In a new research note, Goldman Sachs said that public concern about the banking system has faded in the past few weeks, reducing the risk of further deposit outflows due to the fall of Silicon Valley Bank and Signature Bank.
Slowing online Google searches since March for regional banks perceived to be under stress, as well as the subjects of bank withdrawals and safety of deposits are some of the topics it cites. According to Goldman's April 7 note, such searches have fallen back to normal levels.
The chaos that was roiled the industry began on March 10 and March 12 when regulators seized California lender Silicon Valley Bank and New York lender Signature Bank, causing fears about depositor withdrawals and failures across the U.S. Regulators pledged to protect all depositors and free up cash for other troubled regional banks, moves that appeared to restore confidence in the system.
There are several signs that the stress on the system has subsided over the last month, according to Goldman. Deposit outflows to money market funds have slowed, as did the inflows to money market funds that had been attracting lots of bank depositors during the turmoil in March. Banks are borrowing less from the Federal ReserveFederal Reserve as their liquidity needs are stabilized.
Banks are not clear of all problems. Stock prices are still depressed, due to investor concerns that banks will be challenged by past deposit losses, slimming margins, higher cost of capital and tighter regulation of the industry. President Biden has asked regulators to strengthen their oversight of regional banks that was loosened at the end of last decade.
The focus is now shifting to whether banks are cutting back on lending standards, which would reduce the flow of credit to businesses and consumers. The Fed noted that bank lending fell by nearly $105 billion during the two weeks ending March 29 due to a pullback by smaller institutions. The data from the Fed was the most recent to date since 1973, according to Bloomberg.
There are signs of a lending slowdown at certain institutions that investors will be watching on the results of bank earnings this month. Three of the largest banks in the U.S. including JPMorgan Chase reported their results on Friday.
In the second half of March 2020, Goldman Sachs believes that the decline in commercial and industrial lending is a result of residential seasonality, as fear of the impact of the economy shutting down led many companies to draw on their revolving lines of credit. Goldman said that lending standards had already begun to tighten before the recent banking turmoil due to widespread recession fears.
We expect any further tightening of lending standards to be incremental and the impact on the economy to be moderate rather than dramatic.