Key Takeaways
A banking crisis hit in March, as a deposit flight forced
some regional banks to crystallise losses on fixed
income holdings, sparking bank runs.
Policy action helped backstop the sector, but banks
with large fixed income holdings, less sticky deposits,
exposure to commercial real estate (CRE) lending and
poor geographic diversification remain at risk.
Policy support has stemmed deposit outflows, but
these will continue as household savings are depleted
and money market funds offer higher returns.
Bank lending fell in March but has since stabilised.
Scratching beneath the surface, corporate lending has
been very weak, consistent with our pessimistic view
on capex trends.
We think banks have room to deliver only modest loan
growth from now, especially against the backdrop of
rising capital requirements. Lending capacity looks
even weaker for those small regional banks important
for small business and CRE lending.
The crisis therefore acts as a further shock to credit
supply, which, alongside rising interest rates, should
act as a drag on growth, pushing the economy into
recession around the turn of the year.
But the shock has not been as severe as first feared,
meaning the Fed has turned more hawkish recently as
it sees downside risks recede somewhat.
A re-acceleration in deposit flight could cause a full-blown
credit crunch though, and a deeper recession.