By
Bhushan Akolkar
April 17th, 2024
According to Goldman Sachs, the relief package that is currently being provided to distressed banks stops short of similar reliefs implemented during the 2008 financial crisis.
Economists at American multinational banking giant Goldman Sachs Group Inc (NYSE: GS) have reiterated their belief that the Federal Open Market Committee (FOMC) will not hike interest rates when it meets at its next policy meeting on March 22. According to a CNBC report citing excerpts from a note to investors, the Economists, led by Jan Hatzius believe the current strain in the banking industry will push the Feds to become more dovish this time.
The strain in the financial industry first started with crypto-centric bank Silvergate Capital which noted it will voluntarily close up shop after experiencing significant bank runs that shrunk its deposits. Thereafter, Silicon Valley Bank (SVB) saw more than $60 billion pillaged from its valuation last week as investors feared for the future of the firm amid fundraising through its share sale.
Tagged the bank for the tech sector, the impact of the FUD that spread around Silicon Valley Bank also created a similar scenario as in Silvergate’s with a massive bank run recorded. Regulators promptly swung into action and closed the distressed banks as well as Signature Bank, the other major service provider for the crypto industry. The signature was closed citing systemic risks.
“In light of the stress in the banking system, we no longer expect the FOMC to deliver a rate hike at its next meeting on March 22,” Jan said in the note, taking a shift from an earlier expectation by the market that the FOMC will still implement a 25 basis point increment as it did the last time.
The Fed has been largely dovish in recent times when it concerns its plans to taper inflation. Within the confines of the current reality, however, some of its core strategies may dent a further hole in key sectors of the industry and the Feds will put this into consideration when making its decisions later this month.
Goldman Sachs Economists on Safeguard Measures
According to the Goldman Sachs economists, the relief package that is currently being provided to distressed banks stops short of similar reliefs implemented during the 2008 financial crisis.
Amid the tagging of SVB and Signature as systemic risks, the Federal Reserve has created a new Bank Term Funding Program to aid banks or firms who stand to bear the brunt of the market instability ushered in by the SVB collapse.
“Given the actions announced today, we do not expect near-term actions in Congress to provide guarantees,” the economists wrote, adding that they expect the latest measures to “provide substantial liquidity to banks facing deposit outflows.”
All of these measures, according to Jan, are designed such that deposits can sustain their confidence in the company’s finances. However, uninsured deposits still remain on the loose, and at this point, there’s no idea what might be their fate in the distressed bank.