What the debt limit standoff means for the banking crisis

Sylvan Lane
Updated ·3 min read
6

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The Big Story 

While the banking sector has continued to show signs of stabilizing, experts are raising questions about what a partisan showdown over the debt limit could mean for the industry in the months ahead. 

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“We all talk about the drop dead date … but we will be seeing tensions in advance of that,” said Dean Baker, co-director of the Center for Economic and Policy Research.

 

“We have to worry about getting close to that and creating fears because obviously people are fearful for the security in the banking system,” he said.

 

Congress is estimated to have until sometime in the summer, when the Treasury Department is expected to run out of so-called “extraordinary measures,” to stave off a national default.

 

Lawmakers on both sides are expected to raise the debt ceiling, which caps how much money the Treasury can owe to cover the nation’s bills. But there are deep divisions in Washington over how to do so.

 

At the same time, there are questions about whether concerns of a debt ceiling impasse could drive borrowing costs higher, complicating the banking system’s rebound.

 

If the debt limit isn’t raised or if investors fear the nation is headed for default, bond interest rates could rise “if investors think there’s a higher probability they won’t get repaid on time,” said Ben Ritz, director of the Progressive Policy Institute’s Center for Funding America’s Future.

 

“Higher interest rates stemming from fear of a default — or an actual default — will reduce the value of outstanding bonds. That reduces the value of banks’s capital reserves, makes it harder to cover deposits and you’re just more at risk of a Silicon Valley Bank-like situation,” Ritz said.

 

Aris has more here. 

Welcome to The Hill’s Business & Economy newsletter, we’re Karl Evers-Hillstrom, Aris Folley and Sylvan Lane — covering the intersection of Wall Street and Pennsylvania Avenue.

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