Published: April 24, 2023 at 3:16 pm ET
Do people have trouble getting credit? Are we facing a nationwide credit crunch? Is an unsettled US banking industry retreating into a protective shell and damaging the economy?
Maybe not.
The collapse of Silicon Valley Bank last month sparked worries of a banking crisis that could hurt the US economy, but the threat appears to be waning as…
Do people have trouble getting credit? Are we facing a nationwide credit crunch? Is an unsettled US banking industry retreating into a protective shell and damaging the economy?
Maybe not.
The collapse of Silicon Valley Bank last month has sparked worries of a banking crisis that could hurt the US economy, but the threat appears to be waning, with some arguing a so-called credit crunch is unlikely.
Savers withdrew tens of billions of dollars in cash from banks in March after SVB and Signature Bank collapsed and lending briefly contracted.
But deposits have stabilized since the US Federal Reserve created an emergency lending program for banks to prevent further defaults. Lending to businesses and consumers has also recovered slightly.
“While there may be a slow decline in credit appetite, the sharp ‘credit crunch’ that markets had been anticipating has not materialized,” Citibank economists wrote in a note to clients.
A credit crunch involves a reluctance by banks to lend in times of stress, a situation that can severely damage an economy. Lending is the lifeblood of economic growth.
The US last experienced a crisis during the 2007-09 recession.
The latest round of quarterly earnings reports from banks also suggests that the US financial system is in sound shape.
Unlike 2007-09, most banks are well capitalized and have made far fewer risky investments, analysts say. Tighter government regulation and regular “stress tests” have also helped protect the US financial system.
“Banks’ first-quarter results did not raise any new warning signs about strains in the banking system and largely allayed concerns about systemic risk,” said Solita Marcelli, chief investment officer for the Americas at UBS Global Wealth Management.
What could also prevent a credit crunch is the relatively modest rise in credit of all types compared to a historic surge in despots in the wake of the pandemic.
Banks gained about $4.5 trillion in new deposits from 2020 to 2022 after the federal government distributed massive stimulus payments to businesses and consumers. However, less than half of these new deposits were converted into loans.
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Instead, banks parked most of their money in relatively safe assets like government and mortgage bonds.
“This increase in deposits has only recently begun to reverse and has never been accompanied by an increase in bank lending,” said Steven Ricchiuto, chief US economist at Mizuho Securities USA.
The recent drop in deposits would need to be sustained for a long time, economists say, to restore the pre-pandemic deposit-to-loan ratio.
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