By Davide Barbuscia
NEW YORK (Reuters) – Investors and central bank analysts are calling for more coordinated action to restore financial stability, as they fear continued turmoil in the global banking sector in light of rising interest rates.
Market turmoil continues after the collapse of two of the largest US banks this month and the takeover of Credit Suisse, which was arranged by the Swiss government. Deutsche Bank (ETR:) shares fell on Friday amid concerns that regulators and central banks have so far been unable to contain the worst shock to the banking sector since the 2008 global financial crisis.
Central banks around the world, including the Federal Reserve (the US central bank), have recently taken measures to enhance the provision of liquidity through swap arrangements. However, the US central bank and its European counterpart continued to raise interest rates over the past two weeks to curb persistent inflation.
Erik Nielsen (NYSE:) Chief Economic Adviser to UniCredit Group in London said that central banks should not separate their monetary policies from financial stability at a time when there are growing concerns that the problems of the banking sector could lead to a large-scale financial crisis.
He added in a note today, Sunday, “The major central banks, including the American and European ones, must issue a joint statement that any additional interest rate hike will not be on the table, at least until the return of stability to the financial markets.” “It is likely that such a statement will be needed within the next few days to bring us back from the brink of a much deeper crisis,” he said.
Financial markets in the United States also expect the US Central Bank to temporarily stop continuing to raise interest rates.
* Repeating the 2008 scenario
Investors now see events this year as a repeat of the sequence of the crisis that swept the markets in 2008, and they are also worried about the collapse of other banks if people believe that regulators in the United States and Europe will not be able to protect depositors’ money.
“The situation remains volatile, but we tend to think that the way out of this problem could be coordinating the work of central banks to boost confidence in the (banking) system,” said Felipe Villarroel, partner and portfolio manager at Twentyfour Asset Management.
“The problem with major European and US banks right now is trust. Capital is not it (the problem)… Consumers are nervous because they see banks fail and wonder if such (collapses) will be the fate of other banks and if They should withdraw their deposits or sell their bank shares.”
US regulators said last week that the banking system remains “robust and resilient” in an effort to calm markets and bank depositors. Treasury Secretary Janet Yellen said on Thursday that she is ready to replicate the actions taken against Silicon Valley and Signature to protect uninsured bank deposits if deposit withdrawals from banks increase.
However, US Central Bank data showed on Friday that deposits in small US banks fell by a record amount after the collapse of the Silicon Valley bank on the tenth of March.
Meanwhile, total deposits in the banking sector have fallen by about $600 billion since the Fed began raising interest rates last year, the largest withdrawal of banking sector deposits ever, said Torsten Slok, chief economist at Apollo Global Management.
“Near-term risks for banks, coupled with uncertainty about deposit withdrawals, bank funding costs, asset price turbulence and regulatory issues all call for a tightening of lending conditions (and indicate) slower bank credit growth over the coming quarters,” he said.
(Reporting by Elisa Martinazzi, prepared by Mohamed Ali Farag for the Arabic Bulletin, edited by Ali Khafaji)