“Who will be next?” So simple is the question posed by the economic scientist Volker Wieland at the conference “The E.K.T. and its observers’ in Frankfurt. Wieland wonders which bank could be the next to fail, like Silicon Valley Bank or Credit Suisse.

The university’s large lecture hall is packed, with many well-known names in the financial sector. First speaker: the president of E.K.T. Christine Lagarde, clearly eager to dispel doubts. In the end, however, this is overturned by her compatriot Voltaire. “Doubt is not pleasant, but certainty is absurd.” The further course of interest rates is doubtful, mainly due to the uncertainties in the banking system, although the European one is stable and safe.

Who is the next volatile candidate?

Lagarde says in the morning the same thing that her American Central Bank colleague Jerome Powell emphasizes in the evening on the other side of the Atlantic: “The American banking system is stable and resilient”, she assures – despite or precisely because of the bankruptcy of Silicon Valley and of Signature Bank, but also despite the turmoil in the regional banking sector. But no one knows what may come next.

It is no coincidence that the statements come from the leading monetary authorities of the dollar and euro zone. Because the current turmoil has a cause, and that is the central banks themselves, as with their strong and decisive interest rate hikes last year, the prices of today’s bonds on the banks’ balance sheets have fallen. Anyone who is not currently dependent on liquidity can convert the bonds into money at their face value at maturity. But when customers – as in the case of Silicon Valley Bank – suddenly want their deposits back en masse, that’s a problem for some banks.

On the other hand, the increase in interest rates presents other, absolutely desirable results. High interest rates make loans more expensive, weakening demand. As a result, spending and investment are reduced. And that’s exactly the goal, because central banks want to tame runaway inflation. Their central driver is interest rates, which allow them to tighten money, which reduces price pressure.

“Recent developments are likely to lead to tighter credit conditions for households and businesses, weighing on economic activity and hiring rates,” Powell said. By this he means not only rising interest rates, but also the uncertainty resulting from bank failures. “The extent of these impacts is unclear.”

Doubts again

Similarly, Christine Lagarde argued that, for example, investment in the business and construction sectors fell sharply in the last three quarters, as a consequence of the sharp shift from the previous policy of zero interest rates. Now it is being considered whether there will be increased “transmission” in the coming months, i.e. effect of the interest rate hike on the real economy. On the other hand, uncertainty in the banking sector may lead to tighter credit terms. Then, the recent crisis would essentially relieve the Central Bank of some of its work, which is why it is not committed to further rate hikes in the first place.

E.K.T. It follows a firm strategy, which is “based on the state of the data and consolidates the willingness to act, but does not compromise on our primary objective,” Lagarde said. Primary objective is price stability or containment of inflation at 2%. Similarly, Jerome Powell reports: “The committee will closely monitor the information it receives and assess the impact on monetary policy.” However, it assumes that an additional tightening of monetary policy could be appropriate in order to reduce inflation to 2% over time.

Central banks on both sides of the Atlantic they are now moving in a foggy landscape: On the one hand, high inflation is threatening. On the other hand, there are the problems in the banking sector, and the financial consequences of rising interest rates. Recently, imminent interest rate hikes have been announced in order to keep inflation expectations low. Now the Central Banks emphasize that henceforth they want to take decisions according to the existing data and information. In this way they ensure a margin of movement. In other words, they proceed cautiously.