Goldman Sachs cuts GDP forecast because of stress on small banks, which are key to U.S. economy

Goldman Sachs on Wednesday lowered its 2023 economic growth forecast, citing a pullback in lending from small- and medium-sized banks amid turmoil in the broader financial system.

The firm lowered its growth forecast by 0.3 percentage points to 1.2% under expectations that smaller banks will attempt to preserve liquidity in case they need to meet depositor withdrawals, leading to a substantial tightening in bank lending standards.

Tighter lending standards could weigh on aggregate demand, implying a drag on GDP growth already affected by tightening in recent quarters, Goldman economists David Mericle and Manuel Abecasis wrote in a note to clients.

“Small and medium-sized banks play an important role in the US economy,” the analysts wrote. “Any lending impact is likely to be concentrated in a subset of small and medium-sized banks.”

Banks with less than $250 billion in assets comprise about 50% of U.S. commercial and industrial lending, 60% of residential real estate lending, 80% of commercial real estate lending and 45% of consumer lending, according to the firm. 

While the two recent bank failures — Silicon Valley Bank and Signature Bank — account for just 1% of total bank lending, Goldman noted that lending shares are 20% for banks with a high loan-to-deposit ratio and 7% for banks with a low share of FDIC-insured deposits.

Regulators had seized both of the banks earlier this week and ensured that depositors would regain full access to their funds through the FDIC’s deposit insurance fund. Many depositors were uninsured due to the $250,000 cap on guaranteed deposits. 

The analysts assume that small banks with a low share of FDIC-covered deposits will reduce new lending by 40% and that other small banks will reduce new lending by 15%, leading to a 2.5% drag on total bank lending.

The effect of tightening would have the same impact on demand growth as would an interest rate hike of 25 to 50 basis points, they said.