It has been quite a week with what looked like being the main event ( US CPI inflation) being rather shuffled down the pecking order. In fact right at this very moment we have seen yet another signal and it comes from the East.
the People’s Bank of China decided to reduce the deposits of financial institutions on March 27, 2023. The reserve ratio reduction is 0.25 percentage points (excluding financial institutions that have implemented a 5% deposit reserve ratio). After this reduction, the weighted average deposit reserve ratio of financial institutions is about 7.6%.
So China is acting to raise the supply of broad money as it hopes this will encourage their banks to lend. That is exactly the opposite of what happened in Europe yesterday.
Summing up, inflation is projected to remain too high for too long. Therefore, the Governing Council today decided to increase the three key ECB interest rates by 50 basis points, in line with our determination to ensure the timely return of inflation to our two per cent medium-term target. ( ECB)
Actually there is a more literal divergence as we note that the ECB is now acting to reduce the money supply by selling some of the bonds it owns.
The decline will amount to €15 billion per month on average until the end of June 2023 and its subsequent pace will be determined over time.
Federal Reserve
Actually it is not only the Chinese who have been expanding the money supply this week.
NEW: Borrowing at the Fed this week
+$148.3 billion – net discount window borrowing
+$11.9 billion – the new Bank Term Funding Program Subtotal: $160.2 billion
+$142.8 billion – borrowing for banks seized by FDIC
Total: $303 billion ( @NickTimiraos )
Indeed some argue that more is on its way.
Market observers are on alert to find out just how much extra funding the Federal Reserve’s new bank backstop program will ultimately add into the system, with analysts at JPMorgan Chase & Co. positing that it could inject anywhere up to $2 trillion in liquidity. ( Bloomberg)
Care is needed as some on social media are already claiming that US $2 trillion has been added when it is much more accurate to say that a potential liability has been added.
The analysts’ prediction based on the amount of uninsured deposits at six US banks that have the highest ratio of uninsured deposits over total deposits is closer to $460 billion. ( Bloomberg)
What has happened here was the Federal Reserve backstopping uninsured deposits ( above the FDIC limit of US $250,000) at Silicon Valley Bank and the others which have recently failed. So the implication is that they will have to do the same in future at other banks.
In a tough week in many ways it looks like my theme of “The Precious! The Precious!” is back in full force as the banks just got enormous backing from the US taxpayer via the US Treasury for nothing. The analysts seem to have more faith in the biggest US banks than I do. or perhaps they work for them.
While the largest banks are unlikely to tap the program, the maximum usage envisaged for the facility is close to $2 trillion, which is the par amount of bonds held by US banks outside the five biggest, they said. ( Bloomberg)
The UK
I did not think this through thoroughly at the time but the Bank of England has made the same implied guarantee.
The Bank and HMT can confirm that all depositors’ money with SVBUK is safe and secure as a result of this transaction. SVBUK’s business will continue to be operated normally by SVBUK. All services will continue to operate as normal and customers should not notice any changes.
For those unaware of the situation deposits with a bank are formally guaranteed by the FSCS compensation scheme up to a limit of £85,000. I do recall an occasion where that was applied ( to a small building society if I remember correctly) so there was a clear change of policy here and of course it will be demanded next time.
Switzerland
At the moment the Swiss look to be most exposed as a relatively small country with a large bank that is already in trouble. We looked at the current risk only yesterday.
Credit Suisse plans to borrow up to SFr50bn ($54bn) from the Swiss central bank and buy back about $3bn of its debt, in an attempt to boost its liquidity and calm investors a day after the bank’s share price plummeted. ( Financial Times)
We do not know how much of this will be drawn down by Credit Suisse? Although we do know that as it is cheap there is an incentive to do so and that things usually turn out to be worse than claimed. I have pointed out before that bad news from banks is released in penny packets rather than telling the full truth. It seems investors are thinking along the same lines because as I type this the share price has fallen to 1.95 Swiss Francs. Only last week that would have been considered to be a disaster and remember it has a ready supply of cash to tap at the Swiss National Bank.
Although some look at the supply of cash in another way.
Credit Suisse, a bank that lost $7.8 billion last year, is being rescued by a bank that lost $143 billion last year. Gotta love the banking system. ( @GRDecter )
Comment
It has been an extraordinary as we note that central banks are back to singing along with Elvis Costello.
Pump it up) When you don’t really need it
(Pump it up) Until you can feel it
Sometimes the most significant decisions come away from the monetary policy spotlight. Here their financial stability counterparts have caught them in something of a spider’s web. There is an added nuance though that many of them are the same people.
If we retiurn to the Chinese move this morning it comes with some rather grand ambition and rhetoric.
The function is to maintain an appropriate amount of money and credit and a stable pace, maintain a reasonable and sufficient liquidity, keep the growth rate of the money supply and social financing scale basically matching the nominal economic growth rate, better support key areas and weak links, and avoid flooding Flood irrigation, taking into account internal and external balance, and strive to promote high-quality economic development.
By flood they mean not over expand the money supply rather than literally. Also we know that the growth target has been lowered so surely money supply growth is enough? In reality I think we see another of our themes in play that the Chinese property sector continues to need help.
Meanwhile the ECB in a show of bravado or maybe to avoid too much embarrassment for its President has just raised interest-rates by 0.5%. But investors are not convinced as the two-year yield of Germany is only 2.59%.