at least if we look at the weekly movements in New York, the bank alarm was not very familiar to the leading three indices. The Dow Jones lost only a few small points from Monday to Friday, while the technology Nasdaq managed to make a nice gain, rising by almost five percent. The values ​​of the shares of the largest banks did not decrease significantly. Bank of America emphasized that they have no problems, only on Tuesday, according to Bloomberg, they had almost $15 billion in inflows into deposits. Citigroup, JPMorgan and Wells Fargo banks also had high inflows. Customers are apparently moving their money to banks deemed too big to fail (“too big to fail“). The pan-European Stoxx 600 index fell 3.9 percent, the most since last September. The safe haven was gold, which was just a few dollars closer to the $2,000 mark, and bitcoin even more so. Its weekly gain is more than 30% (of the leading 20 cryptocurrencies, this is the most), the price exceeded $27,500, and the market capitalization was smooth $500 billion.

Eurybor has come down sharply from its 14-year peakHowever, the latest banking turmoil also has some positive effect. The rise in the EURIBOR rate has not only stopped, but has turned significantly downwards, which is great news for anyone with a variable rate loan. A week ago, the six-month EURIBOR was at 3.46 percent, the highest since December 2008, but on Friday it slipped below three percent again. The sharp drop in oil prices is also a welcome sign for consumers. On a weekly basis, the price of Brent collapsed by 12 percent due to the great instability of the financial system, which means the biggest weekly drop since the beginning of the epidemic. The price of US WTI oil looked below $70 for the first time since December 2021. Meanwhile, Saudi Arabia and Russia have confirmed the October commitments of the Opec+ cartel to cut production by two million barrels per day by the end of 2023.