On Wednesday, Goldman Sachs lowered its economic growth forecast for 2023, commending a pullback in lending from small to medium-sized banks amid disruption in the larger financial system.
Also, the firm lowered its growth forecast by 0.3 percentage points to 1.2%, expecting that smaller banks will attempt to recoup liquidity in case they need to meet depositor withdrawals, which also leads to a substantial tightening in bank lending fundamentals.
David Mericle and Manuel Abecasis, economists at Goldman Sachs, wrote in a note to their clients, “Besides, tighter lending standards could contemplate aggregate demand and suggest a drag on GDP growth, which is already affected by tightening in the initial quarters.”
“Small and medium-sized banks play an important role in the US economy,” the analysts wrote.
“Any lending impact is likely to be concentrated in a subset of small and medium-sized banks,” they added.
According to Goldman Sachs’ analysis, banks with less than $250 billion in assets comprehend 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.
However, in recent times, the two bank failures, Silicon Valley Bank and Signature Bank, have accounted for just 1% of total bank lending, as the firm noted that lending shares are 20% for banks with a high loan-to-deposit ratio and 7% for banks with a low share of FDIC-insured deposits.
Furthermore, the regulators had taken a grip on both of the banks earlier in the week and made sure that depositors had the possibility of regaining full access to their funds through the FDIC’s deposit insurance fund. Many depositors were unindemnified due to the $250,000 cap on guaranteed accumulation.
The analysts also anticipated that small banks with a low share of FDIC-covered deposits would downslide new lending by 40% and that other small banks would reduce lending by 15%, which results in a 2.5% drag on total bank lending.
As a result, the effect of tightening would have the similar impact on demand growth as would an interest rate hike of 25 to 50 basis points, according to analysts.
- Published By Team Genuine Reporter