After the new bank bailout, fears are (still) allayed

The First Republic Bank headquarters is seen on March 16, 2023 in San Francisco, California, United States.

Tayfun Coskun | Anadolu Agency | Getty Images

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The banking crisis seems contained for now… yet.

  • The European Central Bank raised interest rates by 50 basis points, or half a percentage point, to 3%. The move comes after – and despite – yesterday’s turmoil in the European banking sector, caused by a sale to Credit Suisse. Thus, in parallel with its rate hike, the ECB declared itself ready to support the banks if necessary.
  • Small banks could be left out of efforts to protect the banking system. US Treasury Secretary Janet Yellen said only banks that would “create systemic risk and significant economic and financial consequences” would have their uninsured deposits protected.
  • Still, US equities rode a wave of optimism. All major indexes rallied on Thursday, with the Nasdaq Composite posting additional performance. Asia-Pacific markets rose on Friday. Tech stocks, in particular, surged alongside the Nasdaq. Hong Kong’s Hang Seng index climbed 1.85%, led by Baidu’s 14.31% jump and Bilibili’s 8% rise.
  • The Chinese government is setting up a new “Central Financial Commission” to strengthen the Chinese Communist Party’s oversight of the finance and technology sectors, state media said Thursday. The commission will be responsible for high-level financial stability and development planning, according to the report.
  • PRO Markets expect the Federal Reserve to raise interest rates by a quarter of a percentage point next week. But there is a chance that the central bank will suspend the hikes.

At the risk of bringing bad luck to the situation, fears of a broader collapse of the banking sector, which spread yesterday from the United States to Europe, seem (still) to have subsided.

It is thanks to the extraordinary number of measures that financial regulators and central banks on both sides of the Atlantic have used to boost confidence. And these are not just empty promises. For example, four days after the Fed introduced the Term Bank Funding Program — which lends money to banks for a year in exchange for high-quality collateral — financial institutions have already borrowed $11.9 billion. dollars to the program. Whether this number reveals material weakness in banks’ balance sheets is not really the question. The important thing is that consumers and investors are psychologically reassured.

Wall Street was encouraged by the rapid response to the banking crisis. The Dow Jones Industrial Average rose 1.17%, the S&P 500 rose 1.76% and the Nasdaq surprised by jumping 2.48% – tech stocks had a very strong Thursday. Alphabet rose 4.38%, Amazon added 3.99% and Microsoft rose 4.05%. Microsoft rallied after the company announced it would add artificial intelligence features, called Copilot, to applications such as Word, Powerpoint and Excel. But other tech giants likely rose because investors were betting — now that there’s evidence that something is breaking in the economy — that the Fed might not be so aggressive in raising rates. This would benefit technology companies the most.

It would also benefit the economy as a whole, which Goldman Sachs says has a 35% chance of entering recession in the next 12 months, up from 25% before the banking crisis. The two mandates of the Fed, to stabilize the economy and to fight against inflation, are increasingly opposed. It will not be an easy task.

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