Banking Turmoil to Cut U.S. Economic Growth, IMF Warns

April 11, 2023

The collapse of Silicon Valley Bank and ensuing turmoil in the banking system is expected to prompt tighter lending, a move that will slow economic growth in the U.S. this year, according to the International Monetary Fund.

The lending capacity of U.S. banks will decline 1% this year, due to the falling prices of many bank stocks as investors reassess the stability of small- and mid-sized regional banks, the IMF said in a recent report on global financial security. This reduction in lending is projected to reduce U.S. gross domestic product by 0.44% in 2023.

 The IMF notes that regional and smaller banks account for more than one-third of total bank lending in the U.S., and that “a retrenchment from credit provision could have a material impact on economic growth and financial stability.”

In a separate report, the IMF projected that the U.S. economy would expand by 1.6% this year, down from 2.1% last year. The organization expects the global economy to grow 2.8% this year, down from 3.4% in 2022.

High inflation and rapidly rising interest rates pose a risk to the global economy, the IMF warned, noting that after years of ultracheap borrowing, many financial institutions may struggle amid higher interest rates, which are necessary to combat rampant inflation. Credit tightening could lead to further financial stress, complicating the task of bringing down inflation for central banks, which may face trade-offs between combatting inflation and protecting financial stability.

The IMF report also noted the growing risk in the commercial real estate sector, where valuations are falling and landlords are struggling to find tenants after the shift to working from home. This increases the chances of defaults, adding further strain to the finances of the banks that lent money for commercial real estate. 

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