A financial crisis that erupted less than two months ago now seems to be more of a gradual bleed. It might even seep through and function as a potential trigger for recession later this year.
Banks’ reports on the impact of a run on deposits on their operations paint a varied picture. Larger banks, such as JPMorgan Chase and Bank of America, took significantly less damage. Meanwhile, smaller competitors, such as First Republic, face a far tougher battle for existence.
That means the money flow to Wall Street is essentially intact. However, the situation on Main Street is significantly more volatile.
Steven Blitz, TS Lombard’s senior U.S. economist, predicts that the tiny banks will be lending less. He added that such an occurrence is a credit hit for Middle-Class America. He referred to the ongoing events as “a negative for growth.”
Future economy on the shoulders of consumers
How bad will become clear in the coming days and months as data filters through.
The First Republic, a regional lender, is a barometer of how badly the deposit constraint would strike the industry. The reported results were above estimates but showed an otherwise struggling ratio.
Bank earnings appeared to be generally good in the first quarter. However, the sector’s future remains uncertain. Additionally, stocks are under huge pressure, with the SPDR S&P Bank ETF down more than 3% in afternoon trade on Tuesday.
This week’s earnings confirm that the banking stress stabilized by the end of March. Besides, it contained a limit set of banks, Citigroup global economist Robert Sockin wrote in a client note. He said that’s about the best macro outcome that the investors could hope for when stresses first emerged last month.
Where things go from here is heavily dependent on consumers. The consumer sector account for more than two-thirds of all economic activity in the United States.
While service demand is returning to pre-pandemic levels, cracks are appearing. With the growth in credit card balances and delinquencies comes the additional challenge of tightening credit criteria. Both aspects are out of a need for the greater risk of harsher regulation.
