The banking disaster is having a gradual impact on the financial system

People walk past the New York Stock Exchange (NYSE) on February 14, 2023 in New York City.

Spencer Platt | Getty Images

A banking crisis that erupted less than two months ago now appears less of a major blow to the US economy than a slow bleed that will seep its way and act as a potential catalyst for a much-anticipated recession later this year .

When banks report on the impact of a deposit rush on their operations, the picture is mixed: larger institutions like it JPMorgan Chase And Bank of America suffered far fewer hits, while smaller counterparts such as First Republic face a much harder fight and a struggle for survival.

This means that the money pipeline to Wall Street remains mostly alive and well while the situation on Main Street is much more fluid.

“The small banks will lend less. It’s a credit hit in Central America, on Main Street,” said Steven Blitz, U.S. chief economist at TS Lombard. “That’s negative for growth.”

How negative will be seen in the coming days and months as data flows through.

First Republic, a regional lender considered an indicator of how hard the deposit crisis will hit the sector, posted earnings that beat expectations but otherwise reflected a troubled company.

Bank earnings were mostly decent in the first quarter, but the future of the sector is uncertain. The shares were under pressure, with the SPDR S&P Bank The ETF (KBE) lost more than 3% in Tuesday afternoon’s trading.

“Rather than providing worrying new information, this week’s results confirm that bank stress stabilized by the end of March and was confined to a limited number of banks,” said Robert Sockin, global economist at Citigroup, in a note to clients. “That’s about the best macro result one could have hoped for when stress surfaced last month.”

growth with foresight

For the immediate future, despite the banking problems, largely positive economic growth is expected in the first quarter.

When the Commerce Department releases its first estimate of GDP growth for the first three months of the year, the Dow Jones estimate is expected to increase by 2%. The Atlanta Fed’s data tracker is forecasting an even better 2.5% gain.

However, this growth is unlikely to last, mainly due to two related factors: the Federal Reserve’s rate hikes, deliberately aimed at cooling the economy and lowering inflation, and restrictions on lending to small banks. First Republic, for example, reported that it suffered a more than 40% drop in deposits, part of a $563 billion contraction this year at U.S. banks that will make lending harder.

Still, Blitz and many of his peers still expect any recession to be shallow and short-lived.

“Everything keeps telling me that. Can there be a recession that isn’t led by cars and real estate? Yes you can called. “This is also a mild recession. A 2008-2009 recession occurs every 40 years. It’s not a 10-year event.”

In fact, the most recent recession was just two years ago, in the early days of the Covid crisis. The downturn was historically steep and short, culminating in an equally unprecedented volley of fiscal and monetary stimulus that continues to flow through the economy.

Consumer spending appears to have held up fairly well amid the banking crisis, with Citigroup estimating about $1 trillion in excess savings is still available. However, delinquency rates and balances are both rising: Moody’s reported Tuesday that credit card charges were 2.6% in the first quarter, up 0.57% from the fourth quarter of 2022, while annualized balances increased 20.1% increased.

Personal savings rates have also fallen, falling from 13.4% in 2021 to 4.6% in February.

But the most comprehensive report yet, covering the period during which Silicon Valley Bank and Signature Bank shut down, suggested the damage is limited. The Federal Reserve’s periodic Beige Book report, released April 19, pointed out only that lending and demand for credit “generally declined” and standards “amid rising uncertainty and liquidity concerns.” “ have been tightened.

“The impact of the crisis appears to be less severe than I expected just a few weeks ago,” said Mark Zandi, chief economist at Moody’s Analytics. The Fed report “was a lot less heated than I expected. [The banking situation] It’s a headwind, but it’s not a hurricane headwind, it’s just kind of a nuisance.”

It’s all about the consumer

What happens next depends heavily on consumers, who make up more than two-thirds of all US economic activity.

As demand for services returns to pre-pandemic levels, cracks are forming. Along with the rise in credit card balances and payment defaults will likely come the further obstacle of tightening credit standards, both due to the need and increasing likelihood of tighter regulation.

Lower-income consumers have been under pressure for years as the share of wealth held by the top 1% of earners has continued to rise, to 31.9% from 29.7% when Covid hit, according to the latest Fed Mid 2022 data available.

“Before this really started to unfold in early March, you were already seeing signs of contraction and lending restraint,” said Jim Baird, chief investment officer at Plante Moran Financial Advisors. “You’re seeing reduced credit demand as consumers and businesses start to pull in the deckchairs.”

However, Baird also sees little chance of a severe recession.

“When you look at how all the forward-looking data is lining up, it’s hard to see how we’re going to avoid even a small recession,” he said. “The real question is how far the strength of the labor economy and the still-sizable cash reserves that many households hold can push consumers and keep the economy on track.”

Comments are closed.