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- A credit slowdown resulting from the banking turmoil will help the Fed's inflation fight but it will weigh on the economy and earnings, according to eToro's Ben Laidler.
- "I think the banks are gonna be doing the Fed's work for it," Laidler told Yahoo Finance.
- Deposit outflows and the fear of regulatory crackdowns are prompting banks to tighten lending standards, according to him.
A credit slowdown resulting from the recent banking turmoil will help the Federal Reserve in its fight against inflation, but it will also slow the economy and earnings, according to eToro's global market strategist Ben Laidler.
Banks will be lending less as they turn more risk-averse following last month's collapse of Silicon Valley Bank and Signature Bank - that, in combination with the Fed's ongoing monetary-tightening campaign, will lead to an economic slowdown, he said.
"Financial conditions are tightening. I think the banks are gonna be doing the Fed's work for it. We're not saying there's a banking crisis, but we have lived through a scare," Laidler told Yahoo Finance on Monday.
"We've already got the lag, the Fed's 5% interest rates, and now on top of that, we've got banks which are going to be lending less, and that combination is going to slow the economy and slow earnings, which we really haven't seen yet," he added.
The latest data has shown the steepest drop on record in bank lending over the last two weeks, and that suggests the credit crunch has already started, according to Morgan Stanley. Furthermore, the most recent small business lending survey showed that credit availability has seen its largest drop in 20 years, coming alongside the highest interest rates seen in 15 years.
Banks are tightening lending standards amid fears of regulatory crackdowns following the recent lender collapses, and also as they see large outflows of deposits into other avenues such as money-market funds, according to Laidler. Smaller banks have seen the worst of the deposit outflows — and he expects they will see the worst of regulatory crackdowns as well.
"But regardless, everybody is going to be lending less going forward than they might otherwise have done and lending standards are already tightening," according to him.
"The system as a whole will be lending less than it would otherwise have done. That's going to feed through into the real economy, that's going to particularly hurt some segments – commercial real estate, small caps – but it is gonna have a broader macro impact. And I think the way to think about it is, this is the replacement for an extra 50-75 basis points of Fed hikes, which we now won't see," Laidler said.