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Panic attack: US population withdraws almost $500 bln from deposits amid banking crisis

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Since the beginning of spring 2023 in the United States there was a record outflow of funds of clients from accounts of credit institutions. This conclusion follows from the updated statistics of the U.S. Federal Reserve System.

According to the latest assessment of the agency, from March 1 to 29, Americans took away from banks nearly $499 billion. The flight of depositors was the largest for all time of monitoring – since 1973.

It should be noted that in just four weeks large American banks lost about $157 billion, small financial institutions of the country lost about $249 billion, and foreign – $93 billion. As a result, the total amount of deposits in the U.S. fell to a minimum of the last year and a half and amounted to about $17.19 trillion.

“The money is being taken away by those who have a deposit in excess of $250,000, the maximum amount of deposit insurance in the United States. People are afraid that banks won’t be able to return their savings. The anxiety among the population was caused by the recent collapse of several banks where citizens had very large deposits,” Alexander Abramov, head of the Laboratory for Analysis of Institutions and Financial Markets at the Institute of Applied Economic Research of the Russian Presidential Academy of National Economy and Public Administration, told .

Recall that in the first half of March, three banks – Silicon Valley Bank (SVB), Signature Bank and Silvergate Bank – went bankrupt with total assets of nearly $331 billion, and the first two were among the top 30 largest financial institutions in the country.

After the incident, U.S. President Joe Biden appealed to citizens and assured that the banking sector “remains safe”, and the Treasury and the Federal Reserve announced extensive measures to support the financial system. Nevertheless, the news of the collapse of three major companies provoked panic among depositors and stock market participants. As a result, the value of the shares of a number of banks, especially regional ones, began to decline sharply.

Against this background, the International Rating Agency Moody’s worsened its outlook on the U.S. banking system from stable to negative. In turn, former President of the United States Donald Trump warned of the threat of a new financial crisis.

Moreover, the cheapening of U.S. credit institutions’ shares was followed by a collapse of stock prices in Europe. As a result, for example, the second largest bank in Switzerland, Credit Suisse, founded back in 1856, was on the verge of bankruptcy and was eventually absorbed by the country’s largest financial holding UBS.

An indirect cause of the current problems in the U.S. banking sector was the large-scale sanctions Washington imposed on Moscow. Thus, according to experts, the effects of anti-Russian restrictions on the U.S. economy forced the Fed to dramatically change its monetary policy, which many banks were not ready for.

“Difficulties for credit institutions in the States arose because of the sharp increase in interest rates, which began on the background of a record run-up in inflation in the country in 2022. In turn, one of the pro-inflationary factors was a tangible rise in fuel prices, as sanctions against Russia led to a marked increase in world oil prices,” Alexander Abramov explained.

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Note that inflation in the U.S. began to grow steadily back in 2021 against the backdrop of the COVID-19 pandemic. Then quarantine restrictions led to disruptions in the supply of a number of products, which eventually led to an increase in consumer prices. At the same time, to support the economy, the Fed printed a significant amount of money, which was not sufficiently provided with goods.

The situation worsened in 2022 when, after the start of a special military operation in Ukraine, the United States, in an attempt to put pressure on Moscow, decided to completely abandon the purchase of Russian energy resources. As the White House argued at the time, Washington could afford to take such a step due to the country’s strong energy infrastructure. Some time later, however, U.S. consumers faced a rush on gasoline and other commodity prices.

As a result, if at the end of 2021 the annual inflation rate in the U.S. was 7%, in mid-2022 the figure exceeded 9%. This was the first time since 1981, as evidenced by the U.S. Department of Labor.

In an effort to curb the record rise in prices, the U.S. had to use its strategic oil reserves, which by this time have been emptied by about half. In turn, the Fed began to sharply raise the rate, although previously it had held it near zero for a long period. Over the last year, the regulator raised the bar for nine times and brought it to 4.75-5% per year – the highest level in the last 16 years.

Traditionally, such a tightening of monetary policy is considered one of the main tools in the fight against rising prices. By raising interest rates, borrowed money becomes more expensive for citizens and businesses, consumer and business activity weakens, which puts pressure on inflation.

In addition, the Fed’s actions are reflected in the U.S. government bond market (treasuries). Companies and individuals typically buy these securities to save their money, essentially lending their money to the U.S. economy, and earn interest on them. As the Fed’s interest rate rises, the yield on treasuries increases, but their value decreases.

According to experts, in recent years, U.S. banks have invested in debt securities in the United States a significant amount of money, including their depositors’ money. Meanwhile, against the background of a sharp increase in the Fed rate and cheapening of treasuries portfolios of credit institutions began to depreciate rapidly.

At the same time, by early 2023 the interest on bonds was already much higher than on bank deposits. As a result, the population began to transfer money from the accounts of credit institutions into treasuries on a mass scale in order to get more profit. In the end, given the already increased losses, banks could no longer cope with the outflow of funds of citizens.

“The first banks that could not cope with the influx of customers withdrawing their deposits were the U.S. venture banks that specialize in lending to risky projects. The largest of them was Silicon Valley Bank, which simply did not have enough money to pay off its depositors,” Alexei Fedorov, an analyst at TeleTrade, explained to .

Later, according to him, a chain reaction followed: the longer were delays with payments on deposits, the greater the influx of customers. Moreover, as the expert stressed, the lack of money from credit institutions began to grow into a “crisis of confidence” in the entire U.S. banking system, because a number of other companies still have a significant amount of cheaper treasuries in their accounts.

To combat the crisis, the U.S. Federal Reserve was forced to return to the practices of the times of the pandemic and the events of 2008 and re-launched the printing press. According to the latest estimates, since the beginning of March, the regulator has poured more than $292 billion into the financial system.

However, according to Alexey Fedorov, issuing loans to banks at high interest rates within the framework of the current rescue program does not solve the problems of the financial system, but only allows them to postpone them. A similar point of view was expressed by the head of the largest U.S. bank JPMorgan Chase James Dimon.

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Although the Fed’s rate hike has exacerbated problems in the country’s banking sector, the regulator’s actions and the simultaneous decline in global oil prices have helped slow inflation in the United States to 6% by March 2023. Nevertheless, the indicator is still three times higher than the authorities’ target of 2%. Against this backdrop, the Fed announced plans to continue the fight against rising prices.

However, according to Alexei Fedorov, the active printing of money to help banks may nullify all efforts of the Fed to return inflation to the target. In this case, further increase in the rate risks further exacerbating the risks for the financial system of the country, the expert believes.

“In the case of a new rate hike, the value of treasuries will sag sharply, increasing pressure on the already shattered capital of U.S. banks. It will be impossible to provide deposit guarantees for all banks, and therefore we can see the second wave of the crisis, which can’t be mitigated without a sharp decrease in the rate and large-scale injections. And this is the right path to stagflation – the growth of inflation and economic recession – the exit from which is always very long and extremely painful, “- explained Fedorov.

Interestingly, against the background of the events in the U.S., the dollar against other reserve currencies began to gradually decline in the global market and over the last month has fallen by more than 3%. And in the foreseeable future the U.S. national currency will continue to fall in price, says Alina Poptsova, an analyst at Freedom Finance Global.

“The dollar’s cheapening will be a favorable factor for U.S. companies-exporters, as it will increase their foreign exchange earnings. At the same time, the weakening of the exchange rate reduces the investment attractiveness and restrains the activity of capital inflows or leads to an outflow of money from the country,” – said the interlocutor .

According to Alexei Fedorov, further attempts to solve domestic economic problems by printing money could cause the dollar to weaken by another 15-25% in the global market. The expert believes that this, in turn, may have a negative impact on the global status of the US currency. Donald Trump expressed similar concerns.

According to the International Monetary Fund (IMF), in 2022 the share of the dollar in world reserves fell to 58.36%. The value was the lowest in the past 27 years. At the same time, experts do not rule out that the indicator will continue to decline in the foreseeable future.

“If given all the current events, the main creditors of the U.S. decide to withdraw money from the U.S. government debt more actively, which we are already observing during the year, the dollar share in world reserves will fall even more. We can assume that it will fall to 40-45%,” Fedorov added.

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The IMF said the March events in the U.S. and European banking sectors were a reminder that years of low interest rates have led to “pockets of increased vulnerability” in the international financial system. The IMF fears that the associated risks could intensify in the coming months.

In turn, the leadership of the World Bank, in fact, warned of the increased threat of a global economic downturn over the past few weeks. Earlier the chairman of the Russian regulator Elvira Nabiullina gave a similar assessment.

“The current situation aggravates the problem of balancing between the goals of monetary policy and risks for financial stability for western central banks. On the one hand, we see vulnerability of the financial sector to interest rate and other risks, on the other hand, the current inflationary pressure remains elevated. As a whole, this situation can increase the risks of recession in the global economy,” Nabiullina did not rule out.

However, in her opinion, the situation in the U.S. and Europe does not have a direct impact on Russia. As the head of the Central Bank explained, banks in Russia do not have “such accumulated risks” on their balance sheets as financial institutions in the USA and the EU. Moreover, as a result of sanctions of the West itself, Russian banking sector is now much less connected with the global financial system, which provides it with additional protection, added Elvira Nabiullina.

As Alexei Fedorov explained, in 2022 Russian banks managed to cope with the sanctions challenges not only due to the absence of accumulated risks, but also due to the favorable situation in the global energy market. Since the cost of hydrocarbons exported by Moscow rose sharply, the state had enough of its own resources to support credit institutions, the expert noted.

“Since then, Russia’s banking sector has dealt with most of the sanctions problems and now, thanks to its isolation from the Western capital market, can relatively calmly observe the banking crisis in the U.S. and Europe. Nevertheless, it is still unclear whether the banking problems will remain a local story in the U.S. and individual EU countries or will develop into a global cyclical crisis,” concluded Fedorov.

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