Economists warn about 200 banks at risk of crackdown or bankruptcy

Further rate hikes are expected at this week’s Federal Reserve meeting after a new study found that nearly 200 banks are at risk of the same kind of failure that happened to Silicon Valley banks. Concerns will arise that it will hasten bankruptcy.

There are concerns that bank assets, such as government bonds and mortgage-backed securities, will fall in value if the Federal Reserve raises rates again to keep inflation in check. It will be vulnerable to execution by depositors in the same way SVB went bankrupt.

“The recent decline in bank asset values ​​has significantly increased the vulnerability of the U.S. banking system and increased the number of uninsured depositors,” said the Social Science Research Network economist. , suggesting that in the absence of other government interventions and recapitalization, it is certainly at risk of runaway.”

A survey of the network estimates that 186 banks in the US are vulnerable when only half of their depositors withdraw their funds.

Federal Reserve Chairman Jerome H. Powell on Wednesday will raise the benchmark rate again after raising rates eight times in the past year as the central bank tackles chronically high inflation. We will announce whether Earlier this month, Mr. Powell said the Federal Reserve (Fed) would hike interest rates beyond the expected quarter-point rise as inflation has not fallen far enough and the labor market remains strong. suggested that it could be done.

But that was before the March 10 failures of Silicon Valley Bank and Signature Bank, the second and third largest bank failures in US history. And last week, California’s First Republic Bank received an emergency injection of $30 billion from 11 of the nation’s largest banks in an aid package brokered by the Biden administration.

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Part of the trouble for the banks is that the Fed’s series of rapid rate hikes has reduced the value of long-term debt. The bank was unable to meet a string of withdrawal requests from depositors seeking higher yields elsewhere.

Bank stocks were hit hard. On Wall Street, shares of First Republic Bank fell 32% on Friday. In Switzerland, shares of troubled lender Credit Suisse fell 8%.

SVB Financial Group said Friday it has filed for Chapter 11 bankruptcy to seek buyers for its assets, a week after its former division, Silicon Valley Bank, was acquired by regulators.

The company said it has about $2.2 billion in liquidity after having $209 billion in assets at the end of last year. On March 9, a depositor said he tried to withdraw $42 billion in one day. This was due to widespread concerns about the financial instability of banks.

Treasury Secretary Janet Yellen, who brokered that deal and SVB’s closure, told lawmakers on Thursday that the overall U.S. banking system “remains healthy” and Americans shouldn’t worry about money in banks. But even as she testified, the big banks were banding together to back First Republican Bank with a $30 billion bailout package.

Republican chairman and top Democrat on the House Financial Services Committee said on Friday that the panel will hold the first of “multiple” hearings over the failures of Silicon Valley and Signature banks that have disrupted the banking industry and financial markets. bottom. North Carolina Republican Speaker Patrick McHenry and California Democratic Rep. Maxine Waters urged Martin Grunberg, Chairman of the Board of the Federal Deposit Insurance Corporation, and Michael Burr, Vice Chairman of the Federal Reserve Board, to federal regulators. said to ask. Hearings will take place on March 29th. They said the committee is “committed to uncovering the truth about the failures of Silicon Valley banks and their signatories.”

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See also: House committee launches bipartisan move to hold series of hearings on bank failures

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Western central banks need to keep raising interest rates to keep high inflation in check, a major research agency said Friday, despite widespread concerns about the banking industry. The Organization for Economic Co-operation and Development said the central bank should continue to focus on curbing inflation.

A group that provides policy advice to governments, including the United States, said the Fed should raise its benchmark interest rate to a range of 5.25% to 5.5% from its current range of 4.5% to 4.75%.

The European Central Bank disappointed expectations by raising its key rate to 3% from 2.5% on Thursday. The Bank of England will also meet this week to announce its latest interest rate decision.

Last week, one of the key indicators of US inflation moved in the right direction. The Producer Price Index, which tracks how much American producers pay for goods and services, fell at an annual pace of 4.6% in February, according to a Labor Department report. This was a notable improvement from his downwardly revised 5.7% annualized rate in January.

Republicans blame the administration for much of the banking problem.

Idaho Republican Sen. Mike Crapo said a “reckless tax and spending agenda forced through Congress” has contributed to record-high inflation that the Fed is battling through higher interest rates.

South Carolina Republican Senator Tim Scott told Yellen that the administration’s “handling of the economy contributed to this.”

“We’re going to hold regulators accountable,” he said.

Virginia Democratic Senator Mark Warner also wondered, “Where is all this regulator?”

President Biden has called on Congress to allow regulators to impose tougher penalties on failing bank executives, making it easier to reimburse them or bar them from operating in the industry.

Biden said the Federal Deposit Insurance Corporation should be able to force broader bank executives to pay compensation if a bank fails.

“Increasing accountability is a key deterrent to future mismanagement,” Biden said in a statement. “Congress must act to impose tougher penalties on bank executives whose poor management has caused financial institutions to fail.”