First, the sudden outflow of deposits from Silicon Valley Bank, with insolvency to cover deposits and bankruptcy, followed by Signature and Silvergate and finally the Californian First Republic, four US banks with credit support from other banks and the Federal Reserve to face the crashing panic withdrawals – or bank run.
The origin of the problem is twofold: first, because the high interest rate on savings naturally boosts the credit rate and, due to the high rate of the second, direct investment and consumption on credit decrease, but not savings with higher yield expectations , in such a way that bank profits are reduced due to the lower differential in rates and commissions. Thus, the problems are exacerbated in relatively small banks specialized in certain economic activities. Besides, the tendency to “non-payment” can be presented due to the high cost of money.
Second, the deregulation ordered by Donald Trump for banks with assets of less than 250 billion dollars, allowed the placement of savings in long-term government bonds with an even higher rate, this to expand the bank’s profits. But the risk was not being able to deliver deposits in the short and medium terms, which happened and caused a flight of deposits; In addition, they had to sell long-term bonds. but with less profitability and had losses. The foregoing required saving the money of savers with the Federal Reserve’s deposit insurance (up to 250,000 dollars), but not the funds of those who, through bank intermediation, invested in long-term instruments.
The same dynamics in Europe and on March 15 a collapse of -24.24% in the share price of the Credit Suisse bank was announced, with a rescue by the Central Bank of Switzerland with 280 billion dollars; With this support, on March 19, its purchase by the largest Swiss bank, UBS, was announced, thus accentuating the process of concentration of financial capital. There were capital losses from -2.1 to -10.49 in banks around the world, including some that operate in Mexico (El Economista, 03-15-23). Uncertainty and volatility might continue in the coming weeks.
Raising interest rates in many countries is an orthodox decision to reduce price levels, but its negative effects are, among others, bank failures. The greatest negative impact on prices came from the shortage of energy and food due to the war in Ukraine and the economic sanctions once morest Russia, that is, global inflation. The central banks raised the deposit rate -savings- but at a slower rate, in the United States with 0.25% (5.25%; 02-22-23) and Mexico the same (11.25%; 03-30-23). Bank failures are a warning of the excessive percentage of return on savings, with negative consequences for credit rates and global economic growth and for each country.
Bank crashes are focused and the risk of more bankruptcies has diminished. However, as inflation is contained or reduced, expensive money – which does not contribute to growth – might continue into next year with risks for small and medium-sized banks.
For this reason, it is necessary to implement government actions to mitigate price rises: tariff reduction, subsidies for oil derivatives, increased imports of certain goods -especially food-, strategic guarantee prices, among others.
A possible economic recession in the United States is expected to be moderate and would have minor effects in Mexico, because in our economy there are signs of recovery: banking regulation and sufficient capitalization in financial intermediation; increase in national and foreign direct investment; IMSS-registered hiring rises; contained inflation -until now-; minimal fiscal deficit; consumption growth -retail sales-; stable exchange rate, among other indicators.
