Samuel Braithwaite | The collapse of SVB and BOJ monetary policy
On March 10, the eyes of the financial world were fixated on the US banking system. The share price of Silicon Valley Bank, SVB, the 16th largest US bank, plummeted upon news that it was on the verge of failing.
The collapse of SVB is now the second-largest banking failure of a US bank and the largest failure since the 2007-2008 financial crisis; the collapse of Washington Mutual Bank, or WaMU, in September of 2008, was the largest collapse.
Two days after the collapse of SVB, Signature Bank was closed by the American authorities.
The value of SVB, as at December 2022, stood at $209 billion, while that of Signature Bank was $110 billion. Put together, these banks constitute one to two per cent of the United States’ banking industry.
The blame for the collapse of SVB rests on two pillars: the poor risk management of SVB compounded by poor regulatory oversight; and the significant increase in interest rates as occasioned by the rapid increase in the policy rate (federal funds rate) by the US Federal Reserve.
What does the SVB collapse indicate about BOJ interest rate policy?
It is apropos to make clear from the outset that the BOJ’s interest rate hikes will not precipitate the failure of local banks. The point I wish to make, however, is that the collapse of SVB, as bad as it was, is an indication of the effectiveness of US monetary policy.
In the case of Jamaica, BOJ Governor Richard Byles can often be heard calling out domestic commercial banks for not increasing the rates paid to depositors; his pleas can be characterised as moral suasion. Moral suasion is part of the suite of tools available to central bankers and is often used to complement the use of other tools, such as the policy rate.
Some might argue that if the US banking sector is efficient, then why did it come close to the edge of contagion? American economist John Cochrane would argue that there is nothing about ‘efficiency’ that promises ‘stability’. The market will punish those institutions whose risk management procedures have been sacrificed at the altar of high expected profits.
The preponderance of online banking, smartphones and social media have arguably increased the efficiency of the market and, at the same time, the sensitivity of the market to adverse news. It is the increased sensitivity to news, rapidly disseminated, which brought SVB to its knees in hours, as opposed to the days it took for past bank runs.
Are Jamaican commercial banks increasing interest rates commensurate with BOJ rate increases?
In response to my Gleaner article of March 1, I received an email in which the writer said: “It’s either you don’t live here, or you do not have a loan, but NCB has raised my rate three times since Mr Byles mopping up of liquidity to tame the inflation monster. People are feeling it, so please stop saying the [banks have not raised] their rates, [because] they have.”
I understand the writer’s frustration and I am aware of increases in mortgage rates. However, the BOJ rightly focuses on weighted average interest rates for deposits and loans.
Table 1 provides information which allows us to better appreciate the weighted average interest rates. The savings rate remains flat, while the overall deposit rate is rising. However, the weighted average rates on time deposits have increased from 2.6 per cent in September 2021 to 5.16 per cent in December 2022 – a change of 2.56 percentage points.
The level of the overall deposit rate – 1.62 per cent in December 2022, up from 1.03 per cent in September 2021 – is indicative of the greater weighting which is attached to savings and demand deposits as opposed to time deposits.
Table 2 shows that average mortgage rate and the average commercial rate have remained flat over the period September 2021 to December 2022, a period characterised by persistent policy rate increases.
In the United States, the 30-year, fixed-rate mortgage average moved from 2.9 per cent in September 2021 to 7.1 per cent in November 2022. As of March 2023, the rate is 6.6 per cent.
I do not condemn Jamaican commercial banks for not significantly moving the needle on average interest rates for deposits and loans.
In terms of deposits, those who have the income can surely deposit funds in time deposits. As for loan rates, commercial banks might very well be concerned that any significant interest rate changes could put undue pressure on their clients – clients who are already facing higher prices at the supermarket.
What, then, are we to expect when those higher supermarket bills are compounded by higher mortgage rates? What are we to expect when medium, small, and micro enterprises are faced with higher interest rates on loans, along with increased costs for raw materials and increased wages?
The increase in the minimum wage will have a knock-on effect on the wages of workers at higher levels. For example, we do not expect a receptionist to receive the same wage as a cleaner, so when the wage of the cleaner increases the wage of the receptionist is also likely to increase, and so on up the chain.
A second and related concern I have is that even if local commercial banks were to increase their average interest rates, I am not convinced that the size and structure of the Jamaican economy will allow for a material decline in the rate of inflation. More attention needs to be placed on better understanding the pricing strategies of the private sector. On this point I hasten to note that the BOJ does conduct surveys of firms.
An important development which has so far escaped the business pages of local papers is that the Monetary Policy Committee of the BOJ intends to re-examine the transmission mechanism.
The transmission mechanism is concerned with how changes in the BOJ’s policy rate cause changes in the price level and the output of goods and services. This commitment by the Monetary Policy Committee should be applauded.
In closing, I am grateful to Carey-Ann Williams of the BOJ for the time taken to craft a response to my article of March 1.
Samuel Braithwaite is a lecturer in the Department of Economics, University of the West Indies, Mona.