Goldman Sachs slashes GDP forecast as smaller banks critical to US economy come under pressure

Goldman Sachs on Wednesday cut its economic growth forecast for 2023, citing a drop in lending by small and medium-sized banks amid turmoil in the broader financial system.

The company lowered its growth forecast by 0.3 percentage points to 1.2% on the belief that smaller lenders will seek to maintain liquidity in case depositors withdraw their funds, which will lead to a sharp tightening of bank lending standards.

Goldman Sachs economists David Mericle and Manuel Abecasis wrote in a note to clients that tighter lending standards could weigh on aggregate demand, which would mean a drag on GDP, which has already been hit by the tightening in recent quarters.

"Small and medium banks play an important role in the US economy," the analysts wrote. "Any impact on lending is likely to be concentrated in a small group of small and medium banks." commercial 80% of real estate loans and 45% of consumer loans.

While two of the most recent bankruptcies — Silicon Valley Bank and Signature Bank — accounted for just 1% of total bank lending, Goldman Sachs noted that banks with high loan-to-deposit ratios had a 20% share of lending, while banks with high lending loan-to-deposit ratios accounted for 20% 7%. FDIC-insured deposits have a lower share.

Earlier this week, regulators took control of two banks and ensured depositors had full access to their money through the FDIC's deposit insurance fund. Due to the $250,000 limit on guaranteed deposits, many depositors are uninsured.

Analysts assume that smaller FDIC-covered banks with a lower share of deposits will reduce new lending by 40%, while other small banks will reduce new lending by 15%, resulting in a decline of 2. 5% of total bank loans.

The tightening has the same impact on demand growth as a 25 to 50 basis point rate hike, they said.