Banks On Thin Ice – The IMF Comments On The Banking Situation
Just over one month ago, Silvergate Bank filed for bankruptcy following immense retrievals of customer deposits, leading to the regional bank collapses of SVB, First Republic, Credit Suisse, and more. Now, some of the biggest American financial institutions will be reporting their earnings for the previous quarter, and the International Monetary Fund has provided some background into these banks’ situations. IMF Chief Economist Pierre-Oliver Gourinchas explained that these banks are currently facing larger costs, and when liquifying, they are potentially losing money once they realize the corrupted value of these assets. The same was true for SVB, however, on a magnified scale, where their assets were in the form of long-term treasury notes, which lost billions of dollars of value once sold.
Gourinchas also claimed that the increased tightening of interest rates has the potential to decrease not only the U.S.’s economic growth but the entire growth of the globe. With a 1% national decrease in lending, banks will contribute to a drop in American GDP by 0.44 percentage points. Furthermore, the current forecast at 2.8% global growth will most likely subside to 2.5%, with the worst-case scenario reaching 1% in a global recession. However, he continued to assert that monetary policy should be focused on bringing down inflation, as the central banks have enough resources to aid any other areas of uncertainty. This was true during SVB’s collapse, where U.S. regulators approved to guarantee the deposits for the bank’s customers.
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I am not a financial advisor and my comments should never be taken as financial advice. Investments come with risk, so always do your research and analysis beforehand.