By Davide Barbuscia
NEW YORK, March 26 (Reuters) - Some investors and
analysts are calling for more coordinated interventions from
central banks to restore financial stability, as they fear that
tumult in the global banking sector will continue amid rising
interest rates.
After the collapse of two U.S. lenders this month and last
weekend's Swiss-government-orchestrated takeover of troubled
Credit Suisse markets have remained jittery. On Friday,
shares of Deutsche Bank plunged amid concerns that
regulators and central banks have yet to contain the worst shock
to the banking sector since the 2008 global financial crisis.
Global central banks including the Federal Reserve have
recently taken measures to enhance the provision of liquidity
through the standing U.S. dollar swap line arrangements. At the
same time, however, both the European Central Bank (ECB) and the
Fed have continued to hike rates over the past two weeks, as
they remain dead set on fighting stubbornly high price pressure.
For Erik Nielsen, group chief economics advisor at UniCredit
in London, central banks should not separate monetary policy
from financial stability at a time of heightened fears that
banking woes could lead to a widespread financial crisis.
"Major central banks, including the Fed and the ECB, should
make a joint statement that any further rate hike is off the
table at least until stability has returned to the financial
markets," he said in a note on Sunday. "Statements like these
within the next few days would most likely be needed to take us
away from the brink of a much deeper crisis," he said.
Money markets in the U.S. also expect the Fed to pause. Fed
funds futures traders on Friday were pricing in only a 20%
chance that the Fed will hike rates by an additional 25 basis
points in May, and an 80% probability it will leave the rate
unchanged at 4.75% to 5.0%. They also see the Fed cutting rates
to 3.94% by December.
Others, however, think regulators will be able to ensure
financial stability while continuing with their
inflation-fighting campaign. "We see central banks sticking to a
'separation principle' – using balance sheets and other tools to
ensure financial stability while keeping monetary policy focused
on reining in inflation," the BlackRock Investment Institute
said in a note last week.
For now, few investors see this year's events as a repeat of
the systemic crisis that swept through markets in 2008, but they
are wary that another bank run could erupt if people believe
U.S. or European regulators won't protect depositors.
"The situation remains fluid but we tend to think the way
out of this problem could be coordinated central bank action to
bolster confidence in the system," said Felipe Villarroel, a
partner and portfolio manager at TwentyFour Asset Management.
"The issue with European banks and big U.S. banks at the
moment is confidence. It is not capital," he said in a blog on
Friday. "Consumers are nervous because they see banks failing
and they question whether these issues will spread to other
banks and whether or not they should take their deposits out or
sell their bank stocks."
U.S. regulators said last week the banking system remained
'sound and resilient' in a bid to calm markets and bank
depositors. Treasury Secretary Janet Yellen on Thursday also
said she was prepared to repeat actions taken in the Silicon
Valley and Signature Bank failures to safeguard uninsured bank
deposits if failures threatened more deposit runs.
Still, Fed data on Friday showed deposits at small U.S.
banks dropped by a record amount following the collapse of
Silicon Valley Bank on March 10.
Meanwhile, overall deposits in the banking sector have
declined by almost $600 billion since the Fed began to raise
interest rates last year, the biggest banking sector deposit
outflow on record, noted Torsten Slok, chief economist at Apollo
Global Management.
"The near-term risks to banks combined with uncertainty
about deposit outflows, bank funding costs, asset price
turbulence, and regulatory issues, all argue for tighter lending
conditions and slower bank credit growth over the coming
quarters," he said.
(Reporting by Davide Barbuscia and Elisa Martinuzzi; Editing by
Andrea Ricci)
Messaging: davide.barbuscia.reuters.com@reuters.net))
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