The Republic’s first bailout helps contain the banking crisis

A sign is placed on the outside of a First Republic Bank office on March 16, 2023 in San Francisco, California.

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The banking crisis appears to be contained for the time being… again.

  • The European Central Bank raised interest rates by 50 basis points, or half a percentage point, to 3%. This step comes after the turmoil that occurred yesterday in the European banking sector due to the heavy selling operations in Credit Suisse. Hence, besides raising the interest rate, the ECB said that it would be ready to support the banks if needed.
  • Small banks may be left out of efforts to protect the banking system. US Treasury Secretary Janet Yellen said that only banks that “will create systemic risk and significant economic and financial consequences” will have protection for their uninsured deposits.
  • forefront Markets expect the Federal Reserve to raise interest rates by a quarter of a percentage point next week. But there is a possibility that the central bank may pause the increases.

At the risk of backtracking, the banking crisis, which has now spread from the US to Europe, appears to have been (again) contained.

This is thanks to the sheer number of measures that financial regulators and central banks on both sides of the Atlantic have used to boost confidence. And these are not just empty promises. For example, four days after the Fed rolled out its term bank financing program — which lends banks money for a year in exchange for high-quality guarantees — financial institutions have already borrowed $11.9 billion from the program. Whether this figure exposes an intrinsic weakness in banks’ balance sheets is not really the point. The important thing is that consumers and investors are psychologically reassured.

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Wall Street rejoiced at the rapid response to the banking crisis. The Dow Jones Industrial Average rose 1.17%, the S&P 500 rose 1.76%, and the Nasdaq surprised by jumping 2.48% – tech stocks had a good Thursday. Alphabet rose 4.38%, Amazon rose 3.99% and Microsoft rose 4.05%. Microsoft stepped up after the company announced it would add artificial intelligence features, called Copilot, to apps like Word, Powerpoint, and Excel. But other tech giants may have risen because investors have been betting that — now that there is evidence that something is breaking in the economy — the Fed may not be as aggressive in raising interest rates. That would benefit tech companies the most.

It would also benefit the overall economy, which according to Goldman Sachs has a 35% chance of entering recession in the next 12 months – up from 25% before the banking crisis hit. The Fed’s two mandates, namely to stabilize the economy and fight inflation, increasingly contradict each other. It will not be an easy task.

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