Macroeconomic consequences of the banking panic in the USA: the role of bailouts in the correction of the debt and credit cycles

Шлапак, Алла Василівна (2023) Macroeconomic consequences of the banking panic in the USA: the role of bailouts in the correction of the debt and credit cycles Інвестиції: практика та досвід (9). pp. 5-11. ISSN 2306-6814

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Abstract

In its entirety, the diversity of financial relations does not form a simple sum of elements, but a system that is an organic set of interacting elements, all structural units of which are interconnected. Despite the fact that each element in the financial system is relatively independent, performs only its inherent specific functions, nevertheless, all elements interact both with each other and with other elements, and in practice these relationships have importance. This approach allows us to highlight the macroeconomic effects of bailouts through the prism of the stability of the public finance system and the financial sector - both creditors and borrowers. A long period of near-zero interest rates has meant that during this time Western banks have purchased a huge amount of long-term government and mortgage bonds at extremely low interest rates. In these assets, they invested the funds of their investors. Rising inflation forced the world's leading central banks to start raising interest rates last year, which led to higher yields and a sharp drop in the value of US and European bonds. Due to this, the value of bonds issued during the period of low rates fell by 25–30% depending on the duration, and the value of long-term (50 or more years) bonds of some European countries decreased by 60–70%. In turn, this led to losses of financial institutions that invested in them. According to regulators, in the US alone, the total net unrealized loss of banks currently exceeds $620 billion. This is about 80 times more than a year earlier. As long as the bonds are not sold, the loss is not fixed and is reflected in the financial statements as a negative revaluation of assets. Theoretically, financial institutions could hold these bonds to maturity and thus return the funds invested in them. In addition, banks could "wait out" a period of high interest rates. The subsequent easing of monetary policy and the reduction of rates would lead to an increase in the cost of bonds and the normalization of the balance sheets of financial institutions. Due to this, the problem of multibillion-dollar unrealized losses of the banking sector could be solved by itself. According to the reserve rules, banks keep some of the assets in the most liquid form, but its volume is insufficient to return funds to all customers. With a massive outflow of funds, banks are forced to sell all their assets, fixing losses on them. As a result, unrealized paper losses are transferred to the section of real ones, and if their size exceeds the bank's own capital, it is subject to bankruptcy. In some ways, today the Fed and other Western regulators face a difficult choice: continue to protect their currency by raising interest rates to further reduce inflation, or protect the banking system from a potential collapse and stop tightening monetary policy. The first option could lead to another global financial crisis, while the second would reverse the slowdown in inflation and push prices up again. Against this backdrop, the Fed launched a bank term financing program, under which banks will be able to pledge Treasury and mortgage-backed securities for cash. This will relieve banks of the need to quickly sell their assets. The provision of liquidity by central banks is likely to stop the problems of the Western financial system and maintain its stability. However, it is difficult to predict how the printing of new money will affect inflation. It is likely that banking turbulence will cause a migration of deposits from smaller institutions to the largest banks, as well as tightening lending standards. In turn, this could lead to a slowdown in the US and European economies this year and increase the likelihood of a recession. It will be more difficult for central banks to keep raising interest rates without triggering turmoil, and problems will mount as debt and credit markets shrink. Banking crises can put additional strain on governments, both directly (by increasing the amount of fiscal spending the government incurs to bail out the banking sector) and indirectly (by spreading market panic), and a fiscal crisis can be transmitted to the financial sector in the event of a series of defaults of banking and financial institutions, which significantly depresses the state of the domestic financial system. The government, determined to avoid a recession, maximize current and future output, will determine the optimal amount of financial assistance to banking institutions, taking into account the risks of worsening inflation and loss of credit rating.

Item Type:	Article
Uncontrolled Keywords:	banking panic; debt cycle; credit cycle; financial cycle; financial accelerator; bailout; demand shock; supply shock; inflation; recession
Subjects:	Це архівна тематика Київського університету імені Бориса Грінченка > Статті у журналах > Фахові (входять до переліку фахових, затверджений МОН)
Divisions:	Це архівні підрозділи Київського університету імені Бориса Грінченка > Факультет економіки та управління > Кафедра міжнародної економіки
Depositing User:	Доцент Алла Василівна Шлапак
Date Deposited:	25 Jul 2023 06:58
Last Modified:	25 Jul 2023 06:58
URI:	https://elibrary.kubg.edu.ua/id/eprint/45723

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