In such times, it is perhaps necessary to focus on a larger picture rather than individual companies alone. This is because the fate of financial markets as well as the global economy for near and mid-term may be shaped in coming months.
Last week, number of large banks have failed on their short-term liabilities in the US and Western Europe. More specifically, it was Silicon Valley Bank, First Republic Bank, and an almost 2-centruries old Swiss giant – Credit Suisse.
Regulators have expressed a very clear and straightforward stance towards these developments. To put it shortly, central banks are ready to provide funding to the banks that face liquidity issues. The statements from monetary authorities have slightly lifted investor optimism: S&P 500 gained 2.1% w/w, while the tech-heavy Nasdaq 100 rallied 6.5%.
It is important to stress that such a stance from the monetary authorities may have a sizeable impact on the inflation issue. When the Federal Reserve, European Central Bank, and other monetary institutions are rising interest rates they are trying to withdraw cash from the economy (i.e. leaving less money in circulation). However, when central banks are injecting money into the system for whichever cause they are doing the opposite (i.e., increasing the money supply). Therefore, by doing this they are reversing their months-long efforts of restricting the amount of money in the economy. To put it simply, every effort of helping out the banks that implies injecting more cash into the economy will make the inflation problem worse.
Lastly, it is worth noting that not all US banks are in the same position. The financial sector behemoths, like Bank of America, JPMorgan Chase, and Goldman Sachs, have sizeable capital reserved for potential rise in deposit withdrawal rates. Moreover, reserves are not the only instrument these banks have at the disposal: central banks are now their best ally, as monetary authorities comprehend the severity of consequences that a financial crisis will have and, therefore, are willing to do whatever it takes to avoid it.
