US banks, after the First Republic bailout, is the crisis really over? – Corriere.it

This week the world’s most important central banks, the Federal Reserve in the United States and the European Central Bank will raise rates once again. The ECB could do it even more than was expected until a few weeks ago (with an increase of 0.5% instead of 0.25%) and probably make it clear that its monetary tightening is not close to the end. It could last until July or even September. As for the Fed, barring surprises, it should instead launch the last (for the moment) of a long and steep series of rate hikes tomorrow; but he will reiterate again that he does not anticipate any cuts this year, even though many market participants still refuse to believe it.

All this determination by the big central banks indicates that they do not want to let their credibility be eroded once again, after explaining two years ago that inflation was transitory. That mistake and excessive waiting before raising rates explains much of their relative intransigence today. Central bankers will not let go at least until price dynamics are much more under control than they are now.

But the mistake observers should not make is to think that the Fed and the ECB are continuing their grip because they are now convinced that there will be no new episodes of financial instability after this spring. Neither the Fed nor the ECB are ruling out new incidents. The latest was the bailout of First Republic in California, with the forced sale to Jp Morgan in the last few hours. In the previous weeks, there had been the bankruptcies of Silicon Valley Bank and Signature Bank of the United States, followed by the convulsive rescue of Credit Suisse thanks to the merger with Ubs and a phase of instability for Deutsche Bank on the markets.

The Fed and the ECB are not letting these episodes influence their strategy to reduce the cost of living. But, precisely, this does not mean that central bankers in the United States and Europe are convinced that there will be no further episodes of instability. The areas of risk are known: banks’ unrealized losses on long-term securities bought before the rate hikes and now falling in price; financial sector exposure to commercial real estate; debt transactions by the private equity industry or other players active in illiquid markets; the vulnerability of some insurance products behind which there are partly illiquid long-term investments. Some of these situations concern both the United States, the United Kingdom and the euro area.

It is by no means a foregone conclusion that rate hikes must necessarily ignite new episodes of financial instability, but it is not excluded. Rather, after years of risk accumulation on the markets in the zero-interest phase, it is unlikely that new outbreaks will be avoided in the coming months with the increase in the cost of money. Central banks know this, but they won’t stop for it: they now believe it is more important to maintain their credibility as inflation-fighting institutions. They expect to respond to new limited crises, if and when they occur, with an extraordinary supply of liquidity and other emergency measures.