U.S. Banking Turmoil Could Slow Global Economy; Bullard's Optimistic Take on Banking Stress

U.S. Banking Turmoil Could Slow Global Economy; James Bullard's Optimistic Take on Banking Stress By James Christie

Good day. The ripple effects from strains in the U.S. financial system could lead to tighter credit that results in a sharper economic slowdown worldwide, many economists say. That marks a shift in sentiment from early in the year, when data showed surprising strength in Western economies, and the beginnings of a revival in China after Beijing ditched its zero-tolerance approach to Covid-19. A lending squeeze on top of rising interest rates could pinch demand for other countries' goods and services, such as German cars, French holidays or Chinese-made electronics. Stress in the U.S. banking system might, however, lead to lower interest rates that could end up giving a boost to the economy, according to Federal Reserve Bank of St. Louis President James Bullard. "Financial stress can be harrowing but also tends to reduce the level of interest rates," he said Friday. "Lower rates, in turn, tend to be a bullish factor for the macroeconomy."

Now on to today's news and analysis.

Top News U.S. Bank Failures Pose Risk to Global Growth

Turmoil in the U.S. banking sector isn't just a problem for the U.S. It also increases the risks of a global recession.

Many economists expected a significant downturn in global economic growth this year even before U.S. lender Silicon Valley Bank collapsed, because of an expected pullback in spending and investment in the U.S. and Europe amid climbing interest rates.

Those concerns eased somewhat early in the year, but now some pessimism is creeping back. Though economists broadly believe that a full-blown financial crisis isn't likely, they also see heightened risks to global growth from a shaken banking sector and the specter of tightening credit.

St. Louis Fed's Bullard: Bank Stress Doesn't Have to Derail Economy

Federal Reserve Bank of St. Louis President James Bullard said Friday that measures of financial stress are much lower than during the financial crisis of 2007-08 and the early days of the pandemic.

Fed's Barkin: High Inflation Made Case for Rate Rise 'Pretty Clear'

Richmond Fed President Thomas Barkin told CNN on Friday that doggedly high U.S. inflation justified the Federal Reserve's move to raise interest rates again despite turmoil in the banking system.

How Bank Oversight Failed: The Economy Changed, Regulators Didn't

Interviews with past and current regulators and examiners, bankers and people close to Silicon Valley Bank and Signature Bank point to fast shifts in the economy plus regulators who adjusted only slowly , if at all, to those changes.

First Citizens Acquires Much of Failed Silicon Valley Bank Where Financial Risk Lies, in 12 Charts What's Going On at Deutsche Bank? Bank Borrowing From Fed Discount Window Hits Record High First Republic Bank Founder and Family Members Earned a Big Pay Veteran of FDIC Takeover Tells What It's Like to Run a Failed Bank Debt More Expensive, Harder to Get for Startups After SVB Collapse Saudi Chairman of Credit Suisse's Largest Investor Resigns U.S. Economy Economy This Week: Household Spending and Home Prices in Focus

The Commerce Department on Friday will release figures on U.S. household spending and income, along with its personal-consumption expenditures price index , a gauge of inflation closely watched by the Federal Reserve.

Accounting-Fraud Indicator Signals Coming Economic Trouble

Manipulation of earnings from Corporate America is on the rise, new research on accounting fraud concludes, using a technique that flagged Enron as an earnings manipulator several years before its 2001 implosion.

Work-From-Home Era Ends for Millions of Americans

Some 72.5% of business establishments said their employees teleworked rarely or not at all last year, according to a Labor Department report released this week. That figure climbed from 60.1% in 2021.

Key Developments Around the World Banking Strains, Inflation Threaten Global Economic Rebound

Business surveys published Friday recorded pickups in activity across the U.S. and Europe driven by services providers. Japan saw a similar acceleration aided by the arrival of tourists from China after the lifting of Covid-19 restrictions.

Ukraine Allies See a Way War Can End but Lack Plan to Achieve It

Ukraine allies are starting to see a way the war can end but they lack a plan to achieve It. A spring counteroffensive is designed to tilt the balance, but the picture remains unclear.

Germany, EU Reach Deal on Combustion-Engine Plan

The European Union reached a deal with Germany that is expected to water down the bloc's plan to effectively ban new internal combustion-engine cars from 2035, Berlin and Brussels said on Saturday.

Iran's Truce With Saudi Arabia Heals Rift, but Not Its Economy

Iran's move to reset diplomatic relations with Saudi Arabia was a radical break from years of enmity between the two Middle East rivals, but it hasn't been enough to prop up its struggling economy.

Financial Regulation Roundup Convicted of Insider Trading, He Is Crypto's Latest Legal Hope

Crypto has picked an unlikely ally in its battle against oversight by Wall Street's chief regulator: a former manager at Coinbase Global Inc. who pleaded guilty this year to giving his brother and a college friend trading tips.

Crypto Faces Reckoning as SEC Prepares Action Against Coinbase

The Securities and Exchange Commission and Coinbase Global Inc., the largest U.S. crypto exchange, appear headed for a legal showdown that stands to have outsize consequences for both sides.

Banks Step Up to Serve Crypto Firms After Signature, Silvergate Blowups Forward Guidance Monday (all times ET)

10:40 a.m.: ECB's Elderson speaks at 30th anniversary of Foreign Bankers' Association

12 p.m.: ECB's Schnabel speaks at Columbia Economics - Program for Economic Research at Columbia University

1 p.m.: Bank of England's Bailey speaks at London School of Economics

Tuesday

4:35 a.m.: ECB's Enria speaks on European banking supervision at 22nd Handelsblatt Annual Conference on Banking Supervision

4:45 a.m.: Bank of England's Bailey speaks at U.K. Parliament Treasury Select Committee hearing on Silicon Valley Bank

8:30 a.m.: U.S. advance economic indicators report for February

9 a.m.: U.S. S&P CoreLogic Case-Shiller Index for January

10 a.m.: The Conference Board Consumer Confidence Index for U.S. for March; Fed's Barr speaks at Senate Banking Committee hearing on Silicon Valley Bank collapse

10:15 a.m.: ECB's Lagarde speaks at opening ceremony of BIS Innovation Hub Eurosystem Centre in Frankfurt

Research Fed Rate-Hike Expectations Have Dramatically Subsided

The failures of Silicon Valley Bank in the U.S. and Credit Suisse in Europe have upended traders' assumptions for a continued string of interest-rate increases by the Federal Reserve aimed at tackling inflation. Now, investors are betting it's more likely rates will move lower-not higher-reflecting their belief that the Fed will have to change course and cushion a weakening economy. CME Group's tracker of interest-rate futures markets shows that traders have effectively ruled out the possibility that the Fed's target rate will finish 2023 higher than it is now. Just a month ago, traders believed the odds were greater than 9-in-10 that rates would climb further. The swing reflects the complexity of the Fed's challenge. Persistent inflation has prompted the central bank to tighten financial conditions. But recent bank distress signaled that rapidly rising rates can cause significant financial disruptions.

-Matt Grossman

Commentary Welcome to the Superprime Banking Crisis

Banks such as Silicon Valley Bank and Signature Bank that catered to some of the wealthiest, most creditworthy clients-those with superprime credit scores-are the ones running into the biggest problems , Telis Demos writes.

When a Bank Fails, There's Always a Villain

It's tempting to want to solve the too-big-to-fail problem by chopping the giant banks into little pieces, but that ignores the long history in the U.S. of failure among midsize and smaller banks, Jason Zweig writes.

Unlimited Deposit Insurance Can't Solve Everything

Treasury Secretary Yellen put a damper on hopes for one solution to the banking crisis by saying she wasn't considering trying to offer "blanket" deposit insurance, but that will almost certainly not extinguish the idea, Telis Demos writes.

For the First Time, the Fed Is Losing Money

In a development previously unheard of, the Federal Reserve has suffered operating losses of about $42 billion since September 2022 when the massive interest-rate risk created by the Fed's asset-liability maturity mismatch began generating cash-operating losses, and the losses now average $7 billion a month , Paul H. Kupiec and Alex J. Pollock write.

Mr. Kupiec is a senior fellow at the American Enterprise Institute. Mr. Pollock is a senior fellow at the Mises Institute and a co-author of "Surprised Again! The Covid Crisis and the New Market Bubble."

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March 27, 2023 07:15 ET (11:15 GMT)

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