THE RECENT BANKING issues highlighted by the demise of Silicon Valley Bank have shown there is a level of vulnerability for those who have funds deposited in financial institutions. As with many economic issues, perceptions can be a bigger factor than reality, and despite the existence of deposit insurance, confidence for many has been rocked. The issues extend beyond just depositors, though, as the ramifications could affect borrowers in the coming months as well.
SVB, Credit Suisse and concerns around other financial institutions have resulted in a loss of confidence in holding money in deposit accounts, despite assurances being made by the federal government and Treasury that they will do whatever is necessary to bring calm to the market. Depositors have continued to withdraw funds from banks, and this is having an impact on lending for many financial institutions.
In the last two weeks of March, federal statistics showed a decline of over $105 billion in the amount of money lent by U.S. financial institutions — the largest decline recorded since records began in the 1970s. With credit being the largest contributor to the financial sector and growth of the economy, many pundits see this having an impact on economic growth in the coming months, particularly in sectors heavily dependent on borrowing. Banks need money if they are going to lend, and less money in means less money to go out. The reality is banking and the economy are as much dependent on confidence as they are on reality — the assurances of the Treasury Department are only as good as people’s faith in the government and the belief in the people who run it to have a firm grasp of the situation.
The media tend to focus on Wall Street, but this will play out on Main Street also, with smaller businesses likely to be impacted as well. If you are planning to be in the market for finance in the near future, or are intending to refinance your existing debt, it may be a good time to start this exercise. Money supply could become considerably tighter, and rates have yet to pause their increase, so locking in your interest rate might also give you more certainty. It’s certainly worth a conversation with your broker or bank manager to get a feel for how the market is playing out and whether the changing situation could put a constraint on cashflow over the balance of this year.