A 27-year market vet warns that regional banks will be more reluctant to loan money to their communities in the wake of the Silicon Valley Bank closure — pulling forward a recession and causing stocks to crash as much as 29%
, which had been overleveraged and not liquid enough to meet depositors' demands for their money, there's now a risk of contagion in the financial system. Depositors at other banks may fear for the security of their money, and rush to withdrawal all at once.
This is going to have a knock-on effect on consumer spending, Roberts said, which will trigger a recession sooner than he expected. Naturally, such a drag on consumer spending will hurt corporate earnings, leading investors to discount forward earnings expectations, Roberts said. Right now, the median 2023 earnings per share target among major Wall Street strategists is $210.
After the runs on Silicon Valley Bank and Signature Bank of New York, regulators stepped in and set up bridge banks that guaranteed depositors would have access to their funds. was at high risk of defaulting on its debts given that its overleveraged balance sheet made it vulnerable to a run on deposits, 11 banks stepped in and injected about $30 billion of deposits into the bank to ensure it remained liquid enough.
"We are raising our subjective probability that the US economy will enter a recession in the next 12 months by 10pp to 35%, reflecting increased near-term uncertainty around the economic effects of small bank stress," said a team of economists led by Jan Hatzius.
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