Stock markets worldwide rose after the US and UK governments provided more assurances about the safety of banks.
Numerous bank collapses in recent months have frightened investors.
However, US stock markets rose after Treasury Secretary Janet Yellen stated that the US government would protect depositors’ funds if another bank failed.
In the United Kingdom, the FTSE ended the day up 1.79 percent as top bank shares rose.
Standard Chartered and Lloyds saw their stock markets prices jump by roughly 5%, as did NatWest, Prudential, and Barclays.
Ms. Yellen stated in a speech on Tuesday, “The stock markets situation is improving, and the US banking system remains strong.”
This follows the failures of Silicon Valley Bank and Signature Bank earlier this month.
People rushed to withdraw their funds from the bank because they were concerned about its health.
Last week, a group of the largest US banks raised $30 billion (£24.5 billion) for First Republic Bank, a regional bank. However, its stock dropped by more than 45% on Monday.
Ms. Yellen stated that the United States had to intervene when the two banks failed to “defend the broader banking sector.” She said this after promising everyone’s money was safe in both institutions.
She also stated that the same steps would be taken if this happened to other smaller banks. This meant that savers’ money would be returned if another bank failed.
UK assures the stock markets
Chancellor Jeremy Hunt told Parliament in the United Kingdom that the UK’s stock markets and the entire financial system is “fundamentally solid” after Labour Shadow Chancellor Rachel Reeves questioned him.
Ms. Reeves questioned if the system is “adequate to protect taxpayers and depositors” and whether the government is certain that no other UK banks will fail as a result of the failure of Silicon Valley Bank UK.
There has also been an increase in insecurity. Competitor Swiss bank UBS, for example, had to save Credit Suisse.
Mr. Hunt stated that markets remain unsettled but that the UK financial system is “fundamentally sound” and that UK banks have adequate liquidity—much more than before the 2008 financial crisis.
The US Federal Reserve, the Bank of England, and six other central banks worldwide joined forces on Monday to help prevent the crisis from deteriorating by pumping additional money into the financial system.
Banks can lend money from the central bank seven days a week through the facility.
But banks have yet to use the so-called swap line so far. This shows that the UK banking system is now manageable.
All eyes on what the United States does with interest rates
Numerous issues plague the global economy, and all eyes are focused on one country: the United States.
Two collapsed banks in the United States this month have raised concerns about the soundness of the financial system.
The failures occurred as global borrowing costs rose rapidly, headed by the United States. This rocked the global economy and caused people to fear a painful decline known as a recession.
The US Federal Reserve is at the epicenter of the crisis. The Federal Reserve has been in charge of increasing interest rates since 2022. This is due to their efforts to halt price hikes that are raising the expense of life.
Can that campaign continue while the economy’s threats worsen?
Only two weeks ago, Chairman Jerome Powell stated that the bank might have to raise interest rates sooner and by a greater amount than projected. He stated that he was concerned that progress toward price stabilization was slowing.
Prices rose at a 6% annual rate in the year preceding up to February, well beyond the healthy average of 2%.
But, given the recent problems in the banking system, many investors believe the Fed will be extra cautious not to make a large move that might shock the financial markets.
Several experts believe the government will hike interest rates by 0.25 percentage points or not at all.
Whatever happens, Mr. Powell is in the hot seat and has little hope of appeasing his numerous critics.
Mr. Powell, he says, will “have to play the two-handed economist flawlessly,” convincing investors that the central bank can still hike rates to combat inflation on the one hand while at the same time, using other tools to combat financial system stress on the other.
Mr. Powell, a lawyer former President Donald Trump appointed to lead the Fed, struggled to rebuild trust after notoriously calling the price rises that began in the United States in 2021 “temporary.”
The bank failure has added to the scrutiny, highlighting the risks of the quick rate hike campaign and raising questions about whether the Federal Reserve was too slack in its regulation.
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The Fed has boosted its main rate, which costs banks to borrow, from near zero to more than 4.5% in the last year, the highest level since 2007.
Despite a significant slowdown in the stock markets, housing market and issues in the tech sector, where low borrowing costs had aided growth, solid hiring has helped the economy stand better than many expected.
Yet, the latest banking crisis is likely to plunge the US economy into a recession sooner than expected, and Mr. Sweet stated that the pressure on Mr. Powell has increased.
