Fractures in the banking system could still have a major impact on Americans thanks to the lingering threat of “economic contagion,” prominent economist Mohamed El-Erian has warned — and there are few policymakers to stop it.
In a comment for BloombergEl-Erian, Chief Economic Advisor at alliance and President of Queens’ College at the University of Cambridge, warned that the “impact” of the struggling banking sector would add pressure on an already fragile economy.
Questions about the stability of banks in the US and beyond have come into focus in recent weeks thanks to the collapse from Silicon Valley Bank (SVB) and signature bankThe Forced sale of the Swiss lender Credit Suisse Competition with UBS and problems with other US institutions including First Republic Bank.
“Banking is fundamentally based on trust,” wrote El-Erian, who is also chairman of Gramercy Fund Management. “Any erosion of trust can and will lead to outcomes that just days ago were considered highly unlikely or even unthinkable.”
American confidence in the banking system has plummeted since the sector collapses, found a recent poll. In response to the collapse of the SVB, JPMorgan and other big banks have classified it as “too big to fail”. deposited as customers reallocate their funds away from smaller lenders.
Former Pimco CEO El-Erian noted in his comment that some viewed the shift in banking preferences as insignificant as most of the money stayed in the banking system. However, he cautioned that even if this were true, it failed to capture the full picture.
“The banks receiving the deposits are likely to have different propensities to lend, which affects the size and distribution of overall lending,” he said.
“This could become a major concern for local communities, regions and sectors who fear their access to credit will be restricted as their traditional banking partners have to shrink their balance sheets after losing deposits. It is also a political issue.”
He argued that while the Federal Reserve, Federal Deposit Insurance Corp (FDIC) and the Treasury Department may allay fears by signaling they are ready to deploy a range of tools to protect consumers, they are stemming the “flight flow.” likely not to reverse deposits immediately and fully.”
This, he said, “increased the risk of a credit crunch that could undermine aggregate activity.”
“Unfortunately, there are no simple and immediate policy measures to offset these new headwinds for economic growth,” El-Erian said. “Also, the reduction in lending shouldn’t happen so early, if at all, for small and medium-sized businesses that aren’t heavily indebted.”
He added: “This economic contagion, which will play out over time, threatens to magnify the challenges facing an economy grappling with inflation, a mismanaged rate hike cycle, a decline in personal savings, bouts of financial instability and a The world economy is facing slowdown.”
Not alone
El-Erian is not the only one to warn of the impact that the collapse of the SVB and the broader banking crisis could have on the American economy.
earlier this month, Goldman Sachs said major downturn more likely after banking industry troubles Increasing the likelihood of a US recession from 25% to 35% within the next year.
In the meantime, AXA Investment Managers Chief Economist Gilles Moec to the Reuters news agency on Wednesday that changes in lending patterns due to bank stress posed an economic threat.
“There is a significant risk that the ongoing banking problems could trigger a ‘sudden halt’ in lending, which would then plunge the economy into a recession of sorts beyond what is strictly necessary to tame inflation,” he said he.
This story was originally featured on Fortune.com
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Source : finance.yahoo.com