Financial markets are on edge after problems at a major Swiss bank raised new concerns about the safety of the banking industry. This follows the collapse of two regional US banks.
SACHA PFEIFFER, host.
Look at the financial markets over the past few days and you will see a general bearishness.
STEVE INSKIPP, host.
Which is hardly a crash, but suggests uncertainty following the collapse of two regional banks in California and New York. Concerns about a major Swiss bank sparked a sell-off in both the United States and Europe yesterday, raising the question of whether we should be worried about more than banks.
PFEIFFER: NPR’s Scott Horsley is with us now to try to answer that. Hi Scott.
SCOTT HORSLEY, BYLINE. Good morning:
PFEIFFER: Explain the ripple effects here. How do a pair of bank failures lead to slower economic growth across the country?
HORSLEY: It just created a lot of uncertainty. While U.S. officials acted quickly to limit the damage and reassure depositors that their money was safe, there is just some concern about the problems spreading more widely. And of course it was amplified yesterday by concerns about this big Swiss bank. Now Credit Suisse shares recovered today after the bank received a bailout from the Swiss Central Bank. But Goldman Sachs predicts that the ongoing tensions will make banks more cautious about their lending, and a reduction in that lending could lead to slower economic growth. Now, that’s not necessarily a bad thing. That’s part of what the Federal Reserve was trying to achieve with its higher interest rates, said Julia Coronado, an economist at MacroPolicy Perspectives.
JULIA CORONADO. Consumers are likely to cut back or become more price sensitive and haggle more and thus we reduce inflation.
HORSLEY: Yesterday, the Commerce Department reported that retail sales fell in February, suggesting shoppers are becoming more cautious after a big jump in spending in January.
Pfeiffer: And what is the role of the Federation here?
HORSLEY: The Fed has two jobs here: to fight inflation, of course, and to ensure the stability of the financial system. And it’s a coin toss of sorts that will get top billing when Fed officials meet next week. People who believe that fighting inflation is the central bank’s top priority expect the Fed to raise interest rates by another quarter of a percentage point. But rising interest rates were one of the factors contributing to the collapse of the Silicon Valley bank, so those most worried about financial stability believe the Fed could stop and hold interest rates next week. That tussle in betting markets continues all week as analysts try to decide what the Fed’s most pressing priority is.
PFEIFFER: And interest rates are kind of the short-term job the Fed has to do. What are the longer-term steps that can be taken to address all these problems in the banking system?
HORSLEY: President Biden said Monday he wants Congress and bank regulators to impose stronger rules to prevent problems like those that brought down California-based Silicon Valley Bank and New York-based Signature Bank. Democratic Sen. Elizabeth Warren said part of the problem was a 2018 law that rolled back some of the strict rules in place after the financial crisis. Warren wants to tighten those rules again so that banks the size of Silicon Valley undergo regular stress tests.
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ELIZABETH WARREN. Stress tests are similar to general health checks. They check your heart. They check your liver. They check your kidneys because any one of them could break the bank. It was wrong to take them. We have to put them back.
HORSLEY: But Republicans like Sen. Kevin Cramer say not so fast. A North Dakota lawmaker says he doesn’t want a national fix for what he believes could be a localized problem.
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KEVIN CRAMER: The tendency to rush can be counterproductive. At the same time, somehow we have to create calm where there is no calm, especially if it is unwarranted anxiety.
HORSLEY: So legislative change looks kind of a long shot, but the Federal Reserve is looking at its role and how Fed supervisors failed to spot Silicon Valley Bank’s problems and what the Fed might do differently in the future. The central bank has promised to submit a public report in about six weeks.
PFEIFFER: NPR’s Scott Horsley. Thank you.
HORSLEY: You’re welcome.
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