EUR/USD has gained more than 100 pps at its peak and hit a monthly high above 1.0900. U.S. Treasuries rose after the Federal Open Market Committee meeting, pushing the dollar lower. Wall Street indexes swung between gains and losses with no clear direction.

In terms of the FOMC outcome, as expected, the Fed raised interest rates by 25 basis points to 4.75% – 5.00%. In its statement, the Fed sounded rather dovish, but offered no clear course of action. Thereafter, at the news conference, Fed Chairman Powell said that tighter credit conditions could be seen as an alternative to raising interest rates. “Deflation is absolutely happening,” he said. Regarding the “dot plot,” Powell said Fed officials don't see a rate cut this year.

Why is the current banking crisis may be much worse than what happened in 2007-2009? There are heated debates on Internet specialty Websites, speculating that the previous crisis’s damage was a kind of narrowed to sub-prime mortgages (and relevant bad derivatives), therefore it affected only the participating banks. The current banking crisis will impact all but all banks, because the business model of almost any bank is to take short (less expensive) liabilities and invest them in long (more profitable) assets. This is where banks make their profits, not mentioning all sorts of charges and commissions, but those are comparatively small.

Between 2014 and 2021, due to the Fed’s ultra soft monetary policy, short term debt was borrowed at approximately zero. At the same time, due to the very same near-zero interest rates, there were no near-term instruments to get instant returns on investments. Therefore, many banks dived into what later appeared as unjustified risks and loaded their balance sheets to the max with long-term securities that offered at least some yields – mainly sovereign and mortgage backed securities, and partially – large corporations’ bonds. Now, due to the rapid increase in interest rates and the escalating geopolitics, the so-called “demand for length” dropped to near zero, and the market value of these securities has sunk by tens of percent (depending on their durations). And investors, seeing new opportunities to earn money with a higher yield than a bank deposit at a zero rate, and in general, being increasingly wary of a surge in inflation, they started withdrawing money from bank deposits and move it to money markets, to IPOs, to purchase real estate, etc. And the cost of money on the interbank market has soared. At the same time, the money has been invested for long maturities instruments, and in order to redeem deposits to investors, bankers were required to prematurely terminate their long term investments.

This is how banks got hammered with a triple impact: they 1) depreciated their assets, 2) faced their liabilities surging, 3) envisaged a need for urgent cash liquidity. This problem has affected most banks. After the bankruptcy of Credit Suisse, a new concern arose: a drop in confidence in bank capital and bonds.

As a result, it looks next to be impossible to bail out every exposed bank, because there are just too many – so, more defaults look like predetermined under these circumstances. And since the whole system was one way or another based on trust (credito - I trust, lat.), a debt, banking, and currency struggle of epic proportions looms ahead. With a gradual transition to digital currencies.