Banking stress puts US and Europe on watch for credit crunch

WASHINGTON/FRANKFURT: Stress in the banking sector is being closely monitored for its potential to trigger a credit crunch, a US Federal Reserve policymaker said on Sunday, as a European Central Bank official also flagged a possible tightening in lending.

Authorities around the world are on high alert for the fallout from recent turmoil at banks following the collapse in the United States of Silicon Valley Bank (SVB) and Signature Bank and the rescue takeover a week ago of Credit Suisse.

Last week ended with indicators of financial market stress flashing. The euro fell against the dollar, euro zone government bond yields sank and the costs of insuring against bank defaults surged despite assurances from policymakers. In the latest effort to calm investors, the US Treasury said on Friday that the Financial Stability Oversight Council agreed that the US banking system is “sound and resilient”.

“What’s unclear for us is how much of these banking stresses are leading to a widespread credit crunch. That credit crunch ... would then slow down the economy. This is something we are monitoring very, very closely,” Minneapolis Fed President Neel Kashkari said Sunday on CBS show “Face the Nation.”

“It definitely brings us closer,” said Kashkari, who has been among the most hawkish Fed policymakers in advocating higher interest rates to fight inflation.

He said it remained too soon to gauge the “imprint” bank stress would have on the economy and therefore too soon to know how it might influence the next interest rate decision of the Federal Open Market Committee (FOMC).

Meanwhile in Europe, the ECB believes that recent banking sector turmoil may result in lower growth and inflation rates, its vice president Luis de Guindos said.

“Our impression is that they will lead to an additional tightening of credit standards in the euro area. And perhaps this will feed through to the economy in terms of lower growth and lower inflation,” he told Business Post.