abrdn: Banking stress casts its shadow on the economy

31 maart 2023

Vooruitzichten Banken

Luke Bartholomew, Senior Economist at abrdn on how banking stress affects the economic outlook.

We believe that the recent banking sector issues are not systemic, in the sense of posing an existential risk to the financial sector.

However, crises often initially present as a series of seemingly idiosyncratic shocks that morph into system-wide threats, so there are always risks of a more serious conflagration.

Either way, banks are likely to remain under pressure on both the liability and asset side of their balance sheets, through depositors seeking more competitive interest rates and mark-to-market security losses respectively. Even for healthy banks, net interest margins are likely to contract, weighing on credit creation.

Indeed, the spillovers to the macroeconomy are likely to be significant, reinforcing our recessionary ‘Fed kills the cycle’ baseline scenario. Credit and financial conditions will tighten and confidence will be hit.

Moreover, the events are a salient reminder of the degree of monetary tightening already in the pipeline and still working its way through the system.

As such, we have higher conviction that the sufficient conditions for a US recession this year are falling into place.

In the near term, some further monetary tightening is likely despite the economic and financial market strains. Central banks remain committed to a separation principle that holds that monetary policy can focus on price stability issues, while liquidity and other supervisory tools can be used to deal with financial stability risks.

With the Fed still very focussed on underlying inflation risks, at least one further 25bps hike is likely. However, as the recession we expect begins to bite, attention will turn to the extent of the easing cycle.

While markets have already priced in some rate cuts, we believe a much more significant rate cutting cycle is likely.

crises often initially present as a series of seemingly idiosyncratic shocks that morph into system-wide threats, so there are always risks of a more serious conflagration. Either way, banks are likely to remain under pressure on both the liability and asset side of their balance sheets, through depositors seeking more competitive interest rates and mark-to-market security losses respectively. Even for healthy banks, net interest margins are likely to contract, weighing on credit creation.

abrdn: Banking stress casts its shadow on the economy

abrdn: Banking stress casts its shadow on the economy

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