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Central banks ready to act ‘quickly as needed’ if there’s a ‘rapid demise’ in confidence

Mar 20, 2024
A banking crisis in recent weeks has been unusual and that's because most banking crises happen because companies go bankrupt leaving

banks

and other lenders with bad debts, but this time it didn't happen because some

banks

bought the wrong securities at long term, which caused losses. As interest rates have risen, but the high interest rate cycle is not yet over and concerns about where tensions will arise could cause another problem: lack of

confidence

and lack of liquidity in the banking industry, and that It was one of the triggering factors. points for the 2008 global financial crisis Andrea Kenobi is the head of Frankel Franklin Templeton's fixed income team in Australia and now joins me.
central banks ready to act quickly as needed if there s a rapid demise in confidence
Thank you very much for her time on the program. Andrew just explained this liquidity problem if there is a crisis in the banking industry many thanks to Ross so in the United States we have seen a couple of high profile banks fail in recent weeks and this has a number of problems that really are hiding behind this, so yes, there are some idiosyncrasies in risk management terms. the way some of those institutions manage their asset side versus their liability side, but I think what we're seeing is symptomatic of a general tightening of credit market conditions and that's flowing through the economy and it's exposing some of the vulnerabilities. in terms of business models and seeing, you know, a desire for more liquidity in the economy which of course is flowing into the banks themselves, so you know we're not of the opinion that this is necessarily some kind of crisis similar to that "We saw it in 2008 and 2009, but it is certainly not surprising that when you have had the most aggressive tightening cycle in the history of the United States Federal Reserve in a very short period of time, you see some weaknesses exposed and that's really what we're seeing, we've seen it well in the last few weeks, so one problem with liquidity is that immediately these banks started to get into trouble, whether it's Silicon Valley Bank or Signature Bank or even Credit Suisse.
central banks ready to act quickly as needed if there s a rapid demise in confidence

More Interesting Facts About,

central banks ready to act quickly as needed if there s a rapid demise in confidence...

We have seen

central

banks come out with much more liquidity in the In the case of Credit Suisse, for example, the Swiss Central Bank provided a hundred billion dollars of support for the new merger business merged with UBS, so this is a answer, but the problem, as you point out, is that this is potentially inflationary, very

central

. Banks really have to close that gap when consumers or counterparties to the banking system lose trust and so certainly in the case of UBS and Credit Swissy there was a very

rapid

demise

of an institution as trust really was lost by the community. about that particular bank in the United States, you saw that trust was lost in terms of a very

rapid

withdrawal of deposits from some of those entities and, of course, that had to be covered up, so to speak, by the Federal Reserve creating additional shorts. -Term facilities, uh, medium-term facilities, as well as to help banks access liquidity, so I think the central banks have the tools and they are implementing them, uh, implementing them

quickly

and you know, this is probably , again, it won't be the last time we see some of these measures and, you know, they were released to the market as we went through this very, very significant period of monetary tightening, but they are there

ready

to act

quickly

as

needed

.
central banks ready to act quickly as needed if there s a rapid demise in confidence
Yes, one of the interesting parts of this new brand. this observation on the new york federal reserves uh survey of senior loan officers saying that they are signal conditions as tight as currently indicated in the United States has soon entered a recession the US economy now that's also what the inverse yield curve had for a long time I've really been pointing out in the United States and it was about tighter monetary conditions, as you point out, yes, that survey of senior loan officers is quite significant, it's widely followed and accepted as a very good indicator of credit conditions throughout the US system.
central banks ready to act quickly as needed if there s a rapid demise in confidence
Of course, thousands of banks in the United States and many of those small and medium-sized institutions are responsible for a large amount of commercial and industrial lending, even to areas like commercial property and, so that the survey captures your sentiment, the most recent one we had is at the end of the fourth quarter, where, as you point out Ross, it was al

ready

pointing towards considerably stricter credit standards and conditions and that, of course, it precedes all the Russians that we have seen in recent weeks, so our expectation is that the next one to come out will be The situation is going to be even stricter and, of course, when the flow of credit slows down to a economy that is quite financialized and dependent on access to debt capital as quickly as that, then, in our view, the logical risks of that recession being certainly a higher probability and on the yield curve that has been inverse, i.e. , those short-term returns have been significantly higher than the medium and long-term returns, which is a very, very significant indicator, it has a very long history in many many years predicting a recession because that is the way the market has of bonds to say that politics has done enough;
It has actually moved quite quickly to lift yields in the short term, but in the medium term there will have to be cuts at some point. point to respond to a recession so effectively says you know when this time the banking crisis broke out you know that svb was the firm was Credit Suisse was then there was a wobble in Deutsche Bank which then seemed to be calmed by the European Central Bank but then Meanwhile, the First Republic in the United States, which you know, merged, merged by force, it's almost like you're trying to guess where the next one will appear.
Do you think that guessing game is over yet or is it yet another phase of what could happen as a result of this liquidity of this security, then our observation is that those strict liquidity conditions are still in place. We may see more institutions put pressure on the Federal Reserve to implement some of the facilities it has. alleviated some of the short-term risks, but I think at that point they are reminded that banks are built on trust and, of course, as soon as that trust disappears, their ability to do business, which they need to do every day , is affected and they can very quickly lose access to the markets, they can lose deposits in the case of something like SVP bank and then it's game over, and the other problem, of course, that the banks have is that they are competing for deposits at high interest.
The world of rates and clients can access high interest rates in the money market through cash management funds through treasury bonds themselves, so their cost of financing has increased enormously and the consequence of what happened in the US and the rumors around Deutsche Banks, in general, seeing that this cost of capital in the bond markets for banks has been increasing, that is also another obstacle and yet , central banks can't do much about it while they're actually trying to fight inflation, so we can't have it both ways in some respects because that's ultimately what higher interest rates are all about, that is exactly right and in our opinion what are central banks trying to do right?
They are trying to make the price of money more expensive and They are trying to slow down the creation of credit in the economy and therefore you could see that these events are in some sense consistent with what they have been trying to do. They don't want to see institutions fail or

confidence

in the financial system being lost, but in our view this is a natural consequence of what central banks are trying to do to create a tighter credit environment, so on the one hand side, it is taken with the left hand and returned with the right through balance. spreadsheet management that doesn't necessarily call it quantitative easing, but effectively injects liquidity through other measures while increasing interest rates, that only goes so far, the markets consider that we are pretty close to the end of this cycle of adjustment and therefore, I think the probability that they are raising interest rates and at the same time consuming liquidity through other measures over an extended period is probably quite low.
Yes, Andrew Kenobi, head of fixed interest at Franklin Templeton here in Australia, thank you very much for his time. today's program thank you very much Ross

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