Central bankers and financial regulators on both sides of the Atlantic are bracing for another rocky weekend following last week’s turmoil, which saw the second and third largest bank failures in US history.
They will keep their phones on the alert and keep their ears open to find out if the dramatic actions taken by the US administration to prevent further spread after the collapse of Silicon Valley Bank, Silvergate and Signature Bank, as well as the lifeline provided to the First Republican Bank, were enough to build confidence from further runs.
In addition to guaranteeing deposits at three troubled financial institutions, the Federal Reserve has taken the unprecedented step of creating a bank term financing program to help banks reshape their bond portfolios.
Throwing the dice: The tough question facing the Fed and the Bank of England is whether they will raise interest rates.
This means the Fed is now offering banks access to billions of cash by allowing them to offer their bonds as collateral based on the asset’s face value, rather than at the normal market price.
Why this is so important is that the face value will be higher than the current market value because the bonds they now hold are based on the lower yields they bought up when interest rates were low.
On top of these emergency measures, the Fed also increased its balance sheet by £240bn this week alone.
This is another big and very political move that leaves economists wondering if this marks a pause in the quantitative tightening of policies that has only recently begun. They are also concerned about the future implications of such a turnaround.
Serious questions are also being asked about who is to blame for this latest turmoil: the bankers who rallied so greedily to package up their portfolios of bonds they considered low-risk, or the regulators who encouraged them? Or both.
It is still too early to say whether the latest measures will be enough to boost confidence. However, what the authorities did was to create moral hazard by underwriting the banks. This is a jailbreak map.
Guarantees: US Treasury Secretary Janet Yellen assured Congress that the banking system is generally safe
US Treasury Secretary Janet Yellen assured Congress that the banking system was generally safe and that taxpayer money would not be used for a bailout.
What they haven’t done yet is what trader Nassim Taleb, who wrote The Black Swan, called after the 2008 crash “the socialization of losses, the privatization of profits.”
Yet Yellen’s words had no effect. First Republic shares, which received an emergency injection, fell again yesterday. The same happened to the shares of other regional lenders, as well as the shares of most European banks, including Credit Suisse, which was also bailed out.
The tough question facing the Fed and the Bank of England is whether they will go ahead and raise interest rates when they meet next week. It looked like both banks would pull their horns after these latest crashes, as any rate hike would only drive down bond prices further and scare investors.
But sentiment took a turn for the worse after the unexpected decision by the European Central Bank to raise rates by 0.5 percentage points on Thursday. A bet that both banks will play softer, raising rates by perhaps 0.25 percentage points, and then stop and watch. They should heed President Theodore Roosevelt, who said in a speech in 1901: “Speak softly and hold a big stick; you will go far.
nuclear moon
Rolls-Royce goes to the moon with its nuclear reactors.
The British space agency has just provided the aerospace giant with funding to build a microreactor on the moon that will provide enough power for the people living there.
However, Rolls-Royce still has a long wait before the government launches a tender to build small modular reactors here on Earth.
The launch of a tender for SMRs under the Great British Nuclear Program was one of the best budgeted measures and more details should be announced by the end of the month.
What’s annoying is that Rolls-Royce is by far the strongest contender for the contract, but it still has to overcome technical difficulties along with other competitors. It seems like complete madness, but if the government doesn’t go through with a formal procurement process, other competitors could go to court to overturn the decision.
If HMG doesn’t get back on its feet, Rolls-Royce could get to the moon before it builds the much-touted SMRs.
Credit: www.thisismoney.co.uk /