Are people having trouble getting loans? Are we facing a nationwide credit crunch? Is a rattled U.S. banking industry retreating into a protective shell and hurting the economy?
Maybe not.
The failure of Silicon Valley Bank last month sparked worries about a banking crisis that could harm the U.S. economy, but the threat appears to be fading, and some argue that a so-called credit crunch is unlikely.
Depositors withdrew tens of billions of dollars in cash from banks in March after SVB and Signature Bank collapsed and lending briefly declined.
Yet deposits have stabilized since the Federal Reserve created an emergency bank-borrowing program to help prevent further failures. Loans to businesses and consumers have also rebounded slightly.
“While there may be some slow-moving pull-back in willingness to lend, the sharp ‘credit crunch’ that markets had been expecting did not materialize,” Citibank economists wrote in a note to clients.
A credit crunch involves a reluctance among banks to lend in times of stress, a situation that can cause severe harm to an economy. Lending is the lifeblood of economic growth.
The U.S. last experienced a crunch during the 2007-09 recession.
Uncredited
The recent round of quarterly earnings reports from banks also suggests the U.S. financial system is in solid shape.
Unlike in 2007-09, most banks are well-capitalized and have taken on far fewer risky investments, analysts say. Tighter federal regulation and regular “stress tests” have also helped to safeguard the U.S. financial system.
“First-quarter results from banks did not raise any new red flags about stresses in the banking system, largely putting to rest concerns about systemic risks,” said Solita Marcelli, chief investment officer for the Americas at UBS Global Wealth Management.
What might also prevent a credit crunch is the relatively modest increase in loans of all types compared with a historic surge in despots in the wake of the pandemic.
Banks gained some $4.5 trillion in new deposits from 2020 to 2022 after the federal government doled out massive stimulus payments to businesses and consumers. Yet less than half of the amount of those new deposits was converted into loans.
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Instead, banks parked most of the money in relatively safe investments such as government- and mortgage-backed bonds.
“This surge in deposits has only recently begun to reverse, and was never matched by a surge in bank loans,” said Steven Ricchiuto, chief U.S. economist at Mizuho Securities USA.
The recent decline in deposits would have to go on for a long time, economists say, to restore the prepandemic relationship of deposits to loans.
