2023-04-05 16:08:36
How the threat of a collapse of the US banking sector could affect the Fed's monetary policy?
The forced closure of a number of banks active in the cryptocurrency and technology sectors: Silvergate Bank, Signature Bank, Silicon Valley Bank with assets in excess of $330bn was the largest since the 2008 crisis. The dramatic bankruptcy of three US banks led to panic among investors and depositors, crushing the capitalisation of the US banking sector by $645bn.
To normalize the situation after regulators closed another Signature Bank in New York, the US president made a speech reassuring taxpayers that despite the successive bankruptcies of credit institutions, they would not suffer any losses, and those responsible for the events would be brought to justice. With approximately 4,700 banks in the US, it is clear that the bankruptcy of even a few large banks should not cause the system to collapse, although the consequences could be quite severe. This could include a significant increase in bank borrowing rates and a decrease in consumer confidence in the banking system, which means that the situation remains quite tense.
According to various estimates today from 60 to 200 US credit institutions remain under the threat of bankruptcy. In addition, according to official information of the Federal Deposit Insurance Corporation (FDIC) there is a potential loss from impairment of securities on banks' balance sheets amounting to $620bn
One of the reasons increasing the risks of an intensified banking crisis, which has already led to the collapse of a number of credit institutions, was the sharp increase in the Fed rate in 2022 to the highs since the events of the international financial crisis of 2007 - 2008. The rate hike has devalued the assets in which US banks have invested depositors' money and led to repayment problems. For example, mortgage and treasury bonds bought by Silicon Valley Bank lost $15bn in value on this backdrop.
With further increases in rates this hole in the balance sheet of credit institutions in the U.S. will only grow, and therefore the risk of new bankruptcies of banks will rise because of the inability to meet financial obligations to customers and counterparties. Thus, the U.S. financial regulator has two options, the first is to continue raising the base rate in order to fight inflation, but then there is a high probability of a full-scale banking crisis with the risk of a recession in the economy.
The second option is a temporary easing of monetary policy with the injection of additional money supply for a short-term relief of current financial tensions. Thus, for example, amid panic of private investors and depositors of American banks, the US Federal Reserve has started to inject money into the banking system, the authority's balance sheet has increased by almost $400 billion since the beginning of March 2023 Accordingly, for market participants this is a sign to ease the pace of base rate increases and switch on the "printing press".
It is on these expectations that bitcoin has been rising since mid-March on the back of falling US bank share prices. In the medium term, the regulator's approach will allow high-risk assets, which include cryptocurrencies, to be more free-floating, meaning it will have a positive effect on the capitalisation of the digital asset market. The question is how the US government plans to keep inflation in check going forward, as lower rates and additional cash injections into the economy will increase overall price levels.
In the long term, while the risk of a recession in the US economy remains, the possibility of major shocks to the cryptocurrency market remains. This means that it is important to monitor the US Federal Reserve's actions to understand what the agency's current priorities are. This approach will help track shifting economic fundamentals to make more accurate decisions in the digital asset market.
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