Is the US banking crisis over?

The US banking crisis triggered worries about the global banking system earlier in the year. Three mid-sized US banks, Silicon Valley Bank, Silvergate and Signature, fell in quick succession, driving down bank share-prices across the world.

America’s central bank, the Federal Reserve, made significant amounts of cash available to the failed banks and created a lending facility for other struggling institutions. This calmed investors and prevented immediate contagion, with only one more US regional bank, First Republic, collapsing a few weeks later.

Yet it’s far from clear whether the crisis is really over. As traders return from their summer holidays to a period commonly associated with upheaval in the markets, how are things likely to play out?

Tight margins and dwindling deposits

Central banks have continued to increase interest rates to counter sustained inflation in recent months. In July, the Fed raised its key interest rate to as much as 5.5%, the highest in 20 years. The rate was near zero as recently as February 2022.

Though the increases have slowed this year, such a sudden change can be very harmful for banks – particularly as part of the sort of U-shaped movement in rates that we have seen since the global financial crisis of 2007-09.

US benchmark interest rate, 2007-23

Raising rates reduces the value of banks’ assets, increases what they have to pay to borrow, limits their profitability and generally increases their vulnerability to adverse events. Especially in the first half of 2023, banks have had to cope with low loan growth and high deposit costs, meaning the amount they have to pay out in relation to customers’ deposits.

This increased cost is partly because lots of customers have been withdrawing their money and putting it into places where they can make more interest, such as money market funds. It forced banks to borrow more from the Fed to ensure they have enough money, and at rates much higher than they used to be.

This was one of the reasons for the banking collapses in the spring, destabilising them at a time when the value of the debt on their balance sheets had also fallen sharply. This saw more customers at other banks withdrawing deposits for fear that their money wasn’t safe either. In sum, US banks saw deposits declining between June 2022 and June 2023 by almost 4%. Together with higher interest rates, this is generally bad news for the banking sector.

You can see the effect on banks’ profitability by looking at overall net interest margins (NIMs). These are a measure of what banks receive in interest income minus what they pay out to depositors and other funders.

US banks’ net interest margins (%)

Credit rating downgrades

The ratings agencies have added further pressure. In early August, Fitch downgraded its rating of US government debt to AA+ from AAA. It cited a likely deterioration in the public finances over the next three years and the endless politicking around the debt ceiling, which is the maximum level that the government can borrow.

Sovereign downgrades often reflect problems in the wider economy. This can destabilise banks by making them seem less creditworthy, leading their credit ratings to be downgraded too. That can make it harder for them to borrow money from the markets or potentially even from the Fed. This can then have knock-on effects in reducing banks’ lending capacity, capital buffers for coping with bad debts, overall profitability and share prices.

US banks’ share prices 2023

Sure enough, a week after the Fitch announcement, Moody’s downgraded the credit ratings of ten US mid-sized banks, citing growing financial risks and strains that could erode their profitability. It also warned that larger banks including Bank of New York Mellon and State Street were at risk of a future downgrade.

The other major ratings agency, S&P Global Ratings, has since followed suit, while Fitch is threatening to do likewise. Our research suggests bank downgrades are associated with making them riskier and more unstable, particularly when accompanied by a sovereign downgrade.

Having said all that, there are positives for US banks. Both interest rates and bank deposits are at least projected to stabilise in the coming months, which should help the sector. Despite the overall decline in banks’ profitability, bigger banks are reporting improved margins from charging higher interest on loans. Some of these banks also expect a boost from things like increased deal-making later in the year. Signs like those could help to bring more stability across the board.

In Europe, banks have seen reduced deposits and net interest margins in recent years, which helps to explain why Credit Suisse needed to be rescued by fellow Swiss bank UBS in March. Yet European deposits and profit margins have been recovering in the most recent couple of quarters. At the same time, the European Banking Authority’s recent stress tests concluded that large EU banks are robust.

UK banks appear to be in a slightly worse condition than EU banks. They remain resilient on their balance sheets, but their deposits have not recovered to quite the same extent as in Europe. They have also been adjusting down their profit forecasts in anticipation of further rate hikes by the Bank of England.

Regulatory intervention

To strengthen the US sector, the regulators are planning to further increase the minimum levels of capital that must be held by large US banks (with assets worth more than US$100 billion (£79 billion)).

These plans to increase banks’ capacity to absorb losses are encouraging, though will take more than four years to fully implement. The Basel II international banking rules were introduced to a similar end in 2004, but were not implemented in time to prevent the global financial crisis.

For the moment, the US banking system remains vulnerable both to shocks within the financial system and more general calamities. It will still be a few months before we can say with confidence that the worst is over.

George Kladakis, Edinburgh Napier University and Alexandros Skouralis, City, University of London

George Kladakis, Lecturer in Financial Services, Edinburgh Napier University and Alexandros Skouralis, Research Assistant, Bayes Business School, City, University of London

This article is republished from The Conversation under a Creative Commons license. Read the original article.

US regulators avoided a banking crisis by swift action following SVB’s collapse – but the cracks it exposed continue to weaken the global financial system’s foundation.

U.S. regulators’ swift reaction to the collapse of Silicon Valley Bank and two other lenders partially restored calm to markets, but concerns remain over the stability of the global financial system.

The government is racing to orchestrate a US$30 billion rescue of First Republic Bank by the nation’s largest financial institutions after the California lender’s shares continued tanking. Meanwhile in Europe, Credit Suisse’s own financial woes deepened, prompting the Swiss government to offer a lifeline. While Credit Suisse’s issues are unrelated to those of the failed U.S. banks, they further exposed deep anxiety in global financial markets.

To better understand what U.S. regulators did, the impact of their decisions and what problems remain, The Conversation turned to two finance scholars, Brian Blank of Mississippi State and Brandy Hadley of Appalachian State.

What did US regulators do?

The program introduced by the Federal Deposit Insurance Corp., the Department of the Treasury and the Federal Reserve on March 12, 2023, essentially amounts to life insurance for U.S. banks.

The biggest concern from the sudden collapse of Silicon Valley Bank on March 10, as well as Signature Bank two days later, was the tens of billions of dollars in deposits that would otherwise go uninsured. While the FDIC insures deposits up to $250,000, anything above that is at risk of loss in the event of a bank failure.

So the FDIC agreed to provide a backstop for all SVB and Signature depositors no matter how much they had deposited. And the Fed created a new lending facility to protect other small- to medium-size banks from the same issues that caused bank runs at SVB and Signature.

Notably, this protection for depositors does not extend to management, lenders or investors, including many institutional investors, pensions and large index funds. In addition, the program will be funded by an FDIC fund that comes from a tax on member banks. Taxpayer dollars aren’t at stake, Congress approval wasn’t required and, most importantly, only customers’ claims are protected. This is why the Biden administration insists this is not a bailout – even though some critics call it that.

Nonetheless, the government did intervene to stop the fallout from failing banks, even if done differently than in the past.

Why did the government act so quickly?

When the bank run on SVB’s deposits began on March 8, the lender initially sought to find a buyer. When that failed, regulators stepped in quickly to limit the risk to the financial system.

This was particularly important given that banks rely heavily on trust, and a loss of depositor faith in other mid-size banks could be extremely harmful.

But besides posing a systemic financial risk as the 16th-largest U.S. lender, the failure of SVB also threatened the health of the tech sector.

Close to half of U.S. startups backed by venture capital firms, including tens of thousands of technology and health care companies, were customers at SVB. The bank’s failure would have made it hard for many of them to pay their workers or take out loans that keep businesses running.

What are the problems of this approach?

One concern is something economists call moral hazard.

U.S. regulators were basically doing what governments have done to prevent banking crises since at least the 19th century: provide liquidity. That is, according to the academic theory established by Economist magazine founder Walter Bagehot in 1873, central banks should lend freely to lenders during a financial crisis to prevent a panic and restore confidence in the system.

But doing this could create a moral hazard by potentially encouraging risky behavior by banks, which may come to believe they will always be bailed out. This dilemma highlights the challenge of balancing the need for financial stability with the desire to avoid creating perverse incentives.

With the SVB rescue, regulators likely hope to avoid this by focusing protection efforts on depositors – not equity or debt investors.

Another problem is that the rescue treats the symptoms more than the root causes.

The source of SVB’s downfall was that it invested a significant chunk of its assets in Treasury securities that lost value as the Fed hiked rates in 2022. SVB sold $21 billion worth of these bonds at a loss of $1.8 billion in order to cover customer deposit withdrawals. This then prompted a stampede of clients to yank their mostly uninsured deposits.

But despite the depositor protection offered by the new program, many more banks still face asset-liability mismatches – that is, short-term deposits being invested in longer-term securities – that will not go away as a result of the program. Banks reported $620 billion of these unrealized losses as of December 2022.

Some other banks – such as Signature and Silvergate Capital, which also recently failed – are similar to SVB, with concentrated business in risky sectors like venture capital, technology or cryptocurrencies.

How big of a concern is the root of the problem?

The good news is that few banks are likely to have the same combination of unrealized losses, concentrated deposits and default risk that are likely to result in withdrawals as fast as what happened at SVB and Signature.

Critically, large and mid-size banks are sufficiently regulated, diversified, hedged and capitalized to prevent similar problems, especially given the very different balance sheet compositions and asset liability management strategies.

But the risks are big, as the Fed’s aggressive campaign to raise interest rates could potentially make things worse. Inflation remains elevated, which would normally lead the U.S. central bank to continue to drive up rates. The nascent concern about stabilizing the financial sector at the same time as taming inflation means the Fed has its work cut out for it.

So is the financial system safe?

Unfortunately, not yet.

While the crisis has been averted for now by limiting the risk of another bank run, the financial system – as well as the modestly strong U.S. economy – is showing cracks and fragility.

The recent troubles at Credit Suisse are a stark reminder of how quickly things can spiral out of control. Credit Suisse shares have been under pressure for several years because of its own unique problems, including scandals and a closely knit customer base that makes it more vulnerable to contagion.

But now the recent U.S. bank failures are causing broader panic among banks globally, and this is hitting shares of Credit Suisse hard, prompting the Swiss National Bank – Switzerland’s equivalent of the Fed – to promise to provide liquidity if necessary. This offers some relief but signals just how easily things can spiral out of control.

There’s no reason to think that the financial system is in serious trouble – for now – but the risks of more jitters have increased, putting more pressure on central banks, including the Fed, to roll back their inflation-fighting plans. Of course, doing so can unleash other risks – such as prices once again spiraling out of control.

All told, it’s a challenging balancing act, requiring careful precision and swift action to avoid a painful fall.

D. Brian Blank, Mississippi State University and Brandy Hadley, Appalachian State University

D. Brian Blank, Assistant Professor of Finance, Mississippi State University and Brandy Hadley, Associate Professor of Finance and the David A. Thompson Distinguished Scholar in Applied Investments, Appalachian State University

This article is republished from The Conversation under a Creative Commons license. Read the original article.

This is the second installment in our series on where the global economy is heading in 2023, which started with this article on global inflation.

As 2022 drew to a close, EU energy ministers finally reached an agreement to cap gas prices at €180 (£159) per megawatt hour (MWh) following months of volatility that piled pressure on European businesses and households.

The cap, according to EU policymakers, is an attempt to control the unruly market forces that saw gas prices spike to nearly €340/MWh last summer, driving electricity prices close to a record €1,000/MWh. But by winter, Europe had enough gas in storage for the season and was enjoying increasing imports of liquefied natural gas (LNG) through new floating regasification terminals in Germany and Holland.

While this government intervention might create the impression that the energy crisis caused by Russia’s February 2022 invasion of Ukraine is finally in the rear view mirror, it’s not. The recent gas price cap set by EU policymakers was set well over key LNG prices and the cost of gas bought ahead of time on the futures market for delivery this winter, which is currently trading around €70/MWh.

This matters because suppliers often hedge their price risk in the futures markets and so the cap will introduce uncertainty as the hedges may not reflect real market movements. This could lead to more price volatility.

In fact, it was the high gas prices in 2022 that actually kept the lights on in the UK and Europe this winter. China’s strict zero-COVID policy considerably slowed the country’s demand for energy in 2022.

This meant that more gas supplies from the US, west Africa, Qatar and even Australia headed for Europe, where both demand and prices were higher. Indeed, Europe might have lost about 70 billion cubic meters (bcm) of Russian gas supply in 2022, but it gained over 50bcm of additional LNG imports.

This shows how markets can work to solve problems. Next winter, however, a perfect storm of unfavourable weather and a resurgence of Chinese energy demand could make prices even higher and more volatile for all gas and power users.

If so, energy users may not only have to worry about Putin and extreme weather events in 2023, but also about increasingly assertive government policies potentially causing energy shortages.

Better energy crisis solutions

By meddling with markets, the politicians that set these caps risk repeating mistakes made by the US during the 1970s oil price shocks. Attempts to control energy cost increases by Richard Nixon – who was hoping for reelection as US president in 1972 – with price freezes, discouraged the usual stockpiling of seasonal petroleum products in the US. This led to shortages and misery for the American people.

With increasing government intervention in markets, such shortages could happen again in regions such as Europe. Subsidies, retail price caps and tax reductions are being applied across the world in order to shelter consumers from high energy prices.

But such actions only really support the rich (who consume disproportionately more energy) and support the continued use of damaging fossil fuels. This is bad news for innovators looking for better and cleaner ways to produce energy. It also subsidises the Russian war in Ukraine.

By attempting to shield consumers from high prices, governments will only encourage consumption via lower prices, prolonging the energy crisis. Targeted money transfers to the households in need would be less costly for governments and would also allow the market to do its job of rationing energy.

The outlook for oil

The oil market will be a very different story in 2023. The EU’s Russian oil sanctions came into effect on December 5 2022 for crude and will start on February 5 2023 for petroleum products.

This plan had a very good chance of hurting the Putin regime until the G7 countries set the cap at US$60 (£50) per barrel. Since this is above the going price for Russian oil, it makes the sanctions redundant.

Oil is a homogeneous commodity, mainly traded via ships and so virtually impossible to sanction globally. Supplies outside Opec are plentiful and growing and the fear of recession and poor Chinese demand have stopped prices from rising too rapidly in recent months. This means the short-term outlook is for lower oil prices, with likely increases coming only later in 2023.

But even the mighty global oil market has been affected by the long arm of government policy. In addition to the G7 sanctions, the Biden administration started releasing oil from the US Strategic Petroleum Reserve before the mid-term elections last November.

This was to keep domestic gas prices low – an established US vote-winner – but this additional supply also kept international prices low. As the price of US crude fell towards US$80 a barrel in the past month, the administration started filling its reserves again.

As a result, the US government has effectively become a trader and a swing producer in the oil market, giving it the power to affect prices. We can expect another turbulent year in energy markets in 2023, but such government actions and their consequences may turn out to be the biggest factor moving markets.

This article is part of Global Economy 2023, our series about the challenges facing the world in the year ahead. You might also like our Global Economy Newsletter, which you can subscribe to here.

Adi Imsirovic, University of Surrey

Adi Imsirovic, Senior Research Fellow, Oxford Institute for Energy Studies, University of Surrey

This article is republished from The Conversation under a Creative Commons license. Read the original article.

No nation was ever ruined by trade – Benjamin Franklin

Desires, wants, demand and supply are some of the basic concepts of economics. But these basic concepts play a major role in the development of an economy. It is on these fundamental concepts an economy accelerates. All nations look for rapid economic expansion and are in search of new markets. The policies framed by the government are very significant in enhancing the pace of economic development in a country. Similarly the era of globalization brought in rapid changes in the fields of investment, production, finance, trade and technology and hence it is often cited that the world has shrunk in size and the world is a global village.

Introduction

All the countries in the world are bestowed with natural resources and no country is self sufficient on all the resources. Some countries are superfluous in resources while the others are inadequate. It only at this situation trade take place, the earlier form of trade was the barter system which prevailed across civilizations. Due to practical difficulties, the barter system was abandoned and new and complicated versions of trade took shape in the form of trade barriers and economic policies. With complications on trade on the rise, a new economic policy that would guide nations was the need of the hour and the elucidation to that was Globalization.

Globalization is a process wherein the production of goods and services take place across nations, without any barriers on production, distribution, exchange and consumption. But the pros and cons of globalization continues to be a highly debated topic.

Structural changes in the economy

India attained independence in the year 1947 and the planning for the economy started from 1951 onwards with the introduction of the first five year plan. India is an agrarian economy where 70 percent of the population depends on agriculture and agro related industries for their livelihood. It was only during the Second Five year plan (1956-1961) importance was given to the development of industries. Gradually the industrial policies paved way for rapid economic expansion, gainful employment, introduction of basic and heavy industries, export promotion and progress of small scale industries.

The small scale industries has been a major contributor to the country’s Gross Domestic product with about 45 percent share in industrial goods and 35 percent share in exports. The small scale industries are the bridge linking the large and medium industries and act as an engine of Growth in the 21st century.

Gradual development of industries

Let me take an example of Thanjavur District in Tamilnadu (India) to explain how a place acclaimed as the ‘Granary of South India’ slowly transformed itself as an industrial hub providing employment opportunities to the people of nearby villages. Thanjavur is famous for its architectural wonder – The Big temple and also for the ancient handicrafts and musical instruments.

Setback in the agriculture sector

Even though agriculture yielded good harvests, a majority of the workforce suffered due to seasonal unemployment, procurement and issue price for the food crops, migration of laborers, poverty and other such problems. Further added to the woes of the farmers, the climatic conditions played havoc in the productivity of food crops. To overcome these problems people started to shift to agro based and other allied industries.

The path taken

The small scale industries played a crucial role to tackle the twin objectives of unemployment and poverty. The setting up of the District industries center in 1979 played a vital role in the development of small scale industries located in the Thanjavur district. The small scale industries were successful because they were not only agro based but also chemical, engineering, textile and other miscellaneous industries were set up in rural areas. These industries were labor intensive and they provided employment opportunities to the people and increased their standard of living.

Pre liberalization

It was only after 1980, the government started the initial process of liberalization and the trend was to diminish the strict licensing system and to allow more freedom to the entrepreneurs. There were fluctuations in the economy that could be felt throughout the industries.

Post liberalization

During the post liberalization (1991 onwards) era the focus shifted from ‘protection’ to ‘competition’ based growth. The industrial policies followed by the government were successful in bringing about a change in the development of Thanjavur. Along with this the functioning of commercial banks and private banks, cooperative societies were instrumental in the progress of the district.

The district per capita income at current prices in the year 1999-2000 was Rs.16269 and during the year 2006-07 it had increased to Rs.26714. During the 1980s the number of industries registered was 146 and in the 1990s the total number of industries stood at 227 and during 2009 – 10 the number of units registered were 15028. This is clear from the above data analysis that there is considerable progress of small enterprises sector contributing to the development of the district.

Conclusion

Since Thanjavur is an agricultural dominated district, paddy husks are available in plenty. Industrial units are set up, that use this husk as a raw material to produce card boards and wax can be produced from rice bran. Some of the agro based industries successful in this area are Coconut products, Confectioneries, Banana Products, Dairy products, Electronic Items, Toys and Games, Ready Made garments, Bio fertilizers and Coir based industries.

Globalization has brought in a plethora of opportunities, it is up to the country to optimize the resources and bring in escalation in every segment. Encouraging one sector and neglecting the other will lead only to lopsided expansion. It is a lesson to be remembered by the planners that sustainable growth in agriculture will alone solve the food security problem as well as employment, as majority of them are depended on agriculture. Appropriate policies can be framed to attract the foreign direct investments in manufacturing, automobile and IT related services industry.

Gayathri Ramachandran
Asst. Prof. M.B.A

Article Source: https://EzineArticles.com/expert/Gayathri_Ramachandran/1307088

Article Source: http://EzineArticles.com/7028335

(BPT) – Despite disruptions over the last year, the number of entrepreneurs launching startups hit record highs in 2020. In the U.S., vision, passion, grit and a startup-friendly environment have resulted in the world’s highest number of startups.

If you’re one of the millions feeling the pull to start your own company, your timing couldn’t be better. The proliferation of connected devices, the worldwide shift to remote and hybrid work models and the rapid pace of technological innovation are just a few of the factors bringing exciting opportunities for new products and services.

“The shift to global entrepreneurship has underscored something I’ve believed for a long time, that you can start up a company anywhere,” said Brad Feld, managing director at tech investment firm, Foundry Group. “People are finally realizing that tech hubs, while great, are by no means a critical element to startup success. Today’s visionaries can launch tomorrow’s unicorn from their kitchen table. The tech, tools and people are already out there — it’s just a process of leveraging those resources to make it work for you, wherever you are.”

Below are tips to keep in mind if you’re one of the many innovators ready to make the startup jump.

1) Surround yourself with the right people

Having the right people in place can be the difference between success and failure. It’s hard enough for founders, who’ve lost countless hours of sleep and invested their life savings, to entrust their vision to others, but there’s no other way to grow. Personal recommendations and connections are useful, but not always available. Job sites like Indeed allow employers to screen potential hires with supplementary assessment tests to help determine a candidate’s strengths in critical areas like writing, customer service and technical ability. Once you’ve selected a handful of candidates, be sure to ask questions that can help you gauge their excitement about your vision and how they would make that vision a reality.

Will Herman, serial entrepreneur, angel investor, corporate director and startup mentor said, “The commitment you must make is to embody specific roles and responsibilities, including operational and cultural leadership, vision and direction, and especially, building a great extended team.”

2) Use the experience of others

The five-year success rate of startups looms around 50%, but there are many people you’ve never met who are ready to help you succeed. The internet is full of information, advice and tips from seasoned founders, instantly available and often free. Consider a mentorship organization for support, research what accelerator programs like Y Combinator and Techstars offer, read interviews or listen to podcasts with industry leaders, and make use of the resources available through the U.S. Small Business Administration, designed to support startups with information, access to capital and connections.

The Startup Playbook offers insight and expertise from those who successfully launched multiple companies and walks you through lessons they learned the hard way. Do More Faster explores key issues that first-time entrepreneurs encounter and offers proven advice from successful entrepreneurs who have worked with the Techstars accelerator.

3) Put the right tools in place

Today’s entrepreneurs face virtually no technological barriers to entry. Software programs can be accessed through the cloud no matter where you are, eliminating the need to download applications onto computers bound to one physical office. Zoom and collaboration tools like Slack and Microsoft Teams make communication simple. JumpCloud’s directory platform offers a single login to securely connect employees to any file, application, network or IT resource they might need — and it lets non-technical people manage their IT with ease without breaking the bank. Myriad applications can capture and analyze valuable information like market data, how potential competitors are positioning themselves, and vital insights about how effective your social media, lead generation or marketing programs are — all of which can help recalibrate your business model.

If you’ve identified a clear market need or created a product or service you know will have a big impact, it might be the perfect time for you to pursue that dream. As David Cohen of Techstars said, “Having worked with over 2,000 companies, hard work, brilliance and innovation has been a constant for startups. What’s new is the instant availability of elements that can significantly impact a company’s trajectory — expert advice, easy-to-use and inexpensive software, and a truly global network of talent to pick from. While launching a startup is for the hearty, the amount of support for those who push on despite the odds has never been more robust.”

With access to the right people and advice, and the tech tools to make your journey easy, you can be set up to succeed and scale.