After two U.S. banks collapsed and a record number of outflows from small lenders, the banking industry is starting to shift its concern from being in an immediate crisis to a concern for economic growth. While banks were previously concerned about the impact of the pandemic on their balance sheets, they are now turning their attention to growth-related issues.
Small U.S. banks have experienced a record drop of $119 billion following the collapse of Silicon Valley Bank on March 10. Goldman Sachs analysts think that the growth of real GDP will be reduced due to stress in the banking system to weigh on credit growth.
The uncertainty over government willingness to guarantee customer deposits and the shaken confidence of depositors remain causes of concern for financial markets. As customers move money from checking accounts to money market accounts, consumer spending may decrease.
While tighter credit conditions will put pressure on economic activity, analysts do not expect a catastrophic effect unless the situation escalates into a full-blown crisis of confidence. Government policies, including deposit insurance and liquidity provision, have limited stress in the financial system, but not eliminated it. While banking system stress remains high, there are signs of stabilization and assurance that funding strains will be more short-lived than feared.
Written by: Nate Birck