After New York Community Bancorp recently ran into trouble, Michael Barr, the Fed’s bank supervisor and regulator, addressed concerns about a banking crisis.
• Concerns about US banking sector
• Michael Barr believes the banking system as a whole is strong
• Key interest rate cut: Fed representative is cautious
In late January 2024, New York Community Bancorp (NYCB) came under enormous pressure after it reported an unexpected net loss of $252 million for the fourth quarter while also announcing a cut to its dividend. This sent shockwaves through the regional banking industry, as it brought back memories of spring 2023, when sharp increases in key interest rates combined with home-grown problems led to several mid-sized US banks – including Silicon Valley Bank (SVB) and First Republic Bank – had fallen into a deep crisis.
As a reminder, because the management of the banks had not managed interest rate and liquidity risks effectively, many customers had doubts about the reliability of the banks in question, which is why they panicked withdrew large amounts of money. The banks had invested large amounts in long-term, low-interest bonds, which are actually among the safest investments. But as a result of the recent very hawkish monetary policy the Fed, these securities had lost a lot of value. This caused the banks’ balance sheets to spiral out of control.
Michael Barr: US banking system is solid
But unlike the situation a year ago, currently “the banking system remains solid and resilient, and it is in much better shape than it was last spring,” Michael Barr reassured at a conference of the National Association for Business Economics, according to Reuters. Referring to the problems at New York Community Bancorp, Barr argued, “A single bank missing its earnings expectations and increasing its provisions does not change the fact that the banking system as a whole is strong.”
“We see no signs of liquidity problems across the system,” Barr continued. The Fed representative admitted that certain commercial office buildings could lose value and thus create problems for banks that have loans for these buildings. However, this does not represent an “acute” threat to the financial sector.
Reluctance to cut interest rates
In addition, the US Federal Reserve’s eagerly awaited interest rate turnaround is undoubtedly one of the most important topics on the markets at the moment. Here, however, Barr dampened expectations. On the one hand, it is “still very early to say whether we will end up with a soft landing [der US-Wirtschaft, Anmerkung der Redaktion] will have or not”, on the other hand, the unexpectedly high inflation in January shows that the road to an inflation rate of 2 percent – the Fed’s target value – “could be bumpy”. Because in January consumer prices were around 3.1 (December : 3.4) percent above the level of the same month last year, while economists had only expected annual inflation of 2.9 percent.
Given this data, it is a “difficult” decision for the Fed as to how long it will keep the key interest rate at 5.25 to 5.50 percent. “We continue to need good data before we can start cutting interest rates,” argued Barr, supporting Fed Chairman Jerome Powell’s “cautious approach.”
Editorial team finanzen.net
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