Goldman cuts GDP forecast as small banks come under pressure

Goldman Sachs cut its 2023 economic growth forecast on Wednesday, citing lower lending by small and medium-sized banks amid turmoil in the broader financial system.

The firm slashed its growth forecast by 0.3 percentage point to 1.2 percent on expectations that smaller lenders will try to preserve liquidity in case depositors withdraw money, leading to a sharp tightening of bank lending standards.

Goldman Sachs economists David Mericle and Manuel Abecasis wrote in a note to clients that tighter lending standards could weigh on aggregate demand, meaning a drag on GDP growth, which has already been hit by tightening in recent quarters. .

“Small and mid-sized banks play an important role in the U.S. economy,” the analysts wrote. “Any lending impact is likely to be concentrated in a small group of small and medium-sized banks.”

According to the firm, banks with less than $250 billion in assets account for about 50 percent of U.S. commercial and industrial loans, 60 percent of residential real estate loans, 80 percent of commercial real estate loans and 45 percent of consumer loans.

While the two most recently failed banks — Silicon Valley Bank and Signature Bank — accounted for only 1% of total bank loans, Goldman Sachs noted that banks with high loan-to-deposit ratios had a loan share of 20% and banks with high loan-to-deposit ratios 7% %. FDIC-insured deposits have a lower share.

The regulator took control of both banks earlier this week, Ensuring depositors will regain full access to their funds Through the FDIC’s Deposit Insurance Fund. With guaranteed deposits capped at $250,000, many depositors are uninsured.

Analysts assume that small banks with a lower share of deposits covered by the FDIC will reduce new loans by 40%, while other small banks will reduce new loans by 15%, resulting in a 2.5% decline in total bank loans.

Tightening has the same impact on demand growth as a 25 to 50 basis point hike in interest rates, they said.