“We cannot take the resilience of the financial system for granted.” The phrase may even sound like a no-brainer, in general terms. But if the person who pronounces it is the president of the largest central bank in the world, then you have to understand exactly what he means.
Jerome Powell, the president of the United States Federal Reserve, was in Madrid this morning for a conference organized by the Bank of Spain, the IV Financial Stability Conference. Well, Powell has refused to take for granted the banking crisis that the country experienced after the collapse of Silicon Valley Bank and First Republic Bank. “We are still monitoring the situation,” he explained.
“We are very reluctant to say that the turmoil in the sector has ended. Our job is to worry about things,” he assured, almost intoning a mea culpa. “The bank runs and bankruptcies of 2023 were painful reminders that we cannot predict all the stresses that will inevitably come with time and chance,” she said. In this sense, he has given several examples of what has not worked and of the different elements that the regulator “did not fully appreciate”.
It has recognized that the banking weaknesses of these entities had not appeared in the stress tests. But that this was due to the fact that there were dysfunctions in the asset management model of these banks, which were very subject to the rise in interest rates. Something that was not contemplated. “SVB’s vulnerability stemmed not from credit risk, but from excessive exposure to interest rate risk and a business model that was vulnerable in ways that its management did not fully appreciate, including a heavy reliance on uninsured deposits,” he said. pointed.
At the same time, difficulties and new scenarios emerged in the crisis, which were not previously possible to measure with the usual instruments, such as the expansive effects of the withdrawal of deposits. “Before, you would see queues at client offices to withdraw money. Now everything is done by mobile, with much faster times. In particular, massive withdrawals of funds are no longer a matter of days or weeks, now they can be almost instantaneous “, Powell had to admit.
Then the covid has altered some habits and has given teleworking as an example. As many workers have chosen to work from home after the pandemic, the office market suffered. And the banks exposed in this real estate sector have had to suffer some weakness. Nor was it something that was on the radar of banking regulation and supervision.
After his speech, Jerome Powell took the opportunity to participate in a debate with the Governor of the Bank of Spain, Pablo Hernández de Cos. The Spanish banker has sent two messages. In the first place, when speaking about financial stability, he recalled that the high public debt in Spain represents an element of vulnerability that will require some fiscal consolidation.
As for the restrictive policy followed by the European Central Bank (ECB), it has confirmed that there will be another rate hike in July, although the September meeting is very open and will depend on the data.
As regards monetary policy, Powell has repeated what has been said on other occasions. “Inflationary pressures remain high and the process of bringing inflation back down to 2% has a long way to go,” he recalled, while insisting that at least two additional increases are still to be expected before end of the year of interest rates in the United States, located between 5% and 5.25% and that there are still bullets in the chamber, although it is not possible to know exactly how many.
This Wednesday Powell had already indicated that there is the possibility of raising interest rates in July and September, twice in a row, to curb the persistent pressures on prices and cool a surprisingly resilient labor market in the country.
“Although the policy is restrictive, it may not be restrictive enough and may not have been restrictive long enough,” he said yesterday during a panel hosted by the European Central Bank for a forum in Sintra, Portugal. Apparently Jerome Powell is not worried about the recession. He even came to the paradox of regretting that the US economy did not cool down: “A significant slowdown in rental prices is expected, but it will take time …”.
Indeed, a wave of data released last Tuesday points to the US economy beating expectations and proving resilient to the Fed’s tightening campaign. Reports showed new home sales rose at the fastest pace In more than a year, durable goods orders topped estimates and consumer confidence hit the highest level since early 2022.
