In the last episode of PODCAST “Click – The Turning Point”, we look back on the recent crisis which led to the bankruptcy of the Silicon Valley Bank in the United States and led to the disaster takeover of Crédit Suisse by UBS. A sequence that questions in particular the role of central banks in stabilizing our economies.
All finance specialists will tell you that the actions of central banks (FED in the United States and ECB in Europe) are reshuffling the cards economically and this is a game-changer for banking players in particular. We had been living for nearly 15 years in a context of very low interest rates, but the central banks are in the process of reversing their “extremely accommodating” monetary policy. The interest rate practiced by the FED, for banks which must refinance with it, has gone from 0 to 5% in less than a year… That of the ECB has climbed from 0 to 3.5% in 8 months only.
“Pull on the Brake”
The idea, explains Charlotte de Montpellier, senior economist at ING, “is that to calm record inflation, the central banks have not only decided to stop pressing the accelerator but to pull the brakes altogether… we had never seen in history such a rise in rates fast.“This is what destabilized certain banks which had poorly covered their risks.
Nevertheless, some economists like Eric Dor, professor of macro-economics at IESSEG Lille question the relevance of this lever for action: “What the central banks are telling us today… is that, to fight against inflation, it is necessary to raise rates to dissuade households and businesses from spending on credit, to reduce economic activity… and therefore to reduce the employment and increase unemployment, that way workers will have less bargaining power, they will be able to demand lower wage increases… that way companies will have fewer expenses and will pass them on less in price increases“. AND the economist to wonder: “wouldn’t there be other ways, in a modern economy in the 20th century, to fight against inflation… with a lower social cost?“
On this, the Governor of the National Bank of Belgium, Pierre Wunsch recognizes that this is a real subject of concern and that it is not easy to try to stabilize prices without causing a slowdown in the economy with all the consequences that this entails “but our goal is to bring the economy to a soft landing without creating a recession“says the governor.
If you want to understand why some banks have just taken a tumble and if there is reason to worry about European and Belgian banks, take the time to listen to this week’s 50-minute PODCAST “Déclic – Le Tournant” . Available on audio and on your download platforms.