Whether the fear of financial system contamination and further bank runs is justified is a difficult question to answer. Blom: ‘The tricky thing is that you don’t know for sure in advance. This is also why there is now such a strong response. And what is also annoying is that domino effects can play a role.’ Blom is referring to the situation where account holders withdraw their money from their bank and transfer it to another.
herd behavior
“In principle, those banks will get stronger again. But that financial system is now in flux. And everyone actually holds their breath for a moment. To see what exactly is going on. And with that you also get some self-strengthening effects.’ However, Blom points out that this applies mainly to the American market.
After all, banking supervision in Europe is different and stricter. However, financial markets in Europe also reacted strongly to what happened on the other side of the Atlantic. Blom sees that herd behavior plays a role in this, but points out that he doesn’t look so much at stock prices, but at other metrics. Like what happens to banks’ borrowing costs “because that determines how much financial stress is created in the system.”
In the United States, for example, the difference between what banks pay each other in funding costs and the risk-free interest rate has widened dramatically. While not as strong as during the great financial crisis, it is an indicator of financial stress that markets are responding to again.
Interest rate increase Yes/No
The key question for many economists, policymakers and central bankers now is whether interest rate hikes, designed to reduce inflation, shouldn’t be temporarily halted until the situation stabilizes. Blom sees that the market is almost no longer pricing in that interest rate hike. “So you could say that market traders hardly expect that anymore.”
What considerations do central banks make? ‘On the one hand, they have to curb inflation. They can do this by raising interest rates. But financial stability is a necessary precondition for everything else. So, in these kinds of circumstances, they are very likely to prioritize financial stability.’
To trust
How markets will behave in the foreseeable future is largely a matter of conjecture. Blom points out again that herding behavior of investors may be an important mechanism in this. “And that makes it difficult to make predictions.” According to Blom, everyone in those markets looks at each other and waits. ‘In that sense, trust is the most important thing here. And we will have to wait and see how it develops for the rest of the week.’