A ghost haunts the world: the ghost of financial instability.
In the United States, three small and medium-sized regional banks (Silvergate, Signature and Silicon Valley) have just failed.
Other North American banks have gone through important bouts of volatility.
In Switzerland, the financial authorities forced the acquisition of the legendary Credit Suisse by its rival UBS.
The forced sale implied, among other things, the total evaporation of 17 billion dollars from the company's bondholders, which will be reflected in huge losses in other financial institutions in various parts of the world.
In Germany there are concerns about the financial health of its largest bank, Deutsche Bank, a global systemically important bank,
which has produced uncertainty and volatility in financial markets.
The reverberations of all these events are still felt in the markets and the financial authorities of different countries have tried to send messages of confidence in the health and resilience of their banking systems.
This Friday, the Secretary of the Treasury called an untimely and closed-door meeting of the highest body in charge of supervising financial stability in the United States (FSOC, for its acronym in English), which set off some additional alerts.
In this context, the European Central Bank and the Federal Reserve decided to continue raising their respective interest rates in March.
The former increased it by 50 basis points, as expected before the first episodes of instability, while the Fed increased its rate by 25 basis points (below what was anticipated before the start of financial instability). ).
Although bank instability is not always associated with rising interest rate cycles (the case of Credit Suisse, for example, has been one of constant deterioration and administrative problems that has lasted several years), neither we can say that they are completely isolated events.
The increase in interest rates affects the value of the bonds, which translates into losses (not necessarily materialized) for the banks that invested in this type of instrument.
As long as the banks don't have to sell those bonds, those losses don't materialize, which wouldn't be that bad.
However, in a context in which bank depositors begin to demand their money, either due to mistrust in some specific financial institutions or, in their search for returns, to invest them in short-term instruments (which now provide higher returns). due to the bullish cycle and because the yield curves have inverted, that is, short-term instruments pay higher rates than long-term ones), this may lead to the need for banks,
In order to meet the demands of their depositors, they have to get rid of those holdings of longer duration bonds and, with this, the losses caused by the rate increases materialize.
Thus, financial instability and monetary policy decisions are not necessarily completely isolated events.
Obviously, these situations of imbalance or mismatch between inflows and outflows of money from banking institutions are not attributable to central banks, but rather are mainly risk management problems on the part of the banking institutions themselves.
However, to the extent that central banks are also in charge of guaranteeing the stability of the financial system, it is evident that in upward cycles like the current one it is the responsibility of central banks to strengthen the control and supervision mechanisms of financial institutions. to avoid, dilute or mitigate the costs associated with potential situations of financial insolvency.
This is crucial to guarantee the effectiveness of its own monetary policy actions and to avoid ending up opposing two objectives that now seem to be in conflict: fighting inflation and guaranteeing the stability of financial systems.
Although it has been said that this is not necessarily true to the extent that there is an instrument for each objective (the interest rate to combat inflation and the provision of liquidity for financial stability), the reality is not so simple.
It is enough to see the announcements of the monetary policy decisions of the Federal Reserve and the European Central Bank to understand that the dilemma is there and that from now on these central banks will be very cautious with respect to the evolution of the financial system.
The situation is so complicated that, at least in the United States, there is a contradiction between what the Federal Reserve has said it expects to do in the coming months (that is, continue raising rates) and what the market anticipates it to do. you will have to do (ie pause very early and start lowering rates in the second half of the year).
The reason is that banking instability will very possibly translate into lower credit volumes, which could bring forward the economic slowdown and would then make additional interest rate increases unnecessary.
pause very soon and start lowering rates in the second half of the year).
The reason is that banking instability will very possibly translate into lower credit volumes, which could bring forward the economic slowdown and would then make additional interest rate increases unnecessary.
pause very soon and start lowering rates in the second half of the year).
The reason is that banking instability will very possibly translate into lower credit volumes, which could bring forward the economic slowdown and would then make additional interest rate increases unnecessary.
So far, attention on the issue of financial instability has focused on advanced economies.
This is because of the institutions that have been affected so far and because of their global systemic importance.
However, we cannot rule out future episodes of financial instability in emerging economies.
It is possible that, as in Mexico, the local financial systems are very well capitalized and with compliance standards for liquidity conditions that far exceed the regulatory minimums.
However, nowhere can it be ruled out that there are specific institutions that have problems similar to those that have already been experienced in other latitudes.
As we already learned with the global financial crisis of 2008-2009,
Gerardo Esquivel
has a PhD in Economics from Harvard University.
He currently serves as deputy governor of Banco de México.
He has been nominated by the Government of Mexico to head the Inter-American Development Bank.
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