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2023 Jul/10
Risk Factors in US Financial Markets, and Spillovers from Financial Unrest
Issue Papers 23-12
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- Research Topic Macrofinance
- Page 22
- Summary
- In March 2023, a series of bankruptcies among small- to mid-sized banks in the US raised the possibility of another financial crisis originating in the US. Fortunately, the authorities quickly stepped in to stabilize the market, and prevented the market shock from growing substantially. However, signs of unrest persist due to the vulnerability of smaller banks and the ongoing slowdown in the commercial real estate market.
Financial unrest in the US could not only impact the US economy but also spill over into the real and financial sectors of Korea. Based on the empirical analysis presented in this paper, instances of financial unrest have been observed to slow down both inflation and the US economy, while the Fed mitigated the impact by adjusting policy rates. An analysis of the spillover effect on Korea revealed that US financial unrest primarily resulted in a slowdown in the mining and manufacturing sectors, along with adverse effects on the financial markets. To elaborate, stock prices declined, while there was an observed increase in the spreads between corporate and government bonds, as well as between CP and call rates, along with fluctuations in the won-dollar exchange rate. It was also noted that the impact on yield spreads and exchange rates persisted for a considerable period. Since this episode of US financial unrest in March was not of significant magnitude, improved market conditions were able to effectively counteract the impact. Considering this, it is unlikely that the Fed will reverse its stance on tightening monetary policy due to US financial conditions. Furthermore, it is unlikely that the Fed will reduce interest rates this year, as US inflation is not expected to reach the Fed's target in the short term.
As the Fed is expected to keep its high rate stance, the potential risk factors in the US financial markets could possibly lead to small- or large-scale financial unrest. This necessitates that Korea closely monitors any financial turmoil in the US that has the potential to trigger disturbances in the Korean financial markets. It appears premature to consider altering the monetary policy stance in light of Korea's current inflation status. Nonetheless, it is advisable to promptly address any indications of growing financial stability risks through measures such as targeted liquidity provision. Specifically, it is essential to pre-establish micro-level responses, particularly in the corporate bonds and CP markets, where any adverse impact could potentially evolve into a long-term issue.