Source: Beijing News Shell Finance
In just a few weeks, the risks that originated in Silicon Valley banks could cause global financial turmoil time and again, and even Credit Suisse, Switzerland's second-largest financial institution in Europe, could not escape the fate of being acquired and sadly exited. Why did this storm arise and what should be reflected on financial regulation?
On March 23, Zeng Gang, director of the Shanghai Finance and Development Lab, said in a live broadcast of "The Impact of the Overseas Banking Crisis" held by Beijing News Shell Finance, that the sharp turn of the Fed's policy is one of the important reasons for the risks of US and European banks. In the Fed's continuous interest rate hikes, the value of Treasury bonds, which were originally defined as safe assets, has been "bloodbathed", or the risk weight of assets such as Treasury bonds should be re-evaluated and reconsidered.
Zeng Gang also believes that the Fed's interest rate hike has had a long-term and far-reaching impact on global asset pricing, and the Fed has fallen into the dilemma of "suppressing inflation" and "financial stability", so the uncertainty of whether it will continue to raise interest rates in the future has increased.
The Fed's policy has taken a sharp turn The risk of US and European banks is not unexpected
The risks of the US and European banking industries continue to ferment, but Zeng Gang believes that if it jumps out of Silicon Valley Bank itself, the extreme shift in Fed policy is an important factor in the occurrence of these risk events.
In response to the impact of the pandemic, the Fed has implemented an unprecedented loose monetary policy operation. Zeng Gang said that zero interest rates coupled with unprecedented quantitative easing have led to extremely abundant liquidity in the financial system, which has greatly increased the cash in the hands of enterprises, especially technology companies that have benefited the most from the stock market boom, as well as high-net-worth customers, thereby promoting the overall continuous growth of deposits in the banking industry.
"In the face of the continuous increase in deposits, banking institutions need to be passive asset allocation, and low-risk, high-liquidity financial assets have become the first choice. After that, the Fed launched a process of aggressive interest rate hikes. Zeng Gang further explained that the interest rate hike has triggered interest rate competition between banks, and under the watchful eyes of regulators, the intensifying price competition will inevitably lead to a decline in deposit stability, and eventually lead to a run on small and medium-sized institutions with poor customer bases.
Zeng Gang believes that in this process, there are serious problems in the coordination between US monetary policy and prudential regulatory policies, and there is a lack of corresponding research on the possible impact path and blocking plan of the banking industry's liabilities and assets in the interest rate hike process, so that the risk is directly used at the beginning, which not only fails to effectively control the spread of panic, but also causes serious moral risks.
Stable deposits are unstable This round of events refreshes banks' risk supervision cognition
"Financial regulation is lagging behind, but every crisis is different, so risks in the banking sector are objectively present." Zeng Gang pointed out that unlike the previous round of risks, in this round of risks, it was precisely the customer deposits that were considered to be more stable in the Basel III to be the first to have problems, which led to the subsequent exposure of bank assets.
According to Basel III, corporate and high-net-worth client deposits are sources of liabilities with better stability than interbank deposits. However, in the interest rate hike environment, the cost of switching between banks of superimposed funds is very low, and its stability is not good.
For example, Zeng Gang said that Silicon Valley Bank is not the same as Lehman Brothers in terms of business complexity, and its assets are relatively high-quality; Its liability side is based on deposit liquidity, unlike Lehman Brothers, which has a large amount of interbank funds, and is not a "bad bank" in the traditional sense. However, the benchmark interest rate ranges from 0 to above 5%, and the competition for deposits between banks is bound to be very fierce, and it is easy to form a run.
In fact, although Credit Suisse has developed "with illness" in recent years, it has made considerable achievements in the wealth management business; First Republic Bank of the United States, which is also a bank that mainly serves high-net-worth customers, has encountered problems in the new environment of declining liquidity.
In Zeng Gang's view, the Fed's interest rate hike has also caused losses on the asset side of banks. In the process of rising interest rates on the deposit side, the interest rate of existing loans cannot be adjusted at any time, resulting in continuous narrowing of interest margins or even losses. At the same time, banks hold a large number of low-risk US Treasury bonds, MBS (mortgage-backed securities) and other bonds that have depreciated in value, and some floating losses have exceeded 50%.
The problem of too low risk weight of government bonds highlights the "Pakistan III" rule should be reconsidered
In Zeng Gang's view, the shift in monetary policy itself was too aggressive and did not allow enough time for banks to respond to risks. At the same time, because treasury bonds are already the least risky assets, banking financial institutions do not have the tools to hedge the risk of damage on the asset side.
"Regulators need to be moderately smooth as policy shifts to give institutions plenty of time to adjust." Zeng Gang pointed out that it is also necessary to restrict the competition at the bank deposit end, and it is possible to intervene in the pricing of bank deposits to prevent vicious competition in deposit interest rates, so as to increase the stability of deposits.
Zeng Gang believes that in the Basel III, the risk weight of bond assets such as government bonds is set to zero, and financial institutions are encouraged to hold bonds to maturity by holding the book loss due without being included in the profit or loss, but this does not mean that the bonds do not produce real losses.
"This suggests that the regulatory rules underestimate the risk weight of bonds too low and underestimate the possibility of introducing significant risks during the shift in monetary policy." Zeng Gang pointed out that after this incident, the global financial industry needs to reflect on whether the relevant provisions of Basel III are really reasonable, which also includes the need to adjust the regulatory rules according to the actual situation of each country.
Fed rate hike encounters "dilemma" Uncertainty rises
In Zeng Gang's view, the uncertainty about the impact of the Fed's policy on the market is still increasing. Interest rates are the basis for pricing financial assets, and if the Fed keeps interest rates at a high level of around 5% for a period of time, it will be enough to systematically revise the asset pricing of many of the original financial markets. Therefore, the Fed's interest rate hike will have a long-term and immeasurable impact on market prices.
"At present, the Fed is basically caught in a dilemma: if it does not continue to raise interest rates, high inflation cannot completely subside; If interest rates continue to rise, the economy will suffer pain, and the current risks are only the beginning. Either choice is risky. "Zeng Gang expected that the Fed would be cautious about raising interest rates, and even prompted the rate hike to enter the final stage.
Whether the Fed continues to raise interest rates or not, Zeng Gang believes that the risks brought by this round of interest rate hikes to the financial industry cannot be quickly resolved. For example, bonds such as government bonds have a large loss and scale, and the intrinsic value of loans is also declining, so the impact of interest rate hikes on the market will persist for a long time until it returns to easing. In addition, uncertainty in the exchange rate market will increase.
"In a stock market where seemingly risk-free asset volatility and losses outweigh seemingly higher risk, the market may be at a loss as to what assets to buy." In Zeng Gang's view, the bigger risk is that if the large loss of safe assets such as government bonds continues, it may lead to the collapse of the basis for pricing financial assets. At this time, the Fed's future interest rate hike process has reached a crossroads, and uncertainty will increase.
Beijing News shell financial reporter Jiang Fan
Edited by Xu Chao
Proofreading Lucie