By Saeed Azhar and Davide Barbuscia
NEW YORK (Reuters) – Following the collapse of two US banks and record outflows by smaller lenders, the banking industry is shifting its concerns from an immediate crisis to a medium-term concern: economic growth.
Deposits held by small US banks fell by a record $119 billion to $5.46 trillion after the Silicon Valley bank collapsed on March 10, according to data released by the Federal Reserve on Friday.
“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 chief economist Jan Hatzius wrote in a note referring to gross domestic product.
Financial markets remain unsettled by a lack of clarity about the government’s willingness to guarantee customer deposits, Hatzius wrote. Investors are also concerned about shaken depositor confidence and the uncertainty threatening smaller banks, he added.
As customers move money from their checking accounts to park in money market accounts, consumer spending is likely to fall, Torsten Slok, chief economist at Apollo Global Management, wrote in a note.
Tighter credit conditions will put significant pressure on economic activity, but the impact will not be catastrophic unless the situation escalates into a “full-blown crisis of confidence,” Barclays analysts wrote in a note last week.
Recent stress in the banking sector and the possibility of a subsequent credit crunch is bringing the United States closer to a recession, Minneapolis Fed President Neel Kashkari told CBS’ Face the Nation on Sunday.
Government policies, including insuring deposits for collapsed lenders Silicon Valley Bank and Signature Bank and providing banks with more liquidity, have limited but not eliminated stress in the financial system, Goldman Sachs analysts wrote in a report.
U.S. regulators announced Monday they would support a deal for regional lender First Citizens BancShares to acquire the failed Silicon Valley Bank, resulting in an estimated $20 billion in damage to a state insurance fund.
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The deal comes after the Federal Deposit Insurance Corporation (FDIC) took over Silicon Valley Bank on March 10 after depositors dumped their money in a bank run that also brought down Signature Bank and more than half the market value of several others obliterated, had hurried US regional lenders.
“Tensions in the banking system remain high, but there are some signs of stabilization,” Bank of America Corp analysts said in a statement. “Bank emergency funding growth appears to be slowing.”
The Fed data should offer some reassurance that the funding squeeze will be shorter than feared, UBS analysts said in a statement.
(Reporting by Saeed Azhar and Davide Barbuscia; Editing by Lananh Nguyen and Angus MacSwan)
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