As banking sector confidence falters, central banks called on to do more

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NEW YORK – Some investors and analysts are calling for more coordinated interventions by central banks to restore financial stability, as they fear continued turmoil in the global banking sector amid rising interest rates.

After the collapse of two US lenders this month and the Swiss government’s takeover last weekend of the troubled Credit Suisse markets, it has remained on edge. Deutsche Bank shares fell on Friday amid concerns that regulators and central banks have yet to contain the worst shock to the banking sector since the 2008 global financial crisis.

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Global central banks, including the Federal Reserve, have recently taken measures to enhance liquidity provision through perpetual US dollar swap line arrangements. However, at the same time, both the European Central Bank (ECB) and the Federal Reserve have continued to raise interest rates over the past two weeks, as they remain intent on fighting stubbornly high price pressure.

For Erik Nielsen, chief group economic adviser at UniCredit in London, central banks should not separate monetary policy from financial stability at a time when concerns are growing that banking problems could lead to a full-scale financial crisis.

“Major central banks, including the Federal Reserve and the European Central Bank, should issue a joint statement that any further rate hike is off the table at least until stability returns to financial markets,” he said in a note on Sunday. “Data like this will likely be needed within the next few days to move us back from the brink of a much deeper crisis,” he said.

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The US financial markets also expect the Federal Reserve to pause. Fed fund futures traders on Friday were seeking just a 20% chance the Fed will raise rates by an additional 25 basis points in May, and an 80% chance it will leave the rate unchanged at 4.75% to 5.0%. They also see the Fed cut interest rates to 3.94% by December.

Others believe, however, that regulators will be able to ensure financial stability while continuing their anti-inflation campaign. “We see central banks sticking to the ‘decoupling principle’ – using balance sheets and other tools to ensure financial stability while keeping monetary policy focused on reining in inflation,” the BlackRock Investment Institute said in a note last week.

For now, few investors see this year’s events as a repeat of the systemic crisis that swept markets in 2008, but they worry that another wave of banking will break out if people think US or European regulators won’t protect depositors.

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“The situation remains volatile but we tend to believe that the way out of this problem could be by coordinating the central bank’s work to boost confidence in the system,” said Felipe Villarroel, partner and portfolio manager at TwentyFour Asset Management.

The problem with European banks and big US banks right now is trust. he said in a blog post on Friday. “Consumers are nervous because they see banks fail and wonder whether these problems will spread to other banks and whether or not they should withdraw their deposits or sell their bank shares.”

US regulators said last week that the banking system remains “sound and resilient” in an effort to calm markets and bank depositors. Treasury Secretary Janet Yellen also said Thursday that she is ready to replicate the actions taken in Silicon Valley and the failure of Signature Bank to protect uninsured bank deposits if the failures threaten more deposits.

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However, Federal Reserve data on Friday showed that deposits in small US banks fell by a record amount after the collapse of the Silicon Valley bank on March 10.

Meanwhile, total deposits in the banking sector have fallen by about $600 billion since the Fed began raising interest rates last year, the largest influx of banking sector deposits ever, said Torsten Slok, chief economist at Apollo Global Management.

“Near-term risks to banks coupled with uncertainty about deposit outflows, bank financing costs, asset price turmoil and regulatory issues all call for a tightening of lending conditions and a slowdown in bank credit growth over the coming quarters,” he said. (Reporting by Davide Barbuscia and Elisa Martinuzzi; Editing by Andrea Ricci)