“The effects of banking accidents are unlikely to be contained to the banking sector”
While some of the talk about bank failures seems unnecessarily hyperbolic, Mohamed El Erian wrote about how the fallout from the banking sector, unlike what happens in Vegas, will not stay in the banking sector. “What is happening now is a reminder to financial companies, regulators, and supervisors that the effects of banking accidents are unlikely to be contained to the banking sector. It is also a reminder to markets not to allow the understandable focus on supersonic-speed financial contagion to divert all the attention away from slower-moving economic contagion.” (El Erian also discusses the difference between the financial economy and the real economy, offering a perspective on the different dynamics between r* and financial r* (sometimes referred to as r**)).
“Even resilient banks can impact the broader economy… if they choose to tighten access to credit”
As the Richmond Fed’s Tom Barkin explained in his speech today, “even resilient banks can impact the broader economy if, to minimize their liquidity risk and protect capital, they choose to tighten access to credit”. Our assumption is that this is precisely what is happening. After all, you know what they say about outrunning bears. Yes, there is anecdata… But is there any evidence? It would seem so. Looking at the latest senior loan officers survey data, there has indeed been a material tightening, with the latest survey noting that respondents reported “tighter standards and weaker demand” for CRE loans and C&I loans for firms of all sizes. Additionally, while readings aren’t near catastrophic levels, on net, the NFIB’s respondents reported that they had felt a tightening in access to credit. As an aside, the NFIB’s own data offers potential corroborating evidence of Barkin’s assertion, with Credit Conditions and Expected Credit Conditions leading to both the NFIB’s own readings of poor sales being business’ biggest problem and Unemployment.
P.S. Across the Atlantic, inflation remains more robust than expected amid ongoing strikes that appear to be impacting both wages and commodities.
