When banks face instability—as they are now after Silicon Valley Bank’s sudden downfall, as well as the failures of the crypto-focused Signature Bank and Switzerland’s Credit Suisse—they tend to become increasingly conservative. They’re more selective with loans, they often increase the interest rates on the loans they do offer, and they keep more cash on hand to protect themselves from a worst-case bank-run scenario.
These tighter lending standards can lead to a credit crunch that makes capital difficult to come by for consumers and businesses—and that can have a dramatic effect on the economy. Credit crunch fears have led to repeated predictions of an impending recession this month. But Goldman Sachs chief economist and head of global investment research Jan Hatzius believes that banks’ recent issues and an ongoing credit crunch may actually help the Federal Reserve cool the economy and fight inflation.
