supervise the banks to avoid the squeeze on loans – Corriere.it

Central banks are discussing whether to become firefighters to put out inflation, or even policemen to supervise banks more. this is the dilemma they have been experiencing for a few weeks and which leads them to rethink a path that was very well outlined at the time the fight against inflation began. In the last weeks, both the US Federal Reserve and the European Central Bank continued to adjust rates upwards of reference for creating the conditions for a slowdown in the demand for consumption by households and for investment by businesses, and therefore bring the economies towards a condition in which prices should no longer increase at the rates seen in the last 12-18 months .

Solid system

In doing so, however, they could not ignore what was happening in financial institutions, including bankruptcies and daring bailouts. The Chairman of the Federal Reserve Board, Jerome Powell, said recent crises are localized and the banking system is solid and resilient; but still, to be a bit of a policeman, a bit of a fireman, he raised rates by only 25 basis points, slowing down the rate of increase in the cost of money compared to previous meetings. Christine Lagarde of the European Central Bank, while continuing to support the rate hike line, declared that there is no trade-offs between price stability and financial stability, as if to say that it is no longer enough just to be firefighters.

The economy holds

Moreover, there are still no solid signs of slowing economies. If we look at the United States, the macroeconomic data continue to surprise positively, highlighting the resilience of the US economy despite last year’s monetary tightening. Unemployment in particular, at its lowest since the 1960s, causes a price-wage spiral which makes inflation more persistent. And as long as the Fed raises rates, the European Central Bank is unlikely to stop doing so, otherwise the devaluation of the euro would lead to an increase in inflation via dollar-denominated imports. In the Eurozone, however, lhe inflation that the central bank monitors to establish whether price variations are under control shows no signs of decreasing: the latest data available, referring to March, is 5.7%; in a year the ECB still expects values ​​above 3%. The reconciliation of the two figures, that of the firefighter and that of the policeman, could be easier than expected if the turbulence around the financial institutions accelerates the slowdown of global economies. Indeed, the uncertainty generated by the banking crisis will tighten the conditions for granting credit, amplifying the restriction that was already starting to manifest itself associated only with the increase in rates.

Business loans

There are already important signs in this direction: today a small and medium-sized company in Italy obtains a new loan at rates above 4%, it was 1.7% just a year agobut it is the non-price supply conditions that are rapidly deteriorating as banks today have a lower tolerance for risk and a greater perception of it, which leads them to be extremely cautious. For a not negligible period of time, banks will mainly if not exclusively finance the most solid subjectsmoving towards quality at the expense of volumes, thus accentuating the slowdown of the economies and hopefully of inflation.

Prevention

In navigating this complex phase It is important for central banks to catch signs of a credit slowdown in good time, so as not to find themselves in the situation in which an excessive deterioration of supply conditions transforms healthy companies into problem or non-performing loans, which would inevitably begin to weigh excessively on banks’ balance sheets, dragging them into even more troubled waters. At the same time, the commercial banks would make a mistake in indiscriminately limiting credit: if this were to happen, it would mean that the system of rules created after the financial crisis that began in 2008 does not fully fulfill its role, that of ensuring that the banking system carries out its crucial function of intermediation and risk-taking within a context of capital solidity.

*Chief Economist and Director of Sectoral Strategies and ImpactDeposit and loan fund