US Bank Problems to Spread Abroad, Fed Must Stop Interest Rate Policy, Paul Craig Roberts Says

WASHINGTON (Sputnik) - The current serious banking sector problems in the United States will spill over to other countries and the Federal Reserve must end its high interest rate policy, former US Assistant Treasury Secretary Paul Craig Roberts told Sputnik.

"Because of globalist interconnections, the serious problems in the United States would spread abroad," Roberts said on Monday.

The latest US banking crisis unfolded after members of the California-based Silicon Valley Bank (SVB) withdrew $42 billion in deposits. The SVB is one of top 20 US commercial banks, according to the Federal Deposit Insurance Corporation (FDIC).

When asked what will happen next and if there could be more failures, Roberts said, "I think the Fed will have to discontinue its high interest rate policy as it is undermining balance sheets in the financial sector, thus raising the specter of widespread failure or of so much new money committed to rescue operations as to threaten the value of the US dollar."

The US government will ensure the bank deposits of Americans remain safe amid the collapse of two banks and that the United States does not experience another financial crisis, President Joe Biden said on Monday as he promised action against reckless risk taking by financial institutions.

"The banking system is not safe, because the 5 largest US banks have risk exposure that is two times world GDP," Roberts pointed out. "There is no possibility that the banks have capital to cover this risk."

Roberts noted that the specific causes of the two bank failures are different.

"One failed because the Federal Reserve's higher interest rates reduced the value of the bank's bond portfolio. Seeing insolvency, depositors withdrew their deposits, causing the failure," he explained. "The other failed bank resulted from declines in crypto-currency prices."

The general problem, Roberts underscored, is that higher interest rates on US Treasuries are causing deposit withdrawals from banks where interest rates on deposits are still near zero and very negative in real terms.

"The banks have to sell financial assets to meet the withdrawals, and the sales cause a drop in prices of the assets," he said. "Also, there are many trillions of derivatives that are sensitive to interest rate changes. Higher interest rates change the values of the derivatives, thus creating a looming problem."

"The Federal Reserve has announced that all deposits are protected, not just for the insured amount, and that the Fed will make cash available to banks to cover the withdrawals," Roberts added. "This is sensible."

Biden also said on Monday he was going to request Congress to review and strengthen post-financial crisis banking laws that were loosened by the previous administration, "to make sure that the crisis we saw in 2008 would not happen again."

SVB is the largest US lender to fail since Washington Mutual collapsed in 2008 at the height of the financial crisis.

The bank provided financing for almost half of US venture-backed technology and health care companies in the United States. At the end of 2022, SVB said it had $151.5 billion in uninsured deposits, $137.6 billion of which was held by US depositors. The bank’s total assets at the end of 2022 equaled $209 billion.

The FDIC also took control of Signature, which had $110.36 billion in assets and $88.59 billion in deposits at the end of last year, according to the New York Department of Financial Services.

Biden said the FDIC protection for depositors at SVB and Signature will not be extended to investors and the management at the collapsed banks, which he accused of excessive risk-taking.

US media reported that both, regulators and the banking industry were working to contain the crisis.

The bank that many have viewed as the likely next domino to fall - First Republic – has secured additional financing from JPMorgan Chase & Co during the weekend, resulting in $70 billion in unused liquidity - firepower it can use to respond to potential customer withdrawals, according to the report.