Gabriel Slab Textile
At the beginning of 2023 in my opinion article in The reason “Recession with financial crisis?”, he had concluded that “we are in a context of high global uncertainty, in such a way that any relevant event, such as the case of housing or technology, or the crisis of cryptocurrencies, etc., it can trigger a financial crisis that goes hand in hand with stagflation. We will have to knock on wood so that this scenario does not occur and the landing is soft.”
Recent events seem to indicate that we haven’t touched wood enough, given the outbreak of a mini-banking crisis that was triggered by the collapse of Silicon Valley Bank (SBV), one of the main lenders to US technology companies, the 16th Bank in the world. US ranking and the first big bank to collapse after the great financial crisis of 2008, which sparked a classic bank run.
The US Government’s response was immediate, the bank was intervened and only depositors were saved and not investors and share holders, but then there was the sudden closure of Signature Bank of New York, which caused President Biden, come out on Monday the 13th to say that the United States will do “whatever it takes” to shore up the banking system and that “All Americans should feel confident that their deposits will be there when they need them.”
The reaction of the financial markets to the collapse of a specialized bank such as the SVB in lending to companies start up tech companies and Signature Bank which had many clients involved in crypto is just a sample or pilot experience of a run on banks and what could happen if financial uncertainty continues and especially bailout central banks such as the Federal Reserve (Fed ) under President Jeromy Powell, add more fuel to stagflation by further raising their interest rates.
Remember, as Stigliz recently told Project Syndicate, that: “Powell was part of former President Donald Trump’s regulatory team that worked to weaken the Dodd-Frank banking regulations enacted after the 2008 financial crisis, in order to free up banks “smaller” than the standards applied to the largest and systemically important banks.” Thus, the law was modified and currently only applies to banks that have assets of more than US$250 billion, and not to smaller ones, so the SVB was not subject to the same rules as larger banks.
The problem is not so much in the initial detonator or trigger of the crisis but in the context of high financial disturbances that can resemble a tinderbox. Thus, the bank run did not seem to be contained, instead it was amplified by adding the fall in the shares of the Credit Suissea Swiss bank but which was already in trouble since last year, after its main shareholder ruled out continuing to invest and contribute liquidity to the bank.
However, the Swiss central bank and financial regulator (FINMA) gave support to Credit Suisse AG which said it will borrow up to $54 billion, but in the end UBS, its rival, ended up buying it.
The First Republic Bank bailout also came as the largest US banks agreed to a plan to deposit some $30 billion in the bank, in a government-orchestrated effort to stabilize the lender.
Although the US government acted in a timely manner, the problem lies in the reaction of the main central banks. The European Central Bank (ECB) in the midst of the financial disturbance has already raised its reference interest rate from 3% to 3.5% and now the dilemma of go up or not go up It will be up to the Fed at the meeting on March 21 when it decides whether to continue with the increases in its interest rate or prefer to freeze its rate at 4.75%.
What this mini banking crisis has shown is the concern about the credit quality of the financial system as interest rates rise in a context of financial turbulence and stagflation, so the slogan of raising the interest rate is not so simple at all costs.
*Former President of the Central Bank of Bolivia, Minister of Development Planning and Director of the Economic and Social Policy Analysis Unit (UDAPE). He is an economist and Master of Business Administration. International Official of the Andean Community. Consultant for international organizations such as UNDP, OIT, FONPLATA. Collaborator of the Latin American Center for Strategic Analysis (CLAE)
