Wall Street analysts warn of possibility of recession

The pressure on small- and mid-sized US banks after the swift downfall of SVB Financial Group could further slow the economy, and is likely to raise the probability of a recession in 2023, analysts at Wall Street said.

JPMorgan said regulatory scrutiny on smaller banks and a run on deposits will hamper loan growth. With no offset from larger banks, GDP would fall 0.5% to 1.0%, over the next year or two.

“Ongoing pressure could cause smaller banks to become more conservative about lending in order to preserve liquidity in case they need to meet depositor withdrawals, and a tightening in lending standards could weigh on aggregate demand,” said economists at Goldman Sachs led by Jan Hatzius.

Banks across the globe slumped after the closure of SVB and Signature Bank, with worries about stresses in the global banking system worsened by troubles at Swiss lender Credit Suisse. US banks started to find footing again on Wednesday thanks to bargain hunting.

JPMorgan notes that small banks, per the US Federal Reserve’s definition, account for 30% of aggregate banking system assets, and 38% of the system’s loan book in the US.

Analysts believe the collapse of SVB and Signature Bank highlights the delayed effect of the US central bank’s aggressive rate hike campaign.

Goldman Sachs raised its probability of the US economy entering a recession in the next 12 months by 10 percentage points to 35%, citing the stress on small banks.

Reuters