(The Bharat Express News) - The breaches 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 warned — and there’s little policymakers can do to stop it.
In an op-ed for Bloomberg, El-Erian, chief economic adviser at Allianz and president of Queens’ College at the University of Cambridge, warned that the “breakdown” of the troubled banking sector is adding to pressure on an already fragile economy.
Questions about the stability of banks in the US and abroad have come into focus in recent weeks thanks to the collapse of Silicon Valley Bank (SVB) and Signature Bank, the forced sale of Swiss lender Credit Suisse to rival UBS, and troubles at other US banks . institutions, including First Republic Bank.
“Banking is fundamentally based on trust,” wrote El-Erian, who is also president of Gramercy Fund Management. “Any erosion of trust can and will lead to outcomes that were considered highly unlikely or even unthinkable a few days earlier.”
Americans’ confidence in the banking system has plummeted since the industry’s failures, a recent poll found. In response to the collapse of the SVB, JPMorgan and other big banks deemed too big to fail have been pulling in deposits as customers moved their money away from smaller lenders.
Former Pimco CEO El-Erian noted in his op-ed that some viewed the shift in banking preferences as insignificant, as money largely remained in the banking system. However, he cautioned that even if this were true, it failed to show the bigger picture.
“The banks receiving the deposits are likely to have different lending tendencies, influencing the size and distribution of overall lending,” he said.
“This could become a major problem for local communities, regions and industries who fear that their access to loans will be restricted as their traditional banking partners have to reduce their balance sheets after losing deposits. It is also a problem for policy makers.”
He argued that while the Federal Reserve, the Federal Deposit Insurance Corp (FDIC) and the Treasury were able to allay fears by signaling their willingness to use a range of tools to protect consumers, this was unlikely to stop the “flight flow ” would immediately and completely reverse. deposits.”
This, he said, increased “the risk of a credit contraction that could undermine overall economic activity.”
“Unfortunately, there are no easy and immediate policy measures to offset these new headwinds to economic growth,” El-Erian said. “Moreover, the reduction in lending was not supposed to happen so early or not at all for small and medium-sized businesses that have not borrowed too much.”
He added: “This economic contagion, which will manifest itself over time, threatens to magnify the challenges faced by an economy facing inflation, a mishandled cycle of rate hikes, declines in personal savings, periods of financial instability and slowing global growth. economy.”
Not only
El-Erian is not alone in warning of the impact the collapse of the SVB and the wider banking crisis could have on the US economy.
Earlier this month, Goldman Sachs said a major recession was more likely after the troubles in the banking sector raised the likelihood of a US recession in the coming year from 25% to 35%.
Meanwhile, Gilles Moec, chief economist of AXA Investment Managers, told Reuters news agency on Wednesday that changes in credit patterns due to the banking stress posed an economic threat.
“There is a significant risk that the ongoing banking problems will cause a ‘sudden stop’ in lending, pushing the economy into a kind of recession beyond what is strictly necessary to contain inflation,” he said.
This story was originally on Fortune.com
