After the newest financial institution bailout, fears have (once more) been dispelled

First Republic Bank headquarters is seen on March 16, 2023 in San Francisco, California, United States.

Tayfun Coskun | Anadolu Agency | Getty Images

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The banking crisis appears to be contained for the time being… again.

What you need to know today

• The European Central Bank hiked interest rates by 50 basis points, or half a percentage point, to 3%. The move comes after – and despite – yesterday’s turmoil in the European banking sector, prompted by a sell-off at Credit Suisse. Therefore, alongside its rate hike, the ECB said it was ready to support banks if needed.

• Smaller banks could be left out of efforts to protect the banking system. US Treasury Secretary Janet Yellen said only banks that “would create systemic risk and significant economic and financial consequences” would protect their uninsured deposits.

• Still, US stocks experienced a wave of optimism. All major indices rallied on Thursday, with the Nasdaq Composite posting a particularly strong performance. Asia-Pacific markets rose on Friday. Technology stocks in particular surged alongside the Nasdaq. Hong Kong’s Hang Seng index rose 1.85%, boosted by Baidu’s 14.31% jump and Bilibili’s 8% surge.

• China’s government is setting up a new “Central Finance Commission” to strengthen the Chinese Communist Party’s oversight of the financial and technology industries, state media said on Thursday. According to the report, the Commission will be responsible for high-level planning of financial stability and development.

• PROFESSIONAL Markets expect the US Federal Reserve to hike interest rates by a quarter of a point next week. But there is a possibility that the central bank will pause rate hikes.

The final result

At the risk of jinxing the situation, fears of a broader banking industry meltdown that spread from the US to Europe yesterday appear to have (again) been dispelled.

That’s thanks to the extraordinary number of actions that financial regulators and central banks on both sides of the Atlantic have taken to boost confidence. And these aren’t just empty promises. For example, four days after the Fed launched the Bank Term Funding Program — which lends banks money for a year against high-quality collateral — financial institutions have already borrowed $11.9 billion from the program. Whether this number reveals a significant weakness in banks’ balance sheets is not really decisive. It is important that consumers and investors are psychologically reassured.

Wall Street was applauded by the quick response to the banking crisis. With the Dow Jones Industrial Average up 1.17%, the S&P 500 up 1.76% and the Nasdaq surprisingly up 2.48% – technology stocks had a very good Thursday. Alphabet was up 4.38%, Amazon was up 3.99%, and Microsoft was up 4.05%. Microsoft rallied after the company announced it would be adding artificial intelligence capabilities called Copilot to apps like Word, Powerpoint and Excel. But the other tech giants are likely up because investors have bet — now that there’s evidence that something in the economy is collapsing — that the Fed might not be as aggressive on raising rates. Technology companies would benefit most from this.

This would also benefit the broader economy, which according to Goldman Sachs has a 35% chance of sliding into recession in the next 12 months, up from 25% before the banking crisis. The Fed’s dual mandates of stabilizing the economy and fighting inflation are increasingly at odds with each other. It won’t be an easy job.

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