Fitch Solutions: Downside Risks to Growth from Banking Sector Stress

• Fitch Solutions believes that the recent banking sector stress means that downside risks to global growth will play out through three main channels including banking sector uncertainty, tighter financial conditions, and the potential for weaker credit growth as banks focus on strengthening their balance sheets.
• First, although policymakers responded with liquidity support to Silicon Valley Bank and Signature Bank, their fall has created an untrustworthy atmosphere among regional banks. In addition, Credit Suisse came under significant stress, with credit default swaps surging to record highs as its stock price fell sharply. At the time of writing, UBS agreed to acquire Credit Suisse for $3.23Bn, and while this will help to quell short-term investor fears, this has weighed on investor confidence and could also depress US and global growth.
• Second, there has been a sharp tightening of financial conditions. Although the futures markets saw a significant dovish repricing of the path for interest rates in the US over the past week, market-based measures of financial stress increased significantly. While short-end bond yields in the US declined sharply at the same time, credit spreads across both investment grade, and high-yield bonds rose sharply, pointing to a more challenging financing environment. Moreover, this was accompanied by a sharp increase in bond volatility and a decline in equity markets, which points to increased downside volatility and weaker risk appetite over the near term.
• Third, downside risks to credit growth in the US and abroad have risen as banks focus on risk management, strengthening their balance sheet, and improving their liquidity positions. As a result, in addition to rising interest rates, there is also the potential for recent banking stress to result in credit growth slowing sharply both in the US and Europe over the coming months, which would weigh on real GDP growth.

(Source: Fitch Solutions)