Illustration: Aïda Amer/Axios
In the months before the crisis triggered by Silicon Valley Bank's failure, lenders were already tightening their standards; nevertheless, the economy remained robust with solid growth and a booming job market — and there may be an explanation why.
Why it matters: Extra cash sloshing around the economy — a legacy of pandemic-era stimulus and high savings rates — may have helped blunt spillover from tighter lending standards.
- The huge risk is that may not be repeated as the stockpile built up over the pandemic runs down. That sets up the possibility of a dwindling cushion, as banks pull back on lending in the wake of the SVB collapse.
What they're saying: "[E]xcess cash has allowed economic activity to be funded from alternative sources of liquidity over the last couple of years, keeping financial conditions easy for areas which would typically have been constrained by tighter bank lending," TD Securities' Rich Kelly, Priya Misra and James Rossiter wrote in a note.
- "As the lagged impact of this savings stockpile wears out, it presents the risk that economic activity may have to adjust more suddenly when the recession hits," they write.
Where it stands: Before the string of bank failures earlier this month, one had to squint to see the impact of a rapid tightening of interest rates, intended to chill the economy. Businesses were still hiring swiftly, consumer demand was still strong and prices continued to rise quickly.
The intrigue: The fallout of the Silicon Valley Bank crisis has tightened financial conditions, though Fed chair Jerome Powell noted earlier this month that traditional indices gauging financial conditions don't take bank lending into account.
- That means that overall tightening may be more severe than indices suggest, with possibly a bigger blow to economic activity to follow.
The risks are particularly acute for the commercial real estate sector and smaller businesses, Preston Mui and Alex Williams of Employ America find in a new analysis of historical episodes of credit tightening.
- "In short, employment related to commercial real estate and small businesses is already under stress from post-pandemic recovery dynamics," they write.
- "These are also the parts of the labor market that would suffer disproportionately from a pullback in lending from small and regional banks."
Source: Read Full Article