The US banking sector has been in trouble for the last month spreading out to other countries. This may lead to a global banking crisis if not controlled in time.
Why it happened, was it unavoidable or it needs more stringent action to rectify this kind of crisis in the future?
Russian and Ukrainian War has raised global crude oil prices, which led to higher inflation.
In the US, the fed maintained a very low-interest (Near Zero) rate for a long time.
US Policymakers could not judge the actual threat of inflation and delayed action to control it.
In December 2021, when inflation hit a 40-year high of 6.8 percent, the Fed benchmark rate was near zero
Only in March 2022 the Fed increased the rate by a modest quarter percentage point while the prices had risen a whopping 9 percent from the previous year.
Federal Reserve’s battle against inflation raised the benchmark interest rate sharply toward 5% in a couple of months, leading to the biggest bank failure in US history.
As interest rate rise, investors are more interested in new bonds and the bond market witnessed the biggest fall in the US in 2022.
Regional banks SVB and Signature banks are heavily invested in fixed-rate bonds.
Rate hike reduces bond rate sharply
As depositors rush to withdraw their money, banks collapsed overnight. The problem of Credit Suisse bank add fuel to the fire.
Silicon Valley Bank, and Signature Bank First Republic rescued from the brink of collapse.
Credit Suisse bank was forced to acquire by its Swiss rival UBS at US$3.25 bn
All Banks were Rescued to Calm the Market
U.S. banks are sitting on a staggering $620 billion in unrealized losses (FDIC).That may open a bigger problem if not addressed immediately.
Is the crisis Over?
What Experts Say?
“So far, we’ve been able to prevent big spillover effects — the central bank and others have come in with rapid solutions to keep this from metastasizing into a broader banking crisis,” said Dana Peterson, chief economist at the Conference Board. “But there could still be more shoes to drop.”
Fed has to manage the dual responsibility of keeping the inflation rate low and maintaining banking stability.