Powell holds the Wall Street “sign”

Today ends the two-day meeting of the fed and the big bet in the markets is not so much the decision to raise more Interest rate of 25 basis points – which the market has already discounted – but if the accompanying text and its interview Jerome Powell hints that this will be the last increase, at least for now.

The truth is that at today’s press conference which will follow the monetary policy decisions, we would not want to be in Jerome Powell’s shoes, because he will have to respond masterfully not only on the outlook for the economy and the trajectory of inflation, but also on the new chapter of the banking crisis of American regional banks, that of the bankruptcy of First Republic Bank.

In fact, today’s interview will be given after an adventurous day at Wall Streetin which regional banks have again come under heavy pressure, despite hopes that the takeover of Bank of the First Republic Since JPMorgan Chase put an end to the banking crisis.

Yesterday, the KBW Regional Banking Index posted losses of up to more than 6%, with many shares of regional institutions dropping as much as 22%. So basically Powell will have to heed what the market is telling him.

And what is it?

That the US economy is beginning to show the first side effects of decades of easy money coupled with shortcomings in oversight and regulation.

The particularly aggressive cycle of rising interest rates that we are going through has “pulled” the waters, exposing the weaknesses and irregularities of the financial system and revealing to the public eye the “naked kings”.

At the moment, the market in its own way demands time from Powell. It’s time to fix it right monitoring frameworkpower time excessive risk is “collected”. where the banking sector has taken over the eras and the time of the zero rate for for the economy to absorb the current increases. That is to say implicitly before clearly asking interest rate freeze.

You see, raising interest rates sharply to control inflation has a significant effect on bank balance sheets. And we’re not just talking about losses in the bond valuation of their investment portfolio – remember the FDIC data that US banking sector bond and stock portfolios show potential losses, it’s that is, losses that would be immediate if a mark-to-market were to occur tomorrow in the valuation of their bonds, around $620 billion – but also in the risks that are beginning to appear on the horizon due to highest debt levels.

The low interest rates of previous years have accustomed managers to taking high risks. High interest rates trigger many of these risks today.

The First Republic Bank, for example, took over mortgages when interest rates were very low and kept them on its books. Thus, the First Republic’s vast inventory of mortgages lost value whenever mortgage rates rose.

At the same time, after the first chapter of the banking crisis in March this year, confidence did not recover in the same way for all banks, as investors and depositors started to become much stricter with their criteria. Something of course that was expected. (ps: You can read more here).

So First Republic Bank became another shocking example of bank lending overhaul when it revealed last Monday that its customers withdrew $102 billion in deposits in the first three months of the year – the final figure of 72 billion came thanks to an influx of $30 billion in deposits into the bank by a group of 11 largest banks in March, just before the end of the first quarter – well over half of the $176 billion held in the bank end of 2022.

After the massive flight of deposits and the collapse of its stock, First Republic Bank has been in a state of complete stagnation for the past few weeks, paying on its funding almost as much as it has collected on its loans. It was even reported that it had borrowed $92 billion, mostly from the Fed and government-sponsored lending groups, effectively acknowledging that it had to turn to financial sector lenders of last resort to stay afloat. .

However, each bank meltdown has the effect of making investors and depositors increasingly wary and banks increasingly concerned about the quality of their assets and of course debt levels.

This caution on all sides can make borrowing more difficult and of course more expensive, ultimately stunting the growth of the economy.

So the market with its drop yesterday kind of signaled to Powell that it was time to slow down or maybe even stop the wave of rate hikes, at least for now, since the relay of the tightening has already passed to market forces and a freeze on interest rates is needed to buy valuable time:

– for banks, in order to correct erroneous entries in their balance sheet,

– for the economy, to absorb the increases so far and to “get used” to the “new order of things”, which is completely different from the one where Central Banks whenever there was a little problem, they lowered interest rates, printed money and everything was thrown back into the pink bubble of eternal liquidity.

The speed of market readjustment is accelerating

In a candid account, the Fed last week identified the easing of the supervisory framework as one of the key factors in the current banking crisis. Since acknowledgment of the problem often points to the solution, this Fed report is also the first chapter of market reform.

It is therefore extremely auspicious that the Democrats have already introduced a bill that repeals part of what the law provides – under the Trump administration – on banking regulation.

The bill is called the Secure Viable Banking Act and aims to bring banks with at least $50 billion in assets back under strict Fed supervision and under the stress test scenarios provided by law. Dodd Frank.

It is recalled that according to the bipartisan Dodd-Frank easing bill of 2018, this limit had been increased to 250 billion dollars, that is to say that many banks such as Silicon Valley Bank were exempt from strict supervision..

This is exactly what Kristalina Georgieva, the head of the IMF, meant when she blamed “complacency” and unnecessary deregulation for US bank failures two days ago. As he clarified: “We know there has been unnecessary deregulation…and now we have seen the price we have had to pay. We saw that the management was not at the same level”.

Of course, such statements often create even greater panic, which in turn makes an already significant problem even worse.

Already, many venture capitalists and startups in the United States are opening bank accounts with major banking institutions or fintech banking firms, some of which even offer deposit insurance above the FDIC’s $250,000 limit.

If this trend continues, regional banks will be “stripped” and the prospect of big banks absorbing smaller ones will start to become a major political sticking point and beyond.

Disclaimer

This material is provided for informational purposes only. Under no circumstances should it be considered an offer, advice or solicitation to buy or sell the products mentioned. Although the information contained is based on sources believed to be reliable, no assurance is given as to its completeness or accuracy and should not be relied upon as such.