SVB collapse

According to recent reports, Goldman Sachs has lowered its growth forecast for the US economy by 0.3 percentage points to 1.2% for 2023, due to the impact of the recent Silicon Valley Bank (SVB) crisis.

The bank has predicted that a pullback in lending will lead to a substantial tightening in bank lending standards, which in turn will drag down growth that has already been affected by recent quarters’ tightening.

Tighter lending standards

Goldman economists David Mericle and Manuel Abecasis wrote in a note to clients that banks with less than $250 billion in assets make up approximately 50% of US commercial and industrial lending.

Tighter lending standards in these banks could weigh on aggregate demand, leading to a drag on GDP growth that has already been affected by tightening in recent quarters. The analysts noted that the lending impact is likely to be concentrated in a subset of small and medium-sized banks.

Goldman Sachs stated that banks with less than $250 billion in assets make up 60% of residential real estate lending, 80% of commercial real estate lending, and 45% of consumer lending. While the two recent bank failures – Silicon Valley Bank and Signature Bank – account for just 1% of total bank lending, Goldman 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.

Cap on guarantees

Regulators seized both banks earlier this week and ensured that depositors would regain full access to their funds through the FDIC’s deposit insurance fund. However, many depositors were uninsured due to the $250,000 cap on guaranteed deposits.

The analysts have assumed that small banks with a low share of FDIC-covered deposits will reduce new lending by 40% and that other small banks will reduce new lending by 15%, leading to a 2.5% drag on total bank lending. They added that the effect of the tightening would have the same impact on demand growth as an interest rate hike of 25 to 50 basis points.