With the sudden, unexpected collapse of some of the world’s biggest banks and the additional turmoil in the sector, authorities are concerned about a possible credit crunch that can severely affect the economy.
According to a statement from the U.S. Federal Reserve policymaker on Sunday, the authorities are closely monitoring the banking sector for the possibility of a potential credit crunch. The information came in light of the announcement by the European Central Bank as the bank flagged a possible tightening in lending.
Authorities not only in the United States but worldwide are concerned about and are on high alert for a potential fallout following the turmoil that has taken place in the sector these past few months.
The collapse of the Silicon Valley Bank in the United States can be seen as the starting point of this sudden turn of events in the banking sector. Followed by the collapse of the Silicon Valley Bank, the Signature Bank also faced a similar fate.
The Credit Suisse of Switzerland was the latest bank to be affected in the sector, where it was taken over by its rival, the Zurich-based UBS.
The last week ended with different indicators that signaled stress in the financial market. The market witnessed different events that signaled possible stress as the market as euro fell against the dollar, the bond yields of the eurozone government sank, and also, despite the assurance from the policymakers, the cost of insuring against bank defaults also reported a surge.
While the turmoil in the banking sector is not a secret anymore and authorities are concerned about the future, the U.S. The Treasury released a statement in order to calm the investors. In the statement, the Treasury said that the Financial Stability Oversight Council agreed that the banking system in the country was ‘sound and resilient.’
The issue of a possible credit crunch as a result of the turmoil in the banking industry was discussed in detail by Minneapolis Fed president Neel Kashari during his appearance on the CBS show ‘Face the Nation.’
On the show, Kashkari stated that what confused or was unaware of the authorities was the extent of the banking stress that can lead to a widespread credit crunch. If such a credit crunch is to be reported, it is bound to slow the economy down.
Kashkari said that it is something that the authorities are monitoring very, very closely. Neel Kashkari also added that it is a bit soon to calculate the effect that bank stress could have on the economy and as a result, it will be difficult to predict the effect that could have on the next interest rate decision by the Federal Open Market Committee (FOMC).
Not on;y in the United States, but the authorities in the European banking sector are also concerned about the possible effect of the turmoil in the banking sector on the economy, following the events at Credit Suisse a few days back.
As per the statement of Luis de Guindos who is the vice president of the European Central Bank, the turmoil in the banking sector may result in lower growth and inflation rates.
He also added that the effects can lead to an additional tightening of credit standards in the euro area which could be visible in the mentioned lower growth and lower inflation in the economy.
The signs of the effect of the fall of Credit Suisse are expected to show in the market and value of other European banks. Most recently, Germany’s Deutsche Bank had been making news but not for good reasons.
The shares of the largest bank in Germany saw a sudden fall of 8.5% on Friday and the cost of insuring the bonds of the bank against the risk of default also saw a sharp jump.
As some of the major banks in the world have been affected, questions regarding the aggressive hike in the interest rate of the banks in order to bring down inflation are also starting to surface and it has also prompted some people to calculate when the rates will start to fall.
The chief economic advisor at UniCredit in London, Erik Nielsen, came up with a response to the situation stating that major central banks including the Fed and ECB should come up with a statement that there will be no further hike in the interest rates at least until the financial market returns to stability.
Even though there were efforts from central banks, politicians, and regulators to avoid the concern and confusion from the investors, the turbulence in the banking sector on both sides of the Atlantic followed into the end of the week.
The Fed has given rise to different policies like an emergency lending program with an aim to keep other regional lenders out of the troubles and effects of the turmoil.