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ASR chief economist Dominic White in FT Unhedged: Where’s the credit crunch?

Beth McCann

27th APR. 2023

The FT’s Ethan Wu, with ASR chief economist Dominic White,  consider whether First Republic’s problems are a sign of a wider credit crunch. Dominic commented that, “as savers flock to money markets, deposit competition is increasing, which should pressure bank profitability and further tighten lending standards…”

Dom notes that, “Increased competition for deposits is likely to force banks to pay up for funding. As marginal funding costs rise, net interest margins will contract. Banks might raise loan rates somewhat to try and protect those margins, but this will act as a further headwind to credit growth and broader economic activity. It’s possible that this feeds back into the banking system via deteriorating asset quality. Asset classes such as commercial real estate are a potential risk, where collateral values are declining and maturing loans will need to be rolled over at significantly higher interest rates.” 

The FT continues: 

“In sum: rates have risen a lot; lending standards are tightening; loan growth is rolling over; bond issuance is down. It makes sense that we would see increasing signs of credit-induced distress before long. So far, however, distress is limited. A few banks have failed. In rate-sensitive sectors such as homes and autos, prices are falling — but only slowly. Default rates are ticking up, not leaping. Most banks are reporting decent asset performance and loan growth. If we are in a credit crunch, we are in its very early innings. “  

The very long run deposits chart from ASR is very powerful, with the latest data showing a further decline. 

  • To read the full column in FT Unhedged, see HERE (FT subscription required)

  • ASR clients can read the latest from Dominic White in: ASR Economics - We need to talk about money and listen to the 30 minute webinar HERE

  • To receive a copy of the note and the webinar recording as part of a free trial, please click HERE

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