America's Banking Crisis Edges Closer to Recession

　　America's Banking Crisis

　　America is facing its worst banking crisis since the collapse of Lehman Brothers, threatening to push the U.S. economy closer to a recession. Minneapolis Fed President Neel Kashkari warns that the combination of depreciating long-dated securities and loans granted to the troubled office real estate market could trigger further financial sector losses, leading to recessionary ramifications.

　　Kashkari emphasizes that capital markets have frozen out weaker regional lenders, limiting their access to liquidity and increasing the likelihood of economic contraction. He notes that the stress is ongoing and may take time to resolve, with other banks potentially exposed to the crisis.

　　Kashkari's Experience and Interest Rate Considerations

　　Kashkari, a veteran of financial crises and a rotating regional Fed president, previously managed the $700 billion Troubled Asset Relief Program (TARP) during the 2008 financial crisis. While he has advocated for interest rate hikes in the past, he believes it's too soon to predict their future path given the recent crisis.

　　He explains that the closure of capital markets over the past two weeks could have a significant impact on the economy if it persists due to ongoing nervousness among borrowers and lenders.

　　Fed's Response and Investor Expectations

　　The Federal Open Market Committee (FOMC) recently raised the fed funds rate by a quarter point to combat inflation, acknowledging the tightening credit conditions caused by the crisis. Chair Jay Powell indicated that the committee does not anticipate any rate cuts this year, but investors are pricing in a 74% chance of a 1.25% rate cut by the end of 2023.

　　SVB-Linked Losses and Broader Industry Risk

　　The current crisis was sparked by Silicon Valley Bank (SVB), which saw clients withdraw a massive $56 billion in a matter of weeks, wiping out a third of its deposit base. This was followed by the failure of Signature Bank, the third-largest lender by assets in U.S. history.

　　Investors are concerned about unrealized losses in banks' hold-to-maturity portfolios, with the Federal Deposit Insurance Corporation estimating a $620 billion risk across the industry. Some experts believe the losses could reach $1.7 trillion when factoring in loans.

　　Kashkari's Assessment and Regulatory Changes

　　Kashkari acknowledges that deposit outflows from regional lenders have slowed, and the sector is sufficiently capitalized to withstand the current credit crunch. However, he warns that the crisis brings the economy closer to a recession.

　　He criticizes large banks for siphoning off funds from smaller peers, citing an implicit belief that they are too big to fail. Kashkari calls for regulatory changes to ensure the soundness of the banking system while promoting fairness and allowing community and regional banks to thrive.

　　Conclusion

　　The banking crisis has revived memories of the unpopular bailouts following the 2008 collapse of Lehman Brothers. The failure of SVB and Signature Bank has sparked a debate about whether taxpayers will again be forced to rescue the U.S. banking system through programs like TARP.

　　Kashkari's experience in handling the 2008 crisis and his push for regulatory changes highlight the need to address the underlying issues in the banking sector to prevent future crises.