Goldman Sachs cut GDP forecast due to stress at smaller banks

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

The firm cut its growth forecast by 0.3 percentage points to 1.2 percent on expectations that smaller banks will try to maintain liquidity as they need to meet withdrawals from depositors, which has led to a significant tightening of bank lending standards.

Tighter lending standards are likely to weigh on aggregate demand, meaning that tightening GDP growth in recent quarters will lag, Goldman economists David Mericle and Manuel Abecasis wrote in a note to clients.

“Small and medium-sized banks play an important role in the US economy,” analysts wrote. “Any impact on lending is likely to be concentrated among small and medium-sized banks.”

Banks with less than $250 billion in assets account for about 50% of U.S. commercial and industrial lending, 60% of residential real estate lending, 80% of commercial real estate lending and 45% of consumer lending, according to the firm.

While the two most recent bank failures—Silicon Valley Bank and Signature Bank—accounted for just 1% of total bank lending, Goldman noted that loan shares were 20% for banks with high loan-to-deposit ratios and 7% for banks. Low share of FDIC insured deposits.

Regulators seized both banks earlier this week, giving depositors full access to their funds through the FDIC’s deposit insurance fund. Because of the $250,000 limit on guaranteed deposits, many depositors are uninsured.

Analysts estimate that small banks with a low share of FDIC-covered deposits would reduce new lending by 40%, and other small banks would reduce new lending by 15%, leading to a 2.5% increase in total bank lending.

The effect of the tightening would be the same as a 25 to 50 basis point increase in interest rates on demand growth, they said.