The current liquidity crisis within the banks will pass, says Jefferies, but a credit crisis may soon be upon us.
Contagion fears following the collapse of Silicon Valley Bank (SVB) should fade thanks to measures from the US Federal Reserve, Treasury and Federal Deposit Insurance Corporation (FDIC).
The measures should provide easy access to liquidity, ensuring the current deposit flight does not lead to further failures.
However, credit tightening and demand, the broker says, points to a credit crisis, not similar to ones previously witnessed on Wall Street, but a “Main Street” crisis, where small businesses find access to credit restrained.
Regional banks, which have been lending to small businesses since the pandemic, will be far more limited in their ability and willingness to do so.
The Fed’s Senior Loan Officer Survey shows credit standards have been tightening since the third quarter of 2021 and was at their lowest level since the final quarter of 2020 at the start of this year, highlighting there was a credit problem before the failures of SVB, Silvergate and SBNY.
Jefferies said that when the dust settles, it is likely smaller regional banks will have a smaller deposit base, and it is unlikely they will be able to attract most of their old customers back quickly.
Similarly, loan demand also turned negative according to the Senior Loan Office Survey, in the second quarter of last year, just as the Fed began raising rates.
Demand for loans is approaching recessionary levels, according to the broker, and it expects it will fall further as rates offered to smaller businesses increase.
While larger companies will be able to withstand a broad pullback in the availability of bank loans, small businesses will not have access to the same sort of alternative funding sources and will likely suffer.