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The British newspaper The Economist examined the aspects of rising interest rates that brought misery and prosperity to American banks. Less than a year ago, rising interest rates led to the collapse of Silicon Valley Bank and then First Republic Bank, the biggest banking collapse since the 2008 crisis.
The newspaper adds in the report translated by Arabi 21 that despite these declines, JP Morgan published its quarterly report on January 12, disclosing the calculations of the difference between interest paid and received, indicating that the company is making record profits have the seventh quarter in a row.
She explains that the reason the crisis has not expanded over the past year is because the Federal Reserve was able to contain it through a new and generous lending program. Unfortunately, this idea came with new costs that were not expected. Government intervention in the financial sector meant that any bank brave enough to exploit it created a free money machine.
The newspaper explains that government intervention under the term bank financing program provided loans guaranteed by the face value of government bonds and other securities, and that the purpose of this idea was to save troubled banks from having to urgently sell government bonds in order to to ensure liquidity in the event that depositors withdraw their balance.
Silicon Valley Bank had launched a massive bond sale process after realizing losses caused by high interest rates that caused the value of long-term bonds to fall below their face value. However, the banks’ lending program provides funds as collateral for lending based on the face value and not the actual market value of the bonds in the market. This generous step by the US Federal Reserve managed to control the banking system and prevent what could have developed into a serious crisis.
But today the bank financing program itself has become a problem, as the interest banks must pay to borrow money reflects one-year interest rates in money markets based on expectations about Federal Reserve policy in the coming year. With investors betting that the Federal Reserve will cut interest rates significantly, the cost of borrowing for them today is just 4.8 percent. At the same time, the central bank continues to pay banks an interest rate of 5.4 percent on their cash deposits.
The newspaper explains that this difference simply means that banks can withdraw loans from the Federal Reserve while paying 4.8 percent interest in exchange for it charging 5.4 percent interest on their cash balance, and that difference of 0 .6 percent is a net profit that they receive the cost of the central bank without… Any risk, but in the event that the interest rate paid by the central bank to these banks falls and the equation is therefore reversed, the banks are not forced to to pay the difference to the Central Bank, since they have the freedom to repay the loans early, which is a benefit stipulated in the agreement between the two parties.
She points out that sooner or later the identities of these borrowing banks will come to light and that she may therefore fear that this could affect their reputation. However, for some managers and investors of these banks, the opportunism they practiced is not a shame, since they only took advantage of it. the opportunity.
Given this continued attractive offering, the banking sector in the United States is seeing increasing reliance on the forward bank financing program. Since the beginning of November last year, the amount of this debt has increased from $109 billion to $149 billion, and the value of the bonds has increased over the same period, resulting in success in reducing the problem under which this sector suffered.
These developments suggest that the current trend of many banks to borrow from the Federal Reserve is based primarily on opportunism rather than actual needs. Since the Federal Reserve is owned by American taxpayers, they are ultimately the ones paying out of their own pockets for all of these profits made by the banks.
When asked what the Fed should do now, the newspaper replies that in the middle of the crisis it promised to continue this program until March 2024. A premature termination could therefore damage the credibility of this important program. But perhaps the solution lies in an immediate adjustment of the interest rate on new loans so that it is proportional to the real interest rate, or in the introduction of a change in the clause affecting the possibility for banks refers to repaying these loans early when the problem no longer exists for them is no longer profitable. In any case, the status quo must be abolished or changed
The newspaper believes that the US Federal Reserve will have to be more cautious in its interventions in the event of another crisis in the future. There are examples of this from the past, because in the central bank there is a rule named after the journalist Walter Bighot, who worked for the Economist in the 19th century, which stipulates that central banks must grant loans free of charge to insolvent institutions if they do so do There is a risk that depositors will withdraw their money.
She said that this support is provided in exchange for guarantees of high-quality goods and a higher interest rate in case of late payments. By lending at generous interest rates and lenient terms to banks that may not actually be in trouble, the Federal Reserve today appears to have violated Walter Bighot’s three principles of liquidity crisis lending.
Finally, the newspaper concluded that the crisis experienced by the banking sector in the United States in 2023 was really bad, but the solution chosen by the Federal Reserve to overcome it appeared to have become even worse.
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