We were all cheering for a hold on rates by the US Fed. Alas, we were greeted with a short jab to the guts with a 0.25 bps rise. It's pretty tough out there at the moment, as we have seen and read with all that is unfolding with the US and European banking system. Yet central banks are sticking to their script.
What is becoming more evident, is the importance of regional and smaller US banks. In fact, small banks account for 30% of all loans in the US economy. If I may take this a little further. Banks with less than $250bn in assets account for roughly 50% of US commercial and industrial lending, 60% of residential real estate lending, 80% of commercial real estate lending, and 45% of consumer lending.
We could be seeing pressure on smaller banks to become more conservative about lending in order to preserve liquidity in case they need to meet depositor withdrawals, and a tightening in lending standards could weight on aggregate demand.
This chart from Apollo shows why smaller and regional and community banks are likely to now spend several quarters repairing their balance sheets. And stricter lending standards among smaller banks is likely to slow economic growth overall.
Further to this, bank depositors are pulling their funds out and into money market funds as they seek the safety of treasury securities. Money market funds have hit a record US$5.1 trillion - maybe this is also helping keep treasury yields lower?
It's never one event in isolation that directly causes a crisis, it's more like second and third-order effects. We'll never know precisely what the outcome of our actions are or will be. One domino falls, knocking down another, and so on. It's not until after the fact you realize what caused the entire row of dominos to fall. It's hard to predict the future.
Jonathan Sim and I discuss more of what is going on in financial markets in last week's The Wide Lens Podcast.