The US Fed has upped its interest rate, can we expect the same for the UK if more US banks tank?
The US Federal Reserve is raising the interest rate paid on reserve balances to 5.15 per cent, effective May 4, 2023. The move is likely to spark an interest hike announcement in the UK according to several news reports.
Central banks are preparing for more systemic risks in the banking sector following the collapse of US banks including Silicon Valley Bank and First Republic Bank. Other banks could also be in rescue talks following deep dives in after-house trading yesterday.
Subsequent lifelines have been provided to both SVB and First Republic by the US government and banks such as JP Morgan Chase. This week it was reported that JP Morgan Chase has agreed to pay $10.6bn (£8.5bn) to the Federal Insurance Deposit Corp (FIDC) after officials shut down First Republic Bank.
However, things are not as stable in the regional US banking industry as hoped. News came out in the early hours of this morning that US-based PacWest Bancorp is in talks about a sale of its $2.7bn lender finance loan portfolio, something that has been on the cards since the first quarter of 2023.
Pac West said in a statement that it has not experienced out-of-the-ordinary deposit flows following the sale of First Republic Bank and other news.
Its core customer deposits have increased since March 31, 2023, with total deposits totaling $28 billion as of May 2, 2023 with insured deposits totaling 75% vs. 71% at quarter end and 73% as of April 24, 2023.
The company has recently paid down $1 billion of borrowings with its excess liquidity. Its cash and available liquidity remains solid and exceeded our uninsured deposits, representing 188% as of May 2, 2023. However, its share price plummeted 50% in after-hours trading on Wednesday.
Another regional bank Western Alliance also saw its shares drop in value by 38% in after-hours trading, The Telegraph reported.
Could US bank failures impact the UK?
Despite these developments, “the systemic risk to the banking system is still considered to be low,” says Hargreaves Lansdowne markets analyst Susannah Streeter.
However, she says the “expectation” is that other banks will “tighten up the lending purse strings” to keep more cash on hand in case there’s a sudden deposit withdrawal.
Streeter suggests that if lending is constrained and consumers and companies find it harder to get loans, this could further curtail economic activity.
“This, in turn, could push up the risks of tougher recession, and the possibility that more bad loans could pile up at the banks,” she says.
The Bank of England will next meet on 11th May 2023 to decide what level interest rates should be set.
The Freelance Informer will be updating readers on any interest rate hikes on its social media channels and weekly newsletters.
