It recently became known that the American authorities are preparing a proposal that will push American banks to use the “loophole” of the Federal Reserve Bank of the USA (Federal Reserve, FED) in the event of a new crisis.
For whom does the bell toll?
It is clear that the FED wants to take its measures now in case another banking crash breaks out. This move is reminiscent of similar actions by the FED during the 2007 financial crisis, where authorities encouraged large banks to use the ability to borrow directly from the Federal Reserve in order to push troubled banks to do so. same.
Why are banks reluctant to use this source of liquidity?
The reluctance of banks to tap into this source of liquidity is justified. If depositors believe that a bank needs support from the FED, it makes sense that they would want to leave it. The FED’s stated goal is to provide cover from banks at risk by trying to hold down bank deposits.
The regulator’s concerns about the vulnerability of banks are justified. The FED’s low interest rates meant that financial institutions looking for low-risk assets were buying US Treasuries at very low yields.
As inflationary pressures pushed interest rates up, the value of these bonds was reduced by new bonds with higher yields. It was this pressure that caused the bankruptcy of Silicon Valley Bank in 2023.
In addition, the commercial real estate situation puts further pressure on regional banks, which are responsible for 80% of these mortgages. When interest rates were low, investors viewed commercial real estate as a safe haven investment. Shortly afterwards, they were bitterly denied.
As a result, commercial real estate debt is considered one of the riskiest financial assets in existence today, sitting on the balance sheets of regional banks across the US.
And so while the actions of the FED and financial regulators express real concerns about the state of US banks, at the same time these same institutions insist on telling the world how well the US economy is doing.
