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Silicon Valley Bank’s fallout last month could make it harder for businesses and consumers to take out a loan.
"When the banking stress first surfaced, my primary takeaway for U.S. equity markets was that it would lead to a credit crunch," Mike Wilson, Morgan Stanley’s chief U.S. equity strategist, explained in the firm's Thoughts on the Market podcast on Monday. “The data suggests a credit crunch has started. And the data shows the "biggest two-week decline in lending by banks on record as they simultaneously sell mortgages and treasuries at a record pace to offset deposit flight,” Wilson said. According to Federal Reserve data released on April 14, in the final two weeks of March, loans and leases on the books of commercial banks fell by $105 billion.
Since the Fed started raising rates a year ago, "almost $1 trillion in deposits have left the banking system," Wilson said. "Throw in the already tight lending standards and it's no surprise credit growth is shrinking."
The Federal Reserve Bank of New York released its March 2023 Survey of Consumer Expectations on April 10. Compared to a year ago, perceptions of credit access "deteriorated in March," according to the report. Respondents said it's "harder to obtain credit than one year ago rising and reaching a series high," and they expect it will be harder to get credit a year from now.
'Credit contraction'
For finance executives, the threat to credit availability now adds to the challenges posed by inflation, and geopolitical concerns. And a credit crunch could prompt a recession.
"Banks will do what they have to do to preserve capital and one way to do that is to make fewer loans," Som-lok Leung, the executive director of The International Association of Credit Portfolio Managers (IACPM), said in a statement. IACPM released its Credit Outlook Survey on April 13. As banks move toward making fewer loans, 86% of finance executives in North America surveyed say defaults will rise, while 14% expect the numbers to remain unchanged. Eighty-four percent of finance executives say a recession will occur in the U.S. sometime this year, and 61% see a recession in Europe and the U.K. by year-end. "We’re beginning to see more credit stress and defaults in corporate borrowers," Leung said.
The industries most vulnerable are health care, medium-size tech companies, commercial real estate, and transportation, according to the report. IACPM is an association of over 130 financial institutions in 30 countries such as banks, asset managers, and insurance companies.
Goldman Sachs CEO David Solomon commented on banks and lending during the firm’s Q1 2023 earnings call on Tuesday. "The recent events in the banking sector are lowering growth expectations and there is a higher risk of a credit contraction given the environment is limiting banks' appetites to extend credit,” Solomon said. “This is an acceleration of the trend we're watching closely. Businesses and consumers continue to adjust to higher interest rates. And while the forward trajectory is still unclear, we continue to be cautious about the economic outlook.”
Sheryl Estrada
sheryl.estrada@fortune.com
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