Central banks, an increasingly active bulwark against financial market failures


The headquarters of the European Central Bank, in Frankfurt (Germany), on September 8, 2022.

And in the end, it’s the central banks that come to the rescue, as always. The bankruptcy of the Silicon Valley Bank (SVB) on Friday March 10, as well as that of the Signature Bank on the same day caused the beginning of a financial panic that only the intervention of the American Federal Reserve (Fed) was able to contain. On the one hand, the American authorities decided to guarantee all deposits in these two banks, well beyond the legal limits that were in place. On the other hand, and this is radically new, all the other American banks will benefit from a line of credit from the Fed for one year on extremely favorable terms. The intervention obviously had the desired effect: Tuesday, March 14, most global stock markets rebounded and volatility was reduced.

“The Fed has, once again, pulled out the heavy artillery”underlines the economist Véronique Riches-Flores. “It’s a form of state capitalism, adds Ludovic Subran, chief economist at Allianz, an insurer. But the central banks are in their role. » Richard Portes of the London Business School believes that the US central bank had no choice: “Letting SVB go bankrupt would not have been realistic. The contagion effect to the rest of the banking system could have been considerable. »

The Fed’s decision, from a technical aspect, deserves to be detailed to understand its magnitude. Normally, when a banking institution refinances itself with a central bank (which is a routine operation), it must provide guarantees, in the form of “collateral”. The better these are, the bigger the loan she can get. Most often, banks therefore offer government bonds, considered to be the safest assets.

A “huge grant”

Until now, these bonds were accepted by the central bank at their market value. However, their value has collapsed over the past year, due to soaring interest rates (the value of bonds changes inversely to interest rates). To circumvent this problem, the Fed decided to accept them… at their face value. “It is a radical decision, which upsets decades of consensus in the world of central banks”, underlines Daniela Gabor, a specialist in central banks at the University of the West of England, in Bristol. According to her, this amounts to a “huge grant” to the US banking system.

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To explain the ramification of this new decision, Mr.me Gabor takes the example of the Greek crisis. “At the time, the European Central Bank accepted Greek bonds at 50% of their face value. » This made the financing of Greek banks much more difficult. “Just imagine for a second that Jean-Claude Trichet (President of the ECB until 2011) told the Greek banks that he would accept the bonds at face value. The euro zone would be very different today…” Mr. Portes, who supports the Fed’s intervention, himself acknowledges some surprise at this generosity: “The Fed really signed a blank check. »

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