Some economists have modestly lowered their forecasts for economic growth this year because of the Silicon Valley Bank crisis — as smaller banks pull back lending in an already weak environment.
Goldman Sachs says it has cut its estimate of the increase in gross domestic product this year by three-tenths of a percentage point to 1.2%. Goldman is among the minority of economists not predicting a recession in 2023.
Federal regulators stepped in quickly last weekend to provide funding and ensure that depositors at Silicon Valley Bank and Signature Bank can access all their money from both banks, not just the up to $250,000 insured by the Federal Deposit Insurance Corporation.
The Federal Reserve also said it was offering loans to other financial institutions that may be hit with similar bank runs so depositors can withdraw all their money.
What is the impact of the SVB collapse on the banking sector?
But smaller regional banks are likely to become more cautious about lending to consumers and businesses to preserve their cash in case of unusually large depositor withdrawals, Goldman economists Manuel Abecasis and David Mericle wrote in a note to clients.
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Do smaller banks lend more?
Small and mid-size banks account for about 50% of commercial and industrial lending, 60% of housing-related lending, and 80% of commercial real estate lending, Goldman says.
The research firm reckons that small banks with a low share of FDIC-insured deposits will reduce lending by 40% while other small banks trim lending by 15%. That would result in a 2.5% drop in total bank lending, particularly loans to businesses to finance their capital spending, Goldman says.
Mark Zandi, chief economist of Moody’s Analytics, estimates that stricter bank lending standards will shave 2023 GDP growth by a slightly smaller two-tenths of a percentage point. He’s also forecasting 1.2% growth this year
“This optimism goes to the aggressive government response to the bank failures, strongly signaling that it has the banking system’s back and will do whatever is necessary to ensure the system continues to function well,” Zandi says.
What are the chances of a recession in 2023?
The U.S. economy was already expected to turn in a feeble performance in 2023 because of the Fed’s 4½ percentage points in rate increases the past year to fight inflation – its sharpest hiking campaign since the early 1980s. Most economists surveyed by Wolters Kluwer Blue Chip Economic Indicators are predicting a recession this year.
The rate hikes were also a big contributor to SVB’s meltdown because higher interest rates meant the bank had to sell its substantial share of bonds at a loss to generate the cash needed to meet the withdrawals of depositors, many of whom were troubled tech companies.
Will the Fed raise interest rates again soon?
As a result of the crisis, many economists expect the Fed to pause its rate increases at a meeting next week or lift rates by a quarter point at most rather than the half-point move markets were predicting.
And markets expect the Fed to stop hiking when its key short-term rate rises from the current range of 4.5% to 4.75% to a range of 4.75% to 4.5%. Previously, markets figured the Fed would keep hiking until the rate reaches 5.5% to 5.75%.
Fewer Fed rate hikes should increase GDP growth this year by a tenth of a percentage point, Zandi says. That, he says, would partly offset a 0.3% drag from the stricter bank lending standards and leave a net decline in growth of two-tenths of a point.
Michael Feroli, chief U.S. economist of JPMorgan, expects a bigger hit to growth – a half percent to a percentage point over the next year or two. He says small and midsize banks will also restrict lending because of concerns that the SVB episode will increase regulatory scrutiny of their practices.
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