The current environment with low volatility is similar to that before the last financial crisis, analyzes the Bank for International Settlements. krisanapong detraphiphat / Getty Images
If inflation is not curbed, banks could suffer 2008-like losses, the Bank for International Settlements (BIS) concludes in a report.
The BIS stresses the need for the US Federal Reserve to rein in inflation.
According to the experts, the bank failures in connection with high inflation have increased the risk of a recession.
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The banking crisis that unfolded at the beginning of the year is not over yet. And banks could suffer losses similar to those seen in 2008 if the Federal Reserve (Fed) fails to get US inflation under control. The Bank for International Settlements (BIS) warns of this.
In your annual report, released on Sunday, the BIS warned of the lasting impact of the 2023 bank failures. At the beginning of March, the collapse of the Silicon Valley Bank (SVB) marked the beginning of the crisis. This was triggered by losses on their bonds as interest rates rose and the value of their fixed income securities plummeted. These circumstances escalated into a larger regional banking crisis. Ultimately, they also led to the collapse of Signature Bank and First Republic Bank.
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Experts say the bank failures have increased the risk of a recession and more lenders on the brink of collapse. BIS Director General Agustín Carstens warned of bank losses “of a similar magnitude” to those seen in the 2008 financial crisis.
“The world economy is at a critical juncture,” said Carstens at a press event on Sunday when the report was presented. He stressed that inflation must be brought down in order not to burden the financial system. “The biggest challenge is to contain inflation completely and the last mile is usually the hardest,” he added.
Signals point to recession
The Federal Reserve has been trying to get the high prices under control for a year. It has aggressively raised interest rates to bring down inflation. In the CPI report, prices fell to 4 percent in May, below the 41-year record set last summer. Still, they were above the Federal Reserve’s long-term target of 2 percent.
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Central banks are unlikely to be able to contain inflation to 2% without triggering a recession. Commentators are warning of this, pointing to recession signals that are flashing in various areas of the economy. Mainstream indicators like the inverted yield curve have been pointing to this repeatedly over the past year. But also less traditional signals like the Demand for cardboard boxes and RV sales portend a coming downturn.
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