Banks will suffer 2008-style losses if inflation isn't controlled, top banking expert says
- Banks could suffer losses on par with 2008 if inflation isn't controlled, according to the Bank for International Settlements.
- The BIS emphasized the need for the Fed to bring down inflation in its annual report.
The banking crisis that unfolded earlier this year isn't over, and banks could be hit with losses akin to what was seen in 2008 if the Federal Reserve doesn't get inflation under control, according to Bank for International Settlements.
In its annual report published Sunday, the so-called bank for central banks pointed to the lasting ramifications of 2023's bank failures, starting with the collapse of Silicon Valley Bank in early March. SVB's implosion, sparked by losses on its bond holdings as interest rates rose and the value of its fixed income securities plummeted, snowballed into a wider regional bank crisis that resulted in the fall of Signature Bank and First Republic Bank.
Experts say the banking failures raised the risk of recession and the risk that more lenders are teetering on the brink. BIS general manager Agustín Carstens warned of bank losses of "a similar order of magnitude" as the 2008 financial crisis.
"The global economy is at a critical juncture," Carstens said at a press event on Sunday during a presentation of the report, emphasizing the need to lower inflation to avoid stressing the financial system. "The key challenge is fully taming inflation, and the last mile is typically the hardest," he added.
The Fed has been scrambling to get a handle on high prices for the past year, having raised interest rates aggressively to bring inflation down. Prices cooled to 4% in the May Consumer Price Index report, below the 41-year record notched last summer, but still above the Fed's long-run 2% target.
Central bankers are unlikely to get inflation back to 2% without triggering a recession, commentators have warned, pointing to recession signals flashing in various corners of the economy. Mainstream indicators like the inverted yield curve have been blaring warnings for much of the past year, while less traditional signals like cardboard box demand and RV sales are also pointing to a looming downturn.