"When will we learn from our lessons?" International Sharp Review | US banking industry is illuminated by red lights | Federal Reserve | US
A few years ago, then Federal Reserve Chairman Yellen once said that in her lifetime, "we will never see another banking crisis in the United States.". However, this prophecy was shattered by reality. On the 7th local time, Moody's, one of the three major international rating agencies, downgraded the credit ratings of 10 small and medium-sized banks in the United States, and added six large banks, including Bank of America and Bank of New York Mellon, to the downgrade observation list. In addition, 11 banks had a negative rating outlook. As soon as the news came out, the stock prices of these named banks fell one after another, even affecting other large banks.
Moody's report points out that the US banking industry is facing "multiple pressures", including financing pressure, inadequate regulation, and so on. Among them, "difficulty in financing" is the survival crisis faced by a large number of banks in the United States at present.
Since the first half of this year, Bank of America has experienced a series of crises due to insufficient solvency and insolvency. In March, Bank of America, Silicon Valley Bank, and Signature Bank went bankrupt; In early May, the First Republic Bank collapsed... as a last resort, US regulatory agencies invested in rescue efforts. The Financial Times reported on the 7th local time that regional banks in the United States are still "relying on billions of dollars in government financing to sustain their lives.".
Why have some American banks reached the point of relying on rescue to "survive"? This to some extent reflects the fragility of the US banking industry. Since 2022, in response to inflation, the Federal Reserve has continued to raise interest rates, leading to the depreciation of assets such as US bonds held by banks and putting great pressure on their operations. Take Silicon Valley Bank as an example. Its holdings of US treasury bond bonds and mortgage-backed securities accounted for more than half of its total assets. After the Federal Reserve's aggressive interest rate hike, Silicon Valley banks suffered significant losses in asset value and had to meet the withdrawal needs of depositors, resulting in insolvency and ultimately bankruptcy. According to data from the Federal Reserve Insurance Company, as of the end of 2022, the total book loss of US banks holding bonds reached approximately $620 billion.
The fragility of the US banking industry is the result of a sudden shift in US economic policy and a tendency towards risk-taking. For a long time, American politicians have tended to increase spending and adopt expansionary fiscal and monetary policies to woo voters. After the outbreak of the COVID-19, the United States implemented the "unlimited" quantitative easing policy, maintained ultra-low interest rates, and launched a large-scale stimulus plan, leading to soaring inflation. This has forced the Federal Reserve to aggressively raise interest rates. As stated in the Moody's report, the US banking industry generally lacks preparation for rising interest rates. The European Center for Economic Policy Research pointed out that the banking crisis in the United States is not an isolated case, but a "systemic" one.
At the same time, regulatory issues have exacerbated the risks in the US banking industry. Influenced by partisan interests and lobbying from small and medium-sized banks, the United States introduced a bill in 2018 to raise the total asset threshold for regional banks that require strict scrutiny from $50 billion to $250 billion. This has led to 25 banks in the United States no longer being subject to strict regulation. The First Republic Bank, which collapsed in May this year, was one of the "fish that missed the net" of that year.
"When will Bank of America learn its lesson?" Western media and observation agencies have asked one after another. Just a few days ago, Fitch downgraded the default rating of the US long-term foreign currency issuer from AAA to AA+, expressing dissatisfaction with the US debt ceiling impasse and financial management ability.
In just a few days, two consecutive international rating agencies have downgraded the relevant credit ratings of the United States, which is by no means accidental. Analysts point out that the massive expansion of US Treasury bonds, the aggressive interest rate policies, and the recent banking crisis are all the results of the US's long-term reckless behavior and overdraft of US dollar credit. This is also why US bonds, which used to be a "safe haven asset," have instead become a source of risk.
More importantly, international rating agencies frequently turn on red lights as a warning of the lack of economic governance capacity in the United States. Under the influence of American voting politics, politicians often value short-term and immediate effects and are unwilling to seek real solutions to problems. The US financial industry gradually accumulated more and more risks until one day they erupted.
As an important indicator of the real economy, the US banking industry is facing a crisis, which may bring a series of negative impacts. The Moody's report points out that the US economy will enter a mild recession in early 2024, and banking risks may further increase. Analysts believe that once a crisis spreads widely in the financial system and spreads to the real economy, it may drag down the US economy and even affect global economic recovery.
The two downgrade warnings, from Fitch to Moody's, have already conveyed a clear enough signal. The question is: Can American rulers truly learn from their mistakes?
