Jerome Powell: “We cannot take the strength of the financial sector for granted”

2023-06-29 10:59:43

The Chairman of the Federal Reserve, Jerome Powellhas warned this Thursday that, despite all the improvements to strengthen the financial system after the great recession of 2008, “we cannot take its resilience for granted”, as evidenced by the recent banking “turmoil” in the US -which has affected Silicon Valley Bank, First Republic and Signature Bank- and in Switzerland (Swiss credit).

“The bankruptcies in 2023 have been painful reminders that we cannot predict all the stresses that will inevitably come with time and opportunity. We must not be complacent about the resilience of the financial system.” This was stated by the president of the FED in Madrid, in a brief speech before participating in a dialogue with the governor of the Bank of Spain, Pablo Hernández de Cos, within the framework of the IV Financial Stability Conference organized by the Bank of Spain itself and by the Center for Monetary and Financial Studies (Cemfi).

“Bankruptcies in 2023 have been painful reminders that we cannot predict all stresses”

One day after the result of the the latest annual stress tests on US banks -which have been surpassed by the 23 largest entities despite the financial storm in March- Jerome Powell wanted to emphasize the need for the authorities to be vigilant to recognize when a crisis is brewing and “respond decisively”, since the developments of these can be very fast.

“When Silicon Valley Bank failed, it became clear that some standard assumptions, despite coming from hard experience, were wrong. In particular, deposit leaks They were no longer a matter of days or weeks, now they could be almost instantaneous,” Powell said.

The results of the last stress tests have determined that US banks would remain “above capital requirements” for a hypothetical global recession, despite the fact that they could lose more than 500,000 million dollars (458,227 million euros at today’s exchange rate) in that projection. However, Powell wanted to warn this Thursday that “the bank deposit runs and bankruptcies of 2023 have been painful reminders that the tensions that will inevitably come with time and future circumstances cannot be predicted”, hence the need that the authorities should not become “complacent” about the resilience of the financial system. “We will take these lessons into account and continue to learn as we must, because the work of building and maintaining a resilient financial system is never done,” Powell concluded.

Not surprisingly, in its recent annual report, the Bank for International Settlements (BIS) has warned last Sunday of the possibility of a financial crisis of much larger dimensions than the one who signed up last march with the fall of several regional banks in the US and Credit Suisse, in Switzerland. As the BIS recalled, historical experience shows that “it is quite common for bank stress to arise after a tightening of monetary policy”; frequently, three years after the first interest rate risenotes the BIS in its annual report (on this occasion, the rate hikes began in the first part of 2022, in the US).

Both Powell and De Cos have referred to the actions of the central banks of tightening of their respective monetary policiess to deal with inflation and drive the rates of price increases to the target of 2%. Both have recognized that “in the short term interest rates are going to remain high”, in the expression of the governor of the Bank of Spain and member of the government council of the European Central Bank (ECB). Powell has explained that the effect of a restrictive monetary policy can already be seen in the drop in demand in the sectors most sensitive to interest rates, in particular housing and business investment, although “it will take time for the full effects of monetary tightening to materialise, especially on inflation”