Banking Turmoil's Economic Contagion Threatens the U.S. Economy

　　A Collapsing Trust

　　The recent fractures in the banking system pose a significant threat to the American economy due to the lingering risk of "economic contagion," warns prominent economist Mohamed El-Erian. The troubled banking sector's "fallout" is intensifying pressure on an already vulnerable economy, as evidenced by the collapse of Silicon Valley Bank (SVB) and Signature Bank, the forced sale of Credit Suisse to UBS, and issues at other U.S. institutions.

　　Mohamed El-Erian, chief economic adviser at Allianz and president of Queens' College at the University of Cambridge, emphasizes the fundamental role of trust in banking. Any erosion of trust can lead to unexpected and unthinkable outcomes. A recent poll reveals a sharp decline in Americans' trust in the banking system following these sector failures.

　　A Restructuring of Preferences

　　In response to the collapse of SVB, major banks considered "too big to fail" have attracted deposits as customers reallocate their funds away from smaller lenders. While some may view this shift in banking preferences as insignificant, El-Erian cautions against overlooking the broader implications.

　　The banks receiving these deposits may have different lending propensities, affecting the scale and distribution of overall lending. This could have a profound impact on local communities, regions, and sectors that rely on access to loans from traditional banking partners who are now forced to reduce their balance sheets. This poses a challenge for policymakers as well.

　　Policy Measures and the Flow of Deposits

　　El-Erian argues that while the Federal Reserve, the Federal Deposit Insurance Corp (FDIC), and the Treasury could attempt to calm fears by signaling their willingness to protect consumers, such measures are unlikely to immediately reverse the "flow of fleeing deposits." This increases the risk of a credit contraction that could undermine overall economic activity.

　　The reduction in lending, particularly for small- and medium-size companies that have not overborrowed, was not anticipated to occur so early, if at all. This economic contagion, unfolding over time, threatens to exacerbate challenges facing an economy already grappling with inflation, mishandled interest-rate hiking cycles, declining personal savings, bouts of financial instability, and a slowing global economy.

　　Warnings from Experts

　　El-Erian is not alone in expressing concern about the impact of the SVB collapse and the broader banking crisis on the American economy.

　　Goldman Sachs recently revised its forecast, raising the probability of a U.S. recession within the next year from 25% to 35% due to the banking industry's problems.

　　Gilles Moec, Chief Economist at AXA Investment Managers, warned that changes in lending patterns resulting from banking stress pose an economic threat. He emphasized the risk of a "sudden stop" in lending, potentially triggering a recession beyond what is necessary to tame inflation.

　　The economic contagion stemming from the banking crisis poses a significant challenge, requiring careful attention and comprehensive policy responses to mitigate its impact on the U.S. economy.