9 days ago 1 min read

Experts Issue Warning: Fed's Rescue US Banks May Lead Recession And More Bank Failures

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A number of markets, including the US economy and interest rate outlooks, are being significantly impacted by Silicon Valley Bank's recent failure and following government bank rescue of depositors. Authorities have pledged to completely secure depositor money and provide banks with better loan terms in an effort to allay concerns and prevent panic in the financial system.

Market players are worried about the possibility of moral hazard in the long run, even though this action has temporarily improved mood. William Ackman and Jeffrey Gundlach, among other industry experts, have issued warnings that additional banks may fail and that the Treasuries market is indicating a coming recession.

The new program offers loans of up to one year in exchange for securities with a dollar-for-dollar value of one cent. The loans will be fixed at 10 basis points over the OIS, or overnight interbank spread, measure.

The program will give banks liquidity and boost sentiment, but according to Priya Misra, global head of interest rates strategy at TD Securities, it could result in worsened lending criteria and increased negative risks.

The initiative may cause moral hazard and a significant easing of financial conditions, warn Rabobank strategists Michael Every and Ben Picton, while Jan Hatzius and his team at Goldman Sachs Group Inc. forecast a Fed delay on rate hikes.

Some investors may decide to invest in "Too Big Too Fail But Now Have Been Regulation Into Having Lots of Liquidity and Capital Banks" like JPMorgan, Bank of America, and Wells Fargo in response to the news.

The policy response, according to Australia & New Zealand Banking Group strategist John Bromhead, might allay systemic anxieties and trigger a relief rally, which would put additional pressure on the US dollar.

Experts caution that there is no assurance the current government action will be successful and that irrational fear can have unanticipated repercussions, even while it may stop contagion and the spread of financial risk.

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