Goldman Sachs finds the public's fear about a bank crisis has 'faded'

Goldman Sachs said in a new research note that public concern about turmoil in the banking system has "faded" in the weeks since the fall of Silicon Valley Bank and Signature Bank, reducing the risk of further deposit outflows.

It cites slowing online Google searches since mid March for regional banks perceived to be under stress, as well as the subjects of bank withdrawals and safety of deposits. Such searches have fallen back to "roughly normal levels," according to Goldman's April 7 note.

The chaos that roiled the industry began on March 10 and March 12 when regulators seized California lender Silicon Valley Bank and New York lender Signature Bank, triggering fear about depositor withdrawals and failures across the U.S. Regulators responded by pledging to protect all depositors and freeing up liquidity for other troubled regional banks, moves that appeared to restore confidence in the system.

There are several other signs showing how stress on the system subsided over the last month, according to Goldman. Deposit outflows have slowed, as have inflows to money market funds that had been attracting lots of bank depositors during the turmoil in March. Banks are also borrowing less from the Federal Reserve as their liquidity needs stabilize.

Silicon Valley Bank was seized on March 10. (AP Photo/Damian Dovarganes, File) (ASSOCIATED PRESS)

Banks are not clear of all problems, however. Stock prices are still depressed, reflecting investor concerns that banks will be challenged by past deposit losses, slimming margins, a higher cost of capital and tighter regulation of the industry. President Biden has asked regulators to strengthen their oversight of regional banks that was loosened at the end of last decade.

The focus is now shifting to whether banks are pulling back on lending standards, which would reduce the flow of credit to businesses and consumers. Bank lending did fall by nearly $105 billion during the two weeks ending March 29, according to the Fed, due mostly to a pullback by smaller institutions. The drop was the most in Fed data back to 1973, Bloomberg reported.

Investors will be scrutinizing the results of bank earnings this month for signs of any lending slowdown at specific institutions. Three of the largest banks in the U.S., including JPMorgan Chase (JPM), report their results this Friday.

Goldman Sachs said it suspects much of the decline in commercial and industrial lending "is a spurious effect of residential seasonality caused by a surge in lending in the second half of March 2020, when fear about the impact of the economy shutting down led many companies to draw on their revolving lines of credit."

What’s more, Goldman said, lending standards had already begun to tighten before the recent banking turmoil due to widespread recession fears.

That is a "key reason that we expect any further tightening in lending standards to be only incremental and the impact on the economy to be moderate rather than dramatic."

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