World Insights: U.S. Fed aggressive rate hikes shock financial system, further restraining operations-Xinhua

World Insights: U.S. Fed aggressive rate hikes shock financial system, further restraining operations

Source: Xinhua

Editor: huaxia

2023-03-17 11:21:00

TOKYO, March 17 (Xinhua) -- As the shocking collapse of U.S. Silicon Valley Bank (SVB) triggered turmoil in global financial markets, Japanese media and experts blamed the U.S. Federal Reserve's continued aggressive interest rate hikes for the upheaval in the well-regarded lender.

The Fed's emergency shift in monetary policy could leave the U.S. financial system vulnerable, or bind itself to future policy actions, analysts warned.

Continuous price drops in bonds held by SVB led to a large amount of booking losses, which might translate into real losses when the lender has to sell its bond assets due to tight liquidity.

News of such losses triggered ferocious withdrawals from the bank and a final shutdown, according to Takahide Kiuchi, an economist at Nomura Research Institute.

Start-ups, which SVB mainly serves, are experiencing the ebb tide in the U.S. economic cycle as they began a run on the bank due to difficulties in raising funds, said Kiuchi, also a former Bank of Japan (BOJ) board member.

Kiuchi added that the aggressive rate hikes put banks like SVB to trouble and pushed the U.S. Treasury yield curve to its deepest inversion in over four decades, with two-year note yields exceeding 10-year yields, thus making the business model of SVB hard to sustain.

The SVB's collapse highlights the overall vulnerability of the U.S. banking industry, the Nikkei reported.

As deposits are pulled for higher-yielding investments, many banks face huge paper losses in their bond operations, exposing them to huge potential risks, said the media outlet.

Data from the U.S. Federal Deposit Insurance Corporation showed that unrealized losses, or assets which have decreased in value but have not been sold yet, of banks across the country swelled to 620 billion U.S. dollars by the end of last year, which highlights the vulnerability of the U.S. financial system in dealing with sudden shocks.

Kiuchi believed the fallout from SVB could spread around the world. Many banks in Europe and Japan also face large booking losses and inverted yield curves, and a string of problems could follow if trust in the financial system is damaged.

SVB's emergency shutdown has in fact led to a sharp rise in the market's risk-averse sentiment. Money has been poured into safe assets such as the Japanese yen, the Swiss franc and gold since last weekend. The Japanese stock market plunged for days, with the yen soaring and Japanese long-term interest rates decreasing significantly.

Since last year, Japanese government bonds have suffered continuous sell-offs as interest rate spread between Japan and the United States further widened amid upward pressure on long-term interest rates and the BOJ.

Following the SVB's collapse, the price of Japanese government bonds quickly rose while the yield of 10-year government bonds fell sharply.

Teppei Ino, a chief analyst at MUFG Bank, said that SVB's shutdown brought concerns about the outlook for the U.S. economy into the mainstream, and that the U.S. dollar could depreciate further if volatility in America's financial system continues to spread.

Whether the Fed continues to tighten monetary policy is no longer the biggest concern now, said Naokazu Koshimizu, a senior strategist at Nomura Securities.

According to him, investors, who worry about a domino effect on the banking system and the prospects for a U.S. economic recovery, may rush to the safety of U.S. treasuries in the near term, and U.S. interest rates may face downward pressure in the short term.

Masahiro Ichikawa, chief market strategist at Sumitomo Mitsui DS Asset Management, said the closure of SVB exposed huge risks in the U.S. banking sector, and the Fed's next move may be constrained.

While the Fed's stance on raising interest rates to curb inflation remains unchanged, the intensity of such hikes could be adjusted, he said, expecting the rate hike to be reduced to 0.25 percent at the March policy meeting.

Yasuya Ueno, chief market economist at Mizuho Securities, 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.

Financial markets have been worried that the impact of the Fed's aggressive rate hikes will eventually hit the U.S. economy hard, said Kiuchi.

These concerns, now combined with the SVB collapse, will weigh on the Fed's policy outlook and financial markets, creating a new situation for the Fed's monetary policy, he said.