During the current corona crisis, all eyes are on the financial sector. Recent decisions by the Federal Reserve have some people excited, yet it appears the major American banks are not necessarily sharing this optimism.
The Federal Reserve Increases Liquidity
The main point of focus for governments is to avoid financial collapse. That may prove to be rather challenging, given the current circumstances. All major markets continue to fall off a cliff every single day. Avoiding a repeat of the 2008 financial crisis will be challenging, and may require some very unusual measures.
In the United States, the Federal Reserve is taking some extreme steps. Not only are they using helicopter money to increase liquidity, banks are getting some help too. Restarting quantitative easing is often a death blow to an economy. How this will affect the US economy over the coming months, is anyone’s guess at this time.
Perhaps the strangest measure has to do with banks as well. American banks are no longer required to match 10% of user deposits before they can issue that deposited amount as a loan. Instead, this rate has now been reduced to 0%. As soon as money is deposited by customers, that full amount can be used to provide loans.
In theory, this measure will be beneficial. It can help small businesses and consumers in many different ways. One also has to keep in mind how this creates a big pit which may never be filled again in the future. This situation cannot be left unchecked, as it can permanently cripple an economy otherwise.
Major Banks Aren’t Optimistic
Despite all of these freebies courtesy of the Federal Reserve, major American banks are anything but optimistic.In fact, the Financial Services Forum has announced an unusual turn of events. Its member banks will suspend share buybacks for Q1 and Q2 of 2020.
Member banks include Bank of America, Citigroup, Goldman Sachs, Wells Fargo, JP Morgan Chase, and a few others. All of these banks are currently receiving ample gifts from the American central bank. As such, they should be more than capable of continuing their share buybacks.
Because they are not doing so, there is genuine reason for concern. It makes one wonder what the current state of the Financial Services Forum’s members really is. Blaming this lack of buying back shares on the novel coronavirus also seems a bit convenient.
It is possible that individual members any reverse their stance. As such, the decision to buy back shares can change at any given time. Given the current outlook, it seems unlikely that will be the case. A very worrisome situation well worth keeping an eye on.