How the banking crisis is hitting the Fed
The leadership of the Federal Reserve System contributes not to overcoming the banking crisis that arose in the United States, but to the collapse of the Fed itself
The US Federal Reserve System (FRS) has scheduled a meeting of the Board of Governors on March 22 to deal with the banking crisis. At the same time, some facts indicate that the leadership of the Fed is not going to prevent the collapse of American banks.
The beginning of the banking crisis was laid by the collapse of the online digital currency exchange service FTX. This service, registered in the Caribbean offshore Antigua and Barbuda, was the third largest cryptocurrency trading in the world. The vast majority of transactions made on the platform were from US and African citizens.
American banks also actively used the online service. The latter, speculating in the cryptocurrency market, have made this enterprise one of the significant sources of their income. At the same time, they were not at all embarrassed by the fact that the so-called “virtual currencies” were ordinary fraudulent schemes, speculative pyramid schemes. Banks in pursuit of profit deliberately took risks.
In November 2022, the speculative pyramid collapsed. FTX management has declared virtual bankruptcy. And here, naturally, problems arose for those banks that were actively speculating in the cryptocurrency market. California’s Silicon Valley Bank and New York’s Signature Bank were especially hard hit. Both were not only actively involved in cryptocurrency speculation, but also involved a wide range of people in these fraudulent schemes. In particular, the share of deposits of individuals in cryptocurrencies in Silicon Valley Bank exceeded 30%. Naturally, after the collapse of FTX, the holders of such deposits immediately rushed to banks with the intention of withdrawing them in dollars. And here, naturally, they faced a refusal.
The fact is that almost all American banks have the vast majority of funds invested either in real estate or in securities. Therefore, when there is a flood of depositors seeking to withdraw their funds, banking institutions are inevitably faced with the problem of lack or shortage of cash. In such cases, the main thing is to prevent banking panic. In this situation, it is necessary to prevent ordinary depositors from running after the holders of cryptocurrency deposits to the bank.
To prevent panic, the owners of Silicon Valley Bank and Signature Bank turned to the Fed so that it would issue and lend them cash dollars. That is, they did exactly what commercial banks did before. So, when the banking crisis of 2008 arose, the affected banking institutions turned to the central bank, and the latter gave them huge sums through the issuance. Then the funds were allocated on preferential terms. However, this time the regulator began to act in the exact opposite way.
After the collapse of FTX, when the probability of bankruptcy of large banks became obvious, the Fed raised the base rate twice, which eventually rose from 4.0% to 4.5%.
The base or key rate is the interest on the amount of loans that the central bank allocates to commercial banks for short periods. The higher the base rate, the more expensive the central bank loan, the less opportunities commercial banks have to take it, especially in times of crisis.
Moreover, the head of the Fed, Jerome Powell, speaking on March 8 in the US Senate, said that the central bank has no opportunities for a new large-scale emission. The head of the Fed referred to the fact that the institution subordinate to him had losses in the amount of more than $1.2 trillion. And these losses are connected with the previous uncontrolled emissions.
In addition, Powell recalled that commercial banks that speculated in cryptocurrencies, as their depositors, deliberately took risks. Therefore, they themselves must be responsible for their problems. And it does not matter that the collapse of banks can lead to the collapse of the social system. After all, the affected banks had accounts of pension funds, insurance companies responsible for medical and other insurance.
From a formal legal point of view, the head of the Fed is right. In the United States, the liberal model of the economy is doctrinally fixed. It provides that the state should not regulate the market, interfere in economic activity. The state is not obliged to help anyone.
In addition, the United States has accumulated a huge public debt. Most of it arose as a result of unlimited emission associated with overcoming the consequences of the 2008 financial crisis. For comparison: in 2007 the national debt was $8.9 trillion, and today it is $31.4.
Given this fact, the head of the Fed made it clear that the board of governors at the upcoming meeting on March 22 intends to… once again increase the base rate. According to media reports, it can be increased by 0.25-0.5%. It was this announcement that led the owners of Silicon Valley Bank and Signature Bank to file for bankruptcy, after which the domino effect worked. Shares collapsed almost all major banks.
Such a policy allows us to assert that the leadership of the Fed is not going to deal with the banking crisis.
Let’s add that in this whole story there is one strange detail. One of the failed banks, namely Silicon Valley Bank, is of systemic importance to the Fed itself.
As you know, the US Federal Reserve System is a private corporation consisting of 12 separate legal entities – the Federal Reserve Banks (FRB). The FRB, which is a joint-stock company, is divided according to the regional principle. The largest of these are the Federal Reserve Banks of San Francisco and New York. In many ways, it is they who determine the policy of the entire Fed.
Silicon Valley Bank is owned by SVB Financial Group and is its main asset. At the same time, SVB Financial Group is listed as one of the largest shareholders of the Federal Reserve Bank of San Francisco, and its CEO Gregory Becker is on the board of this Fed. From this perspective, the collapse of Silicon Valley Bank undermines one of the Fed’s two largest banks. And in this situation, the Fed’s refusal to help SVB Financial Group is tantamount to shooting itself in the foot. Such a policy leads not to a reduction, but to an increase in the losses of the Federal Reserve System.
Yuri Gorodnenko, RenTV
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