The sharp slowdown in US bank lending after the failure of Silicon Valley Bank may be a precursor to a hard landing for the world's biggest economy, the Institute of International Finance has said.
The current pace of bank lending is much slower than in the run-up to SVB's failure, which triggered a wider banking crisis in early March, IIF managing director and chief economist Robin Brooks and economist Jonathan Fortun said in their latest research note.
It is especially pronounced in consumer lending, as well as loans to commercial and industrial clients. However, commercial and residential property lending, counter-intuitively, is holding up better.
The US is experiencing a “sudden stop” in loan growth in 2023, compared with the "torrid pace" of 2022, the research note said.
However, markets are dismissing "the sudden stop in bank lending as a potential driver of recession”, the IIF economists said.
“We see this slowdown as a significant downside risk to our forecast for a soft landing [for the US economy].”
California-based SVB, which was founded in 1983, became the biggest bank to fail in US history after Washington Mutual's collapse in 2008, which, in turn, triggered the global financial crisis.
The failure of SVB initiated a turbulent period for the US banking market, with Signature Bank and Silvergate Capital collapsing soon after.
It prompted the US Treasury Department, the Federal Reserve and the Federal Deposit Insurance Corporation to step in and guarantee that depositors would be able to recover all of their money.
The crisis did not stop there and in May, the California Department of Financial Protection and Innovation seized First Republic Bank, which was later taken over by JP Morgan Chase.
The reverberations of the US banking crisis were felt across the global banking sector, and the forced merger of Credit Suisse with rival UBS triggered fears of wider banking sector turbulence similar to that of 2008.
It also stoked fears of recession in the US as risk-averse banks pulled the plug on lending in an already slowing economy.
The institute said the SVB shock in early March had changed the “economic discourse in the US”.
“In the immediate run-up to SVB, markets were focused on inflation running hot and the possibility that the Fed would reaccelerate its pace of tightening,” the Washington-based institute said.
“Fear of deposit flight and a broader banking crisis – unfounded as it turns out – ended that, but it remains an open question just how pronounced [the] fallout from SVB on economic activity will be: Will it cause a mild slowdown or add to the case for a hard landing?”
Deposits in the overall banking system stabilised quickly after the crisis but it was not the case for lending, which is key to the growth of the US economy.
The flatlining of lending growth to commercial and industrial clients may reflect the slump in global manufacturing, while weakness in consumer lending is not unusual at the start of the year.
It is not yet clear if SVB has “materially depressed lending, not least since commercial and residential real estate lending is holding up better than expected”, the IIF economists said.
Data leans in the direction of a soft landing. However, the IIF continues to consider a “hard landing as a material downside risk”.