Xinhua News Agency, Tokyo, March 14 (International Observation) Radical interest rate hikes impact the financial system. The Fed’s future operations may be hampered
Xinhua News Agency reporter Liu Chunyan
The emergency closure of Silicon Valley Bank shocked the world and triggered turmoil in global financial markets. Japanese media and experts pointed out that the major reason for the drastic change of Silicon Valley Bank, which has a good reputation in the industry, is the Fed’s continued aggressive interest rate hikes. The U.S. financial system is fragile due to the emergency shift of the Federal Reserve’s monetary policy, which may restrict future policy operations.
Tohide Kiuchi, a researcher at Nomura Research Institute, analyzed that as the Fed enters the channel of rapid interest rate hikes, Silicon Valley Bank can be said to be in a triple dilemma.
First of all, Silicon Valley Bank mainly serves start-ups. During the U.S. economic deceleration cycle, many start-ups have entered a low tide period, have difficulty raising funds, and have withdrawn money one after another.
Second, the prices of bonds held by Silicon Valley Bank continued to fall, resulting in huge book losses. When the bank encounters continuous withdrawals, liquidity is tight, and the bond assets have to be sold, the book loss will become a huge actual loss. News of the losses sparked a run on Silicon Valley Bank, which was forced to close its doors.
In addition, the aggressive interest rate hikes in the United States have led to a deep inversion of the U.S. bond yield curve. The inversion between the 2-year Treasury yield and the 10-year Treasury yield has hit the largest in 40 years, making the business model of Silicon Valley Bank unsustainable.
“Nihon Keizai Shimbun” reported that the Federal Reserve’s interest rate hike has put many American banks in trouble, and the “thunderstorm” of Silicon Valley Bank highlights the overall vulnerability of the US banking industry. At the same time that deposits are being lost and they are chasing higher-yielding investment products, many banks have suffered huge book losses in their bond operations and are facing huge potential risks.
According to the data of the US Federal Deposit Insurance Corporation (FDIC), as the Federal Reserve continues to raise interest rates, the total book losses of bonds held by all US banks will rapidly expand to about US$620 billion by the end of 2022, making the US financial system more vulnerable to sudden shocks. Vulnerabilities are highlighted.
Tohide Kiuchi believes that the aftermath of the Silicon Valley Bank incident may spread globally. Many banks in Europe and Japan are also facing huge book losses and inverted yield curves. Once the trust in the financial system is damaged, it may cause a series of problems.
In fact, the emergency closure of Silicon Valley Bank led to a sudden rise in the market’s sense of risk aversion. Since the end of last week, a lot of money has flowed into the yen, Swiss franc and safe assets such as gold. The stock market in the Japanese market has plummeted for several days, the yen has risen sharply, and Japan’s long-term interest rates have dropped significantly.
Since last year, the interest rate gap between Japan and the United States has continued to widen, Japanese government bonds have been sold, and long-term interest rates continue to be under high pressure, putting pressure on the Bank of Japan. After Silicon Valley Bank’s “thunderstorm”, buying orders came to the fore. The price of Japanese government bonds rose rapidly, and the yield of 10-year government bonds fell sharply. The yield of Japan’s newly issued 10-year government bonds fell to 0.295% on the 13th.
Tetsuhei Ino, chief analyst at Japan’s Mitsubishi UFJ Bank, pointed out that the closure of Silicon Valley Bank has made market concerns about the US economic outlook mainstream. If the fluctuations in the US financial system continue to spread, the US dollar may depreciate further.
Naokazu Koshimizu, senior strategist at Nomura Securities, analyzed whether the Fed will continue to tighten monetary policy is no longer the biggest concern at the moment. Investors are worried about a chain reaction in the banking system, which will affect the prospects for the recovery of the US economy. They may flock to US debt as a safe haven in the near future, and US interest rates may face downward pressure in the short term.
Masahiro Ichikawa, an economic analyst at Sumitomo Mitsui Asset Management, believes that the closure of Silicon Valley Bank has exposed huge risks in the U.S. banking industry, and the Fed’s next move may be hampered. Although the Federal Reserve will continue to raise interest rates to curb inflation, the attitude will not change, but the intensity of interest rate hikes may be adjusted. It is expected that the rate hike at the monetary policy meeting in March may be reduced to 0.25%.
Yasushi Ueno, chief market economist at Mizuho Securities, also pointed out that given the current turmoil in the U.S. financial system, it will be difficult for the Fed to continue raising interest rates.
Kiuchi pointed out that the financial market has always been deeply worried, believing that the impact of the Fed’s substantial interest rate hikes will appear with a lag, which will eventually hit the U.S. economy. These worries are now superimposed with the Silicon Valley Bank incident, which will have a great impact on the Fed’s policy outlook and financial markets, and the Fed’s monetary policy is facing a new situation.
(Editor in charge: Ma Changyan)