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- The banking turmoil has spawned a new worry for investors: a credit slump that's threatening the economy.
- Latest bank lending data suggests the credit crunch "has already started," according to Morgan Stanley strategists.
- Here's a selection of recent warnings on the emerging threat from experts including Larry Summers, David Solomon, Mike Wilson, Nouriel Roubini and Bill Gross.
The worst banking turmoil since the 2008 financial crisis appears to have calmed somewhat but it's spawned a new worry for investors: a credit slump that's threatening to cripple the economy.
Banks are turning increasingly risk-averse and less willing to lend as they face massive deposit outflows and the prospect of increased regulatory scrutiny amid the sectoral jitters - and that's crimping the flow of credit into the economy. Recent data showed the steepest lending drop on record over the last two weeks, which suggests a credit crunch has already started, according to Morgan Stanley.
Many big Wall Street names and other experts are now concerned about the impact of the credit squeeze on the US economy. Former Treasury Secretary Larry Summers, Morgan Stanley's Mike Wilson, "Dr. Doom" economist Nouriel Roubini and billionaire investor Bill Gross are among those who have warned about the emerging threat.
To be sure, not everyone sees it that way. Apollo Asset Management's Jim Zelter told Bloomberg "it's not a credit crunch" but rather a "transition period" as markets face higher debt costs.
Still, much of the latest economic commentary from top voices is ringing a distinct note of caution. Below are some of the most recent warnings on the credit slump and related economic risks from high-profile investors, analysts and other experts.
Mike Wilson, Morgan Stanley's top stock strategist
"The data suggest a credit crunch has started," Wilson said in a note published over the weekend, referring to recent figures that showed an unprecedented decline in bank lending. He added that $1 trillion in deposits had been withdrawn from US banks since the Federal Reserve began raising rates a year ago.
While equity markets have been relatively stable after the initial impact of last month's bank failures, that should not be taken as a sign that everything is fine, but rather as an indicator that stocks are at risk of a sudden drop, according to Wilson.
Larry Summers, former Treasury Secretary
"The chance that a recession will have begun this year in the US over the next 12 months is probably about 70 percent," Summers said.
"As I put together the lags associated with monetary policy, the credit crunch risks, the need for continuing action around inflation, the risk of geo-political or other shocks affecting commodities, 70% would be the range that I would be in."
"I think that puts me at the pessimistic end of the spectrum of opinion," the economist added.
'Dr. Doom' economist Nouriel Roubini
US regional lenders are bearing the brunt of the recent banking turmoil, and that potentially spells further trouble for the economy, according to Roubini.
"I think the problems are with the regionals. But the regional banks are significant lenders to households for mortgages, for small businesses, for SMEs, for commercial real estate. And therefore we're going to have a credit crunch," the veteran economist said in a recent Fox Business interview.
"That credit crunch is going to make the likelihood of a recession — a hard landing — much greater than before. So we're facing a serious credit crunch for a good chunk of the US banking system," he said.
'Bond King' Bill Gross, Pimco cofounder
"Fed's Williams dismisses link between rate hikes and bank stress !!!!" Gross tweeted last week, after New York Fed President John Williams said he didn't believe rising rates were responsible for the lender collapses.
"Rather unbelievable," Gross continued. "450 basis points and more rate hikes in 12 months time are bound to affect balance sheets that use proper accounting — duration and credit as well."
Jeffrey Gundlach, DoubleLine Capital CEO
"The NFIB Small Business Credit Conditions Index is plummeting (not surprisingly given recent bank failures) and it is now in the same place it was in late 2007/early 2008," the DoubleLine Capital CEO tweeted.
David Solomon, Goldman Sachs CEO
"The recent events in the banking sector are lowering growth expectations, and there is a higher risk of a credit contraction given the environment is limiting banks' appetite to extend credit. We continue to be cautious about the economic outlook," the Goldman Sachs chief said on the bank's first-quarter earnings call on Tuesday.
Daniele Antonucci, chief economist at Quintet
"The legacy of the bout of financial instability and banking-sector stresses is likely to be tighter credit conditions. We expect more stringent lending standards going forward," Antonucci told Insider.
"Whether this qualifies as a full-blown 'credit crunch' remains to be seen. Even though we'd describe it more as a 'credit squeeze' at this juncture, there's a risk that, if left unchecked, it could morph into something broader."
Preston Caldwell, chief US economist at Morningstar Research
"The credit crunch complicates the Fed's job because it creates uncertainty about the sensitivity of the economy to changes in monetary policy," Caldwell told Insider.
Salman Ahmed, Fidelity's global head of macro and strategic asset allocation
"As long as money market yields remain substantially higher than banking system deposit rates, deposit flight from smaller banks to larger banks or out of the banking system entirely might continue fuelling further tightening or stress in the credit channel," the Fidelity strategists said.