Mario Tama
Neil Kashkari, president of the Federal Reserve Bank of Minneapolis, said the recent stresses in the banking system that led to the failures of Silicon Valley Bank and Signature Bank will take time to clear up. During an interview on CBS’ “Face the Nation” on Sunday. He added that these tensions will push the US economy close to recession.
“We know there are other banks that are exposed to long-term Treasuries and they have some long-term risk, as we call it, on their books,” he said. “We also know that there are a lot of commercial real estate assets in the banking sector and there are some losses that are likely to make their way through the banking sector. So this process will take time to fully clear up,” he added.
However, he noted that the banking system has plenty of capital to be able to withstand those pressures.
He said the recent stresses in the banking sector were “definitely bringing us closer” to recession. “What is not clear to us is the extent to which these banking pressures lead to a full-scale credit crunch.” This credit crunch will slow the economy.
On the positive side, these pressures can then lower inflation, Kashkari said, so we have to work less with the federal funds rate to balance the economy. “It’s something that has to be watched very carefully and that’s what we’re focused on.”
He is encouraged that “deposit outflows seem to have slowed. Some confidence has returned between smaller and regional banks.”
But at the same time, “the capital markets have been pretty much closed for the last two weeks. If those capital markets remain closed because borrowers and lenders have remained nervous… that tells me that this is going to have a bigger impact on the economy.”
Although banking pressures may slow down the economy, “it is too early to make predictions about the next interest rate meeting,” Kashkari He said. “We will continue to allow data and evidence to guide us.”
He sees the need to make US banking regulations fairer to regional and community banks.
“We need regional banks in America. We need community banks in America,” he said. “Once we get past this period of stress, we have to come up with a regulatory system that ensures our banking system is sound, but also fair and so that local banks and regional banks can thrive. We don’t have that today.”
On Friday, UBS analysts said the Fed’s balance sheet indicated that liquidity pressures are stabilizing.