Investors face 3 big questions as a banking crisis shakes markets

EQUAL fear of an impending banking crisis weighing heavily on investors’ minds, one economist said what happens next will depend on three key questions:

  • Have policymakers done enough to prevent a system-wide crisis?

  • How can the situation escalate?

  • What does all of this mean for monetary policy?

Neil Shearing, group chief economist at Capital Economics, wrote: “The immediate question is how the market digests the news of the UBS Credit Suisse deal.

Late Sunday, UBS (UBS) announced the acquisition agreement Credit Suisse (CS) for a less than 3 billion dollarsThe news sent Credit Suisse shares down about 50% on Monday while UBS reversed early losses.

Shearing said the elements of the UBS deal were not entirely clear, with a discounted value of $3.25 billion indicating, “a substantial portion of Credit Suisse’s $570 [billion in] the asset may be impaired or is considered to be at risk of impairment.”

This could create new worries about the health of banks, Shearing writes.

In Monday, Bank stocks are generally higher.

However, Shearing notes that crises like those facing the market today do not tend to come and go quickly.

“Crisis management is like a mole game – with new fires starting when existing ones are extinguished. A key issue next week will be whether problems arise in nests.” other institutions or parts of the financial system,” Shearing wrote.

In Shearing’s view, whether the banking crisis escalates depends on any other unknowns emerging from the system due to the sharp rise in interest rates.

“While it’s tempting to eliminate problems at SVB, signature bank and Credit Suisse have their own style, they have revealed that problems are lurking in the financial system as interest rates rise,” Shearing wrote.

“Key areas for supervision include smaller European banks and shadow banking, especially open-ended funds that may suffer from maturities.”

EQUAL Yahoo Finance’s Dan Fitzpatrick outlined over the weekend, about $ 600 billion in “unrealized” credit losses are lurking in the US banking system. But these losses, as Shearing notes, are largely the result of banks failing to manage interest rate risk, rather than extending credit to bad-ass borrowers.

“Credit Suisse aside, the problems to date have been due to failure to manage interest rate risk adequately,” Shearing wrote. “An entirely more severe crisis would develop if credit risk started to emerge – or, in other words, if default rates increased as the bank’s asset quality deteriorated.

Late on Sunday, UBS made an acquisition of smaller Swiss rival Credit Suisse.  Investors continue to digest more than $3 billion in takeovers.

Late on Sunday, UBS made an acquisition of smaller Swiss rival Credit Suisse. Investors continue to digest more than $3 billion in takeovers.

What brings investors top concern this week: What will the Fed do?

As of mid-morning on Monday, markets were pricing in about a 70% chance of the Fed raising rates by 25 basis points at the conclusion of its two-day policy meeting on Wednesday, according to data from CME . Group.

Before the crisisInvestors have placed a better than 50% chance of the Fed raising rates by 50 basis points this month.

“This is an extremely difficult path for central banks,” Shearing said, adding that last week’s developments demonstrate that currencies, credit and the financial sector are just as important. such macro data. inflationary And job when it comes to the Fed’s policy game.

“While the exact impact of recent events on monetary policy remains unclear, it will mean interest rates will be lower than the market had predicted a few weeks ago,” he predicted. .

Federal Reserve Chairman Jerome H. Powell testifies before a U.S. Senate Banking, Housing and Urban Affairs Committee hearing on

Federal Reserve Chairman Jerome H. Powell testifies before a U.S. Senate Banking, Housing, and Urban Affairs Committee hearing on the “Semi-Annual Monetary Policy Report to Congress” on Capitol Hill in Washington, USA, March 7, 2023. REUTERS/Kevin Lamarque

Alexandra channel is a Senior Media and Entertainment Reporter at Yahoo Finance. Follow her on Twitter @allliecanal8193 and email her at [email protected]

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