Meet Kevin: The Fed U-Turn & Banking Flip
The banking crisis has calmed in recent weeks. And the Federal Reserve has suggested that it’s done raising interest rates for now. While those are positive developments, the economy could still face negative consequences ahead.
Recent comments from Fed officials have suggested that there could be more interest rate hikes down the line. It just depends on whether or not inflation continues to trend lower or not.
But there could also be a call for banks to increase their reserves. Rather than keep $0.05 in deposits for every $1 in loans, or 20-to-1 leverage, a move to less leverage, such as 10-to-1 has been proposed. At its extreme, banks may even have to keep $0.40 of every $1.
In that scenario, banks are far less profitable. And they’ll only want to make loans that can get them the highest interest rate.
On the plus side, that high reserve level would likely lead to fewer bank failures. And banks wouldn’t have to make sweet terms in an attempt to increase profitability.
However, recent bank failures have occurred due to their investment in long-dated U.S. Treasuries before interest rates rose. That scenario could still occur, even with higher deposit levels.
These comments suggest that the banking system may still face a crisis. And that regulators are looking into how to prevent it. Investors should still tread with caution in this sector.