Pub. 13 2023 Issue 2

S&P Webinar: U.S. Banks To Stockpile ‘Precious’ Deposits With Recession Forecast

Withdrawals from depositors have subsided or stabilized since March, but the episode supercharged trends that could result in a pullback in lending and a mild recession, experts said during an S&P Global Market Intelligence webinar on April 27.

“Even before the failures of Silicon Valley Bank and Signature Bank in early March, deposits had become ‘more precious’ as deposit levels fell over the course of 2022,” said Nathan Stovall, head of FIG research at Market Intelligence. Following the bank collapses, that trend was pushed forward. Any bank facing elevated liquidity pressures likely would be more reticent to lend, “which could lead to higher funding costs and modestly higher credit costs,” Stovall said.

“First Republic Bank was one of a handful of banks punished by investors and customers for sharing some similarities with Silicon Valley Bank and Signature Bank,” Stovall said, “such as high levels of uninsured deposits and an underwater loan portfolio.”

First Republic reached the end of the road on May 1 after JPMorgan Chase & Co. unit JPMorgan Chase Bank NA agreed to assume substantially all of its assets and all of its deposits from the Federal Deposit Insurance Corp. after regulators took control of the embattled bank.

“What started as a liquidity squeeze at banks in early March has largely been contained, but the turmoil should lead to further tightening of financial conditions, which should help the Federal Reserve in its quest to tame inflation,” according to Chris Varvares, Co-Head of U.S. economics at Market Intelligence. “The most recent Senior Loan Officer Survey published by the Fed showed ‘material tightening of credit conditions’ and a decrease in willingness to lend, with those trends expected to continue,” he said.

The effects of the banking sector tumult led Varvares and his team to no longer predict a Fed rate hike in June.

To access a replay of the webinar and the presentation slides, go to

Earnings Effects

The upshot of the March tumult is that it appears to be an earnings issue for banks rather than a “safety and soundness issue,” Stovall said. Liquidity is largely stable at most banks, though funding costs have gone up as money has moved into higher-cost certificates of deposit (CDs). Earnings will feel the squeeze, as they are expected to fall by 18% in 2023 as higher funding costs pressure net interest margins, according to Stovall. See Figure 1.

Commercial Real Estate

The depth and breadth of the forecast recession will be impacted by what happens in the commercial real estate sector. The office sector is trading at a 53.1% discount to net asset value, which implies that the market is predicting “big haircuts,” Stovall said. He noted that the current situation is due in part to preferential shifts by workers in the post-pandemic world and higher rates, rather than bad practices like highly leveraged banks and lax regulation.

Varvares’ team modeled a scenario in which CRE prices fall 15%, which led to the economy falling into a mild recession of “less than a 1% decline peak-to-trough in the second half” of the year, he said, adding that the CRE declines would have big balance sheet effects on banks and insurance companies.

M&A Slowdown

With respect to bank M&A, Stovall said the first quarter was about as slow as “we’ve ever seen,” trailing only the second quarter of 2020 at the start of the pandemic. Legislators and regulators are expected to respond to the March turmoil with increased regulation, which could “ultimately encourage activity,” he said.

“Specifically, some of the old measures for large regional banks that were wiped away during the Trump administration could be reimplemented, including the liquidity coverage ratio, macroprudential standards and living wills, as well as new rules pertaining to uninsured deposit levels and deposits highly concentrated in one industry,” Stovall said.