The banking industry is anxious about economic growth following the failure of two US banks and huge outflows from smaller institutions. Deposits held by tiny US banks fell by a record $119 billion to $5.46 trillion following the March failure of Silicon Valley Bank, according to Reuters.
According to economic experts, the lack of clarity on the government’s willingness to guarantee client deposits continues to upset financial markets. Following the failure of two US banks and huge outflows from smaller lenders, the banking industry’s focus has shifted from an immediate crisis to a medium-term concern: economic growth.
According to data released Friday by the Federal Reserve, deposits held by small U.S. banks fell by a record $119 billion to $5.46 trillion following the March 10 collapse of Silicon Valley Bank.
“We expect stress in the banking system to weigh on credit growth, which in turn will reduce real GDP growth,” Goldman Sachs analysts led by senior economist Jan Hatzius wrote in a note.
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The lack of clarity on the government’s willingness to guarantee consumer deposits continues to destabilize financial markets, according to Hatzius. Investors are particularly concerned about depositors’ shaky confidence and the uncertainty lurking over smaller banks, he added.
Consumer spending is likely to fall as clients transfer money from checking accounts to money market accounts, according to Torsten Slok, chief economist at Apollo Global Management, in a note.
Tighter credit conditions will exert considerable pressure on economic activity, but the effect will not be disastrous until the situation turns into a “full-blown crisis of confidence,” according to Barclays analysts in a note last week.
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Recent banking sector stress and the risk of a subsequent credit crisis push the United States closer to recession, Minneapolis Fed President Neel Kashkari said on CBS’ “Face the Nation” on Sunday.
Government actions such as deposit insurance for failed lenders Silicon Valley Bank and Signature Bank, as well as increased liquidity for banks, have reduced but not eradicated stress in the financial sector, according to Goldman Sachs analysts in a research.
On Monday, US regulators announced that they will backstop a deal for regional lender First Citizens BancShares to acquire insolvent Silicon Valley Bank, costing a government-run insurance fund an estimated $20 billion.
The agreement comes after the Federal Deposit Insurance Corporation took over Silicon Valley Bank on March 10 following a bank run that also brought down Signature Bank and wiped off more than half the market value of several other U.S. regional lenders.
“Banking system stress remains high, but there are some signs of stabilization,” wrote analysts at Bank of America Corp in a note. “Growth in bank emergency funding appears to be moderating.” According to UBS analysts, the Fed data should provide some assurance that funding constraints would be less severe than previously anticipated.
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