Experts Warn: Fed’s US Bank Rescue Could Trigger Recession And More Bank Failures

Key Points:

• The recent government bank rescue of depositors impacted by Silicon Valley Bank’s failure has provided a boost to sentiment in the short term.
• The new program will provide loans of up to one year in exchange for securities valued at 100 cents on the dollar, but market participants are concerned about the potential for moral hazard in the long term.
• Some investors may opt for a flight to quality and prefer to invest in “Too Big Too Fail But Now Have Been Regulated Into Having Tons of Liquidity and Capital Banks” such as JPMorgan, Bank of America, and Wells Fargo.

Silicon Valley Bank’s recent failure and subsequent government bank rescue of depositors is having a significant impact on various markets, from the US economy to interest rate outlooks. In an effort to calm fears and prevent panic in the financial system, authorities have promised to fully protect depositors’ money and offer easier loan terms to banks, as per Bloomberg.

While this move has provided a boost to sentiment in the short-term, market participants are concerned about the potential for moral hazard in the long-term. Some industry experts, such as Bill Ackman and Jeffrey Gundlach, are warning that more banks could fail and that the Treasury market is signaling an imminent recession.

The new program will provide loans of up to one year in exchange for securities valued at 100 cents on the dollar. The loans will be fixed at 10 basis points above the overnight bank borrowing gauge known as OIS.

According to Priya Misra, the global head of interest rates strategy at TD Securities, the program will provide liquidity for banks and help boost sentiment, but could lead to worsening lending standards and added downside risks.

Michael Every and Ben Picton, strategists at Rabobank, caution that the program could lead to moral hazard and a massive easing of financial conditions, while Goldman Sachs Group Inc’s Jan Hatzius and team predict a Fed pause in rate hikes.

In response to the news, some investors may opt for flight to quality and prefer to invest in “Too Big Too Fail But Now Have Been Regulated Into Having Tons of Liquidity and Capital Banks” such as JPMorgan, Bank of America, and Wells Fargo.

John Bromhead, strategist at Australia & New Zealand Banking Group, suggests that the policy response could quell fears in the system and lead to a relief rally, resulting in further pressure on the USD.

While the recent government intervention may prevent contagion and the spread of financial risk, experts warn that there is no guarantee it will work and that irrational fear can lead to unforeseen consequences.

DISCLAIMER: The Information on this website is provided as general market commentary and does not constitute investment advice. We encourage you to do your own research before investing.

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