May 3, 2023 - Economy

How the bank crisis hits the economy

Illustration of a hundred dollar bill with Benjamin Franklin having two black eyes and a busted lip.

Illustration: Aïda Amer/Axios

Lending is likely to tighten further amid the banking crisis, creating a new headwind for an otherwise decent economy.

Why it matters: Consumption-driven economies depend on access to credit for investment, a big driver of growth. When the flow of credit is curtailed by a financial panic, the economy suffers.

Driving the news: It was yet another wobbly day for the share prices of small banks. Investors are worried that policymakers still haven't been able to snuff out a crisis that began in March with the collapse of Silicon Valley Bank.

  • The S&P 500 index of larger regional bank shares fell nearly 7%, led by a nearly 11% tumble in Utah's Zions Bancorporation.
  • The S&P's smaller regional bank benchmark dove by over 6%, paced by a gnarly 23% swoon in Los Angeles' PacWest Bancorp.

State of play: The small regional firms at the heart of the crisis are almost certainly reducing lending and building stockpiles of cash and super-liquid investments.

  • That means a small but clear downturn in business lending that began in March is likely to worsen.

The numbers: The Federal Reserve's weekly numbers on overall business loans outstanding have dropped 2% since their March peak. Business loans from smaller banks are down a sharper 4.2%.

Context: It's important to remember that banks were already pretty stingy about lending, even before the bank panic struck.

  • A closely watched measure of bank lending standards produced by the Fed showed that lending standards were already near levels associated with recession at the end of last year.

Between the lines: The next update on those numbers will be publicly released next week, but the Fed already has the data.

  • If the data indicates lending is likely to fall off a cliff, it might keep the Federal Open Market Committee from delivering the widely expected quarter-point hike.

What they're saying: "FOMC members will have seen that data before making a decision, and before investors will have the same context. A rapid worsening of already-tight credit conditions, driven by recent bank failures, could prompt that change," said Lauren Goodwin, economist and portfolio strategist at New York Life Investments, in a research note.

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