Goldman Sachs Warns of Recession Risk Due to Collapse of Silicon Valley Bank and Pressure on Small US Banks

Goldman Sachs Warns of Recession Risk Due to Collapse of Silicon Valley Bank and Pressure on Small US Banks

Goldman Sachs analysts have warned that the recent collapse of Silicon Valley Bank could put pressure on small and mid-sized banks in the US, which may lead to a further slowdown of the economy and increase the probability of a recession this year.

In a report published on Thursday, Goldman Sachs increased the likelihood of the US economy entering a recession in the next 12 months by 10 percentage points to 35 percent due to the stress on small banks.

Following Swiss National Bank’s offer of a $54 billion lifeline to troubled Credit Suisse, shares of the Big Four trillion-dollar US banks rose slightly in premarket trading on Thursday in a rebound from the prior session.

However, smaller US regional banks continued to see sharp declines in valuation, with First Republic stock dropping as much as 30 percent in the premarket, raising questions about whether it would seek a buyer.

Economists at Goldman Sachs led by Jan Hatzius noted that ongoing pressure could cause smaller banks to become more conservative about lending to preserve liquidity in case they need to meet depositor withdrawals, which could lead to a tightening in lending standards and weigh on aggregate demand.

Analysts at JPMorgan also warned that the crisis at smaller banks will hamper business loans and trim one-half to one percentage point from gross domestic product over the next year.

Small banks account for 30 percent of aggregate banking system assets and 38 percent of the system’s loan book in the US, according to the U.S. Federal Reserve’s definition.

The closure of SVB and Signature Bank has had a global impact, with banks across the world slumping due to worries about stresses in the global banking system, exacerbated by the troubles at Swiss lender Credit Suisse.


Credit Suisse’s shares soared 30 percent on Thursday after it announced the $54 billion loan from Switzerland’s central bank to shore up its finances, bolstering confidence as fears about the banking system moved from the US to Europe.

This was a massive swing from a day earlier, when shares of Switzerland’s second-largest commercial bank plunged 30 percent on European exchanges after its biggest shareholder said it would not put more money into Credit Suisse.

The crisis comes after Silicon Valley Bank collapsed last Friday, followed by Signature Bank, and crypto-focused lender Silvergate entered voluntary liquidation last week.

Silicon Valley Bank’s collapse was the second largest in US history, behind only the 2008 collapse of Washington Mutual Bank.

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