Mixed views on US banking turmoil

The street is full of terror about the economic outlook of the United States economy after the banking sector turmoil. The collapse of three mid-size US banks was sufficient to dampen the confidence of investors. Fears of banking fiasco have extended to households, which have trimmed their deposits from small US banks dramatically.

Reuters reported on Friday that the data from Federal Reserve (Fed) shows that deposits at small U.S. banks dropped by a record amount following the collapse of Silicon Valley Bank (SVB). Therefore, US authorities have come forward to widen the blanket of support to US mid-size banks by expanding the emergency liquidity facility. This has provided a small time relief, however, the situation is likely to get vulnerable further.

Speaking at the China Development Forum over the weekend, International Monetary Fund (IMF) Chief Kristalina Georgieva warned that “risks to financial stability have increased.” She further added, 2023 would be another challenging year, with global growth slowing to 2.9% due to the pandemic, the war in Ukraine, and monetary tightening.

Precautionary moves from US banks in advancing loans to households and businesses have propelled the risk of a US recession. Minneapolis Fed president Neel Kashkari cited on Sunday, “Recent stress in the banking sector and the possibility of a follow-on credit crunch brings the US closer to recession. It definitely brings us closer." It would be a tough call from the Fed to bring more interest rates if recession fears are potential.