Goldman Sachs cuts GDP forecast due to stress on small banks, that are key to U.S. financial system

Goldman Sachs on Wednesday lowered its 2023 financial progress forecast, citing a pullback in lending from small- and medium-sized banks amid turmoil within the broader monetary system.

The agency lowered its progress forecast by 0.three share factors to 1.2% below expectations that smaller banks will try to protect liquidity in case they should meet depositor withdrawals, resulting in a considerable tightening in financial institution lending requirements.

Tighter lending requirements might weigh on mixture demand, implying a drag on GDP progress already affected by tightening in latest quarters, Goldman economists David Mericle and Manuel Abecasis wrote in a notice to purchasers.

“Small and medium-sized banks play an essential function within the US financial system,” the analysts wrote. “Any lending impression is more likely to be concentrated in a subset of small and medium-sized banks.”

Banks with lower than $250 billion in property comprise about 50% of U.S. industrial and industrial lending, 60% of residential actual property lending, 80% of business actual property lending and 45% of shopper lending, in line with the agency. 

Whereas the 2 latest financial institution failures — Silicon Valley Financial institution and Signature Financial institution — account for simply 1% of complete financial institution lending, Goldman famous that lending shares are 20% for banks with a excessive loan-to-deposit ratio and seven% for banks with a low share of FDIC-insured deposits.

Regulators had seized each of the banks earlier this week and ensured that depositors would regain full entry to their funds by the FDIC’s deposit insurance coverage fund. Many depositors had been uninsured as a result of $250,000 cap on assured deposits. 

The analysts assume that small banks with a low share of FDIC-covered deposits will scale back new lending by 40% and that different small banks will scale back new lending by 15%, resulting in a 2.5% drag on complete financial institution lending.

The impact of tightening would have the identical impression on demand progress as would an rate of interest hike of 25 to 50 foundation factors, they mentioned.