Photo illustration, The Silicon Valley Bank logo is visible on a smartphone with the stock market index in the background on PC on March 14, 2023 in Rome, Italy.
Andrea Ronchini | Nurphoto | Getty Images
Goldman Sachs lowered its economic growth forecast for 2023 on Wednesday, citing a slowdown in lending from small and medium-sized banks amid turmoil in the broader financial system.
The company lowered its growth forecast by 0.3 percentage points to 1.2% on expectation that smaller banks will try to preserve liquidity in case they have to meet depositor withdrawals, leading to a significant tightening of bank lending standards.
Tighter lending standards could weigh on aggregate demand and slow GDP growth, already hurt by tightening in recent quarters, Goldman economists David Mericle and Manuel Abecasis wrote in a note to clients.
“Small and mid-sized banks play an important role in the US economy,” the analysts write. “Any impact on lending is likely to be concentrated in a subset of small and medium-sized banks.”
Banks with less than $250 billion in assets account for about 50% of U.S. commercial and industrial lending, 60% of residential real estate lending, 80% of commercial real estate lending, and 45% of consumer lending, according to the company.
While the two most recent bank failures — Silicon Valley Bank and Signature Bank — represent only 1% of total bank lending, Goldman found that lending shares are 20% for banks with high loan-to-deposit ratios and 20% for banks with high loan-to-deposit ratios. Deposit Ratio 7% is small percentage of FDIC insured deposits.
Regulators earlier this week seized both banks, ensuring depositors would regain full access to their funds through the FDIC’s Deposit Insurance Fund. Many depositors were uninsured due to the $250,000 cap on guaranteed deposits.
Analysts expect small banks with a low percentage of FDIC-covered deposits to reduce new lending by 40% and other small banks to reduce new lending by 15%, resulting in a 2.5% drag on total bank lending.
The impact of tightening would have the same impact on demand growth as a 25 to 50 basis point rate hike, they said.