What factors influence the credit crunch
The collapse of Silicon Valley Bank has caused a significant upheaval in the market and, more importantly, has shown the financial system’s vulnerability. According to Mike Wilson, lead strategist at Morgan Stanley, the world is amid a credit crunch.
The expert came to this conclusion after analysing the trends in tightening lending rules seen in many banks. There was a severe drop in lending just two weeks after the innovations. The reason for the sharpest decline in the history of the banking system was the attempts of financial institutions to stabilise the situation with the outflow of deposit funds. After the bankruptcy of SVB, customers started withdrawing money from banks en masse to avoid the risk of further collapses.
However, the collapse of a technology bank was not the only reason for the drop in deposits. According to Morgan Stanley, around $1 trillion has been withdrawn from US banks since the interest rate hike, held in deposit accounts.
According to Wilson, another factor in the credit crunch has been the declining availability of loans for small businesses. According to an analysis of the sector, this banking service has become the most difficult to obtain in the past 20 years. The situation is aggravated by lending rates being at their highest in 15 years.
The impact of the FED’s aggressive policy on the credit crunch
Higher interest rates and other measures to curb inflation increase the likelihood of a recession. The fact is that credit availability has declined not only for companies but also for individuals, negatively affecting market development.
Morgan Stanley analysts believe 2023 is a highly challenging year for the stock market. They came to this opinion after analysing several bankruptcies of financial institutions, which launched a chain of problems in the credit sector. Wilson noted that the S&P 500 index could fall by 20% by the end of the current period. The main prerequisite for this is a decline in corporate revenues. And the strategist expects the revenue decline to be the largest since the crunch in 2008.
Morgan Stanley warns that even with stable stock indices, there is a significant risk of a stock market crash. The fall in quotations could be sharp and unexpected, as in March this year when SVB and many other banks went bankrupt. Small-cap stocks, less resilient to global challenges, are particularly prone to fluctuations. Wilson advises investors to be more cautious and not to take ill-advised steps, counting on lower inflation.