Spotlight: Fallout from the Big Bankster Bust Continues
SVB and Signature Bank, both among the top 16 U.S. banks, collapsed within 72 hours of each other in early March
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BANKS NOW IN “MORE PRECARIOUS SITUATION,” IMF WARNS
Rising interest rates have left banks less stable, the International Monetary Fund’s (IMF’s) chief economist warned in an 11 April interview with CNBC.
The vulnerability was thrown into the spotlight by the collapse of Silicon Valley Bank (SVB). It held a portfolio of low-yield government bonds that it was unable to sell to raise cash when a wave of depositors demanded to withdraw their money.
That danger is not limited to the U.S., Pierre-Olivier Gourinchas told CNBC.
BEWARE OF THE DOLLAR’S DECLINE
“We are concerned about what we have seen in the banking sector, particularly in the U.S. but maybe also in other countries, might do to growth in 2023,” he said.
SVB and Signature Bank, both among the top 16 U.S. banks, collapsed within 72 hours of each other in early March. Credit Suisse, Switzerland’s second largest bank, failed days later.
Spooked by examples of banks caught short of cash, lenders likely will decide to keep larger cash cushions on hand and be more selective in the loans they make, Gourinchas said.
Tighter lending means less economic growth around the world, he noted.
Financial markets are still wobbling from the near-collapse of the U.K.’s bond market last fall after then-prime minister Liz Truss unveiled a budget based on massive budget cuts paired with borrowing, CNBC said.
“Banks are in a more precarious situation,” Gourinchas said. “They have healthy cushions, but it’s certainly going to lead them to be more prudent and maybe cut down lending.”
The debate around central banks’ interest rate hikes is no longer about growth versus inflation but is now about financial stability versus inflation, Gourinchas told CNBC.
The IMF has gamed out one scenario in which restricted lending by banks could cut global growth to 2.5 percent this year, compared to the agency’s current forecast of 2.8 percent.
On 10 April, the IMF published a new global growth forecast that predicts the next five to seven years will see the weakest economic growth since the early 1990s.
TREND FORECAST: The Banking bust has just begun. As interest rates rise, more money will flow from the banks into more profitable investments. For example, according to the Financial Times, “Big US financial groups Charles Schwab, State Street and M&T suffered almost $60bn in combined bank deposit outflows in the first quarter as customers continued to move their money in search of higher returns.”
And when the Office Building Bust hits the banks and there are more bank failures, the money flowing out will dramatically increase.
Among the safe-haven assets beyond money market funds, we forecast that the worse the banking crisis becomes, the higher gold prices will rise…to well above $2,000 per ounce.