Will central banks be able to overcome the current crisis?

In my column last week, I discussed the potential crisis risk that arose after the sixteenth largest bank in the U.S. collapsed. I suggested that if this situation were to escalate into a total banking crisis, it could be classified as a "fourth-generation" crisis. However, recent developments, measures, and actions taken do not seem to have reassured the markets yet. Consequently, major central banks collaborated and intervened. Although there is a current reduction in risk premiums, it is likely that this issue will continue to be a significant concern for some time.

The aftermath of the collapse of Silicon Valley Bank in the U.S. still causes concerns. Despite some economists describing it as a "controlled crisis," the unease remains high, as seen in the approach of the U.S. economic administration and the Federal Reserve.

Following the SVB collapse, Signature Bank in the U.S. also went bankrupt, and Switzerland-based Credit Suisse faced difficulties. The bailout plan includes the acquisition process of UBS. These and other similar developments have heightened worries about the crisis's globalization.

As you may recall, the U.S. Federal Reserve, as part of the fight against inflation, was raising interest rates on the one hand and narrowing the balance sheet on the other. In this context, the balance sheet contraction has reached $625 billion since April 13, 2022. However, after the collapse of the SVB, we see that the Fed expanded its balance sheet by $297 billion to provide liquidity.

The Fed did not just expand to prevent the spread of the crisis, but also took a new step. According to this new step, the Fed and 5 major central banks decided to increase the frequency of U.S. dollar swap line operations. Central banks of the U.S., Canada, UK, Japan, Europe and Switzerland will act in a coordinated manner to increase liquidity through U.S. dollar swap line arrangements. In addition, the frequency of 7-day futures will be converted from weekly to daily. It is stated that the operation will continue until the end of April for now.

As mentioned earlier, authorities in the U.S. are attempting to assure markets that the crisis will not worsen and there is no cause for concern. Despite their efforts, the frequency of their statements and the nature of the measures taken suggest that economy administrations are fearful of further crisis escalation.

To overcome the crisis, instilling confidence in the markets is crucial. However, it is important to note that maintaining such confidence will not be easy given the lingering memory of the events following the 2007 Mortgage Crisis.