Banking Crisis May Play Out in Slow Motion; Clarida Predicts No Rate Cuts From Fed This Year By James Christie

Good day. Unless federal insurance is extended to all bank deposits, small and medium-size U.S. banks could be in for a prolonged period of pressure on their deposits, which could force them to be acquired or limit lending, Greg Ip, The Wall Street Journal's chief economic commentator, writes. He notes that deposits ballooned during the pandemic, such that the ratio of bank loans to deposits fell to a 50-year low in September 2021. A growing share of banks' deposits were uninsured, but were assumed to be relatively "sticky," as depositors had little reason to look for higher-yielding alternatives. But when the Federal Reserve lifted interest rates toward 4% last year, savers started moving. The stage could be set for a slow-motion banking crisis. Meanwhile, former Fed vice chairman Richard Clarida said on Wednesday at a conference that he sees the central bank raising rates one or two more times and then pausing to see how much inflation declines.

Now on to today's news and analysis.

Top News A Rapid-Finance World Must Ready for a Slow-Motion Banking Crisis

In recent decades financial crises have tended to be fast-moving and violent. They usually revolve around a handful of companies or countries, and often climax over a weekend, before Asian markets open.

That template is grounds for hope that the worst of the current turmoil may have passed with the collapse of Silicon Valley Bank and Signature Bank and the forced merger of Credit Suisse with UBS Group AG this month, as well as the federal backstops implemented in response to these events.

But another template is also possible: the corrosive, slow-motion crisis . SVB collapsed because of a confluence of structural factors that to a lesser extent afflict many institutions. That could force many banks in coming years to shrink or be acquired, a process that also hampers the supply of credit.

White House to Call for New Midsize Bank Rules Billions in Signature Bank Debt to Be Sold by Newmark Group Deutsche Bank Selloff Focuses Attention on Credit-Default Swap Market Banking Worries Fuel Gold Price Rally Small Banks Are Losing to Big Banks. Customers Are About to Feel It. Fed Cuts Interest Rates This Year? Forget It, Clarida Says

It is unrealistic to expect the Federal Reserve to start cutting interest rates in the near future given the persistence of high inflation, former Fed vice chairman Richard Clarida said Wednesday at a National Association for Business Economics conference. Mr. Clarida also said the Fed is likely to raise rates one or two more times and then pause to see how much inflation declines. He added that he would have been hesitant to raise rates by a half percentage point at the Fed's last meeting even had the Silicon Valley Bank failure not happened. At the same time, though, Mr. Clarida said markets should not discount the idea that the Fed could raise rates again later in the year if inflation doesn't fall faster. "Things were teed up before SVB to have a pause," he said. "The Fed would, and I think will go out of its way, to say it's a pause and not that they are done." (MarketWatch)

U.S. Economy GOP Budget Plan Still Months Away, Complicating Debt-Ceiling Talks

President Biden said he needs to see House Republicans' budget proposal to start negotiations related to raising the nation's borrowing limit. House Republicans' response: Not going to happen .

Climate Funding Gets Squeezed by Volatile Markets

The interest-rate increases and market volatility that hit risky investments last year have finally caught up with green startups . In the first quarter, funding for these companies has fallen almost as much as total venture-equity funding.

Key Developments Around the World U.S. Pushes for Investment in Africa to Counter China's Reach

The Biden administration is pushing hard for American businesses to invest in Africa despite the obstacles they face there, more than a decade after China began expanding its economic and political ties with countries across the continent.

[http://China Wants to Be at Center of New World Order, Top EU Official Says] China Is Sending Its Corruption Hunters to a Country Near You Taiwan's President Lands in the U.S. Amid Threats From China Saudis Strengthen Relations With China Amid Strained U.S. Ties

The Saudi government approved partial membership in the Shanghai Cooperation Organization , a political and security bloc that includes China, Russia and India, as U.S. influence wanes in the Middle East.

Russian Security Service Detains Wall Street Journal Reporter

Russia's main security agency said it had detained a Wall Street Journal reporter for what it described as espionage. The Federal Security Service said it had detained Evan Gershkovich, a U.S. citizen, in the eastern city of Yekaterinburg.

Financial Regulation Roundup Credit Suisse Violated Plea Deal in Tax Case, Senate Report Says

Credit Suisse Group AG violated the terms of a 2014 criminal plea agreement in which it promised to stop helping Americans hide assets from U.S. tax authorities, according to a Senate report released Wednesday.

China Deploys Its Corruption Hunters Abroad

China is dispatching anticorruption enforcers abroad to chase down fugitives and recover stolen assets, a new extension of Beijing's international reach aimed at strengthening Chinese leader Xi Jinping's crackdown on graft .

Forward Guidance Thursday (all times ET)

8 a.m.: Fed's Barr speaks at National Association for Business Economics policy conference

8:30 a.m.: U.S. fourth-quarter gross domestic product, third estimate; U.S. weekly jobless claims

12 p.m: Boston Fed's Collins speaks at National Association for Business Economics policy conference

12:45 p.m.: Richmond Fed's Barkin speaks at Virginia Council of CEOs

Friday

2 a.m.: U.K. fourth-quarter gross domestic product, second estimate

4:30 a.m.: Bank of England banking sector regulatory capital report for fourth quarter 2022

5 a.m.: Flash estimate of euro area inflation for March

8:30 a.m.: U.S. personal income and spending for February; U.S. Personal Consumption Expenditures Price (PCE) Index for February; Canada gross domestic product for January

10 a.m.: University of Michigan consumer surveys for March

3:05 p.m.: New York Fed's Willliams speaks at Housatonic Community College

Research Recession Might Be the Only Cure for U.K.'s High Inflation

A recession in the U.K. may be needed to curb the country's high inflation, Paul Dales, chief U.K. economist at Capital Economics, writes in a note. A downturn involving a peak-to-trough fall in real gross domestic product of around 1.0% would be required to ensure domestic price pressures weaken to levels consistent with the Bank of England's 2.0% inflation target, Mr. Dales writes. While some weakness could result from recent concerns over the health of global banks, most will need to be generated by interest rates staying at 4.25% or above all this year, he writes. Should that cut inflation significantly, the Bank of England could then slash rates to around 3.0% next year, he adds.

-Edward Frankl

Consumers in the U.S. Rely More on Credit as Savings Dwindle

U.S. consumers still have some $800 billion left from excess savings accumulated during the pandemic, but the reserves are dwindling and credit is on track to overtake them as a source of funds in coming months, Wells Fargo economists Tim Quinlan and Shannon Seery write in a report. "Just as the drawdown in excess savings is becoming a less consequential driver of spending, credit is getting more expensive and apt to become harder to access in the wake of the banking crisis," they write. They note that the six biggest increases in revolving consumer credit in the past 20 years have happened in the past 12 months.

-Paulo Trevisani

Commentary How the Bank Mess Can Hit Home Buyers

Mortgage bonds-in particular, packages of home loans guaranteed by the likes of Fannie Mae or Freddie Mac-are a big driver of the unrealized losses on bond portfolios that banks are struggling with, Telis Demos writes.

The FDIC Should Act Like a Real Insurer

The Federal Deposit Insurance Corp.'s $250,000 coverage limit appears insufficient to prevent bank runs, but raising or eliminating this cap would create incredible moral hazard, so the FDIC should reduce risk like an insurer would, by pricing it and spreading it around , Brian P. Brooks and M. Todd Henderson write.

Mr. Brooks is a former acting comptroller of the currency and member of the FDIC board of directors. Mr. Henderson is a law professor at the University of Chicago and a visiting fellow at the Hoover Institution.

Basis Points The number of houses going under contract in the U.S. unexpectedly rose in February for a third consecutive month, lifting the National Association of Realtors's Pending Home Sales Index 0.8% to 83.2. Despite recent gains, pending home sales declined by 21.1% compared with the same month a year earlier. (Dow Jones Newswires) The Dallas Fed's quarterly survey of energy firms in its district found the oil and gas sector virtually stalled in the first quarter after a two-year stretch of rising activity. (DJN) Brazil's industrial confidence increased in March, raising the Getulio Vargas Foundation's confidence index for industrial companies by 2.4 points in the month, following two consecutive monthly declines, to 94.4 points. (DJN) Australian job vacancies fell by 1.5% in the three months to February which was less-than-expected given recent signs of a slowdown in the economy. (DJN) Confidence among businesses and consumers in the eurozone worsened slightly in March, suggesting that gains earlier this year could be petering out amid recent volatility in financial markets and a slowing economy. (DJN) Spain's inflation rate eased more than expected in March, reaching its lowest level in 20 months as energy prices sank from a year earlier, when Russia's invasion of Ukraine sent them surging. (DJN) Kenya's central bank on

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03-30-23 0717ET