Although the bankruptcy crisis of Silicon Valley Bank (SVB), which spread due to global financial instability, has been temporarily contained, warnings have emerged that systemic risks such as domino bankruptcies of U.S. banks and credit crunches could gradually spread over a long period. In particular, concerns are growing that if the financial sector, having recognized the risk of a bank run (massive withdrawal of deposits) from this incident, reduces household and corporate lending to manage risks, the economic recession could accelerate.
On the 29th (local time), The Wall Street Journal (WSJ) reported in an article titled "The Financial Sector Must Prepare for a Slow Motion Banking Crisis" that "U.S. financial authorities have so far prevented the contagion of the SVB crisis, but small banks will face (bankruptcy) pressures over the coming years." WSJ particularly noted that while past crises spread rapidly, a slow-motion crisis where the system gradually collapses over a long period could occur in the future.
The crisis is expected to concentrate on small and regional banks. Among these, banks exposed to commercial real estate are seen to carry greater risks. According to UBS, Switzerland's largest bank, U.S. small and regional banks account for 39% of commercial real estate loans.
WSJ, referring to the slow-motion crisis, recalled the savings and loan (S&L) crisis of the 1980s caused by rapid interest rate hikes. When Paul Volcker, then Chairman of the Federal Reserve (Fed), aggressively raised interest rates to curb high inflation, over 3,000 S&Ls and small banks went bankrupt from the mid-1980s. A similar scenario could be repeated. At that time, S&Ls faced liquidity crises due to the gap between loans issued at low interest rates and deposits that had to be paid at high interest rates. This parallels the current situation where Fed's interest rate hikes have lowered the value of banks' U.S. Treasury holdings, leaving them unable to respond to liquidity crises.
The rapid spread of mobile banking also burdens banks, as crises can escalate quickly and bank runs can spread rapidly. According to the U.S. Federal Deposit Insurance Corporation (FDIC), the number of internet and mobile banking users increased from 52% in 2017 to 66% in 2021.
If credit tightens due to banks' risk management, the U.S. economic recession is expected to accelerate. If small and regional banks strengthen lending regulations, households, real estate, and small and medium-sized enterprises (SMEs) that find financing relatively difficult are expected to suffer significant damage.
Global investment bank Goldman Sachs predicted that lending in the U.S. will decrease by at least 2% and up to 5% due to this crisis. International credit rating agency Moody's forecasted that the U.S. economic growth rate will decline by 0.3% this year because of the crisis. JP Morgan projected that growth rates will fall by 0.5% to 1% this year and next year, respectively.
Bloomberg warned, "A credit crunch is the last thing the already strained U.S. economy needs," adding that "a reduction in bank lending could accelerate the recession following the Fed's interest rate hikes."
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