Dwindling Confidence in Financial Institutions
The Impact on the Economy and Stock Market
Recent data collected from the Surveys of Consumers has shown a significant decline in consumer confidence in commercial banks, while other financial institutions experienced only modest declines in confidence. This decline in confidence is believed to be a result of the highly-publicized failures of Silicon Valley Bank, the ongoing debacle with First Republic Bank, and stress within other financial institutions.
Confidence in the Federal Reserve has only slightly declined, suggesting that the public may be more concerned about the stability of individual banks than the overall financial system.
The current environment features tightening credit conditions, a slowing economy, and sticky core services inflation, which may be a recipe for stagflation. The stickiness of inflation puts pressure on the Federal Reserve to continue their hiking cycle, which is likely to induce a recessionary economic environment. However, tightening credit may do some of the Fed’s work for them, discounting the possibility of seeing a terminal rate that approaches 6%.
One example of the financial strain we are experiencing is the potential for First Republic Bank to be taken into receivership as early as next week.
If this occurs, it could lead to further tightening of credit conditions and the possibility of the FDIC selling off the bank's assets. These actions could exacerbate existing concerns about the stability of financial institutions and contribute to further declines in consumer confidence.
Interestingly, the data shows that confidence in commercial banks has decreased the most among those with little or no stock holdings. This suggests that the recent financial market turbulence has had a more profound impact on the general population than on those with significant investments in the stock market, who tend to be among the top 10% of income earners.
In contrast, confidence in the Federal Reserve has not shown significant differences across stock holdings, age, or income groups. The most notable differences in confidence in the Fed are along political lines, with Republicans expressing more negative views than Democrats. This partisan divide has existed for over a decade and has persisted through multiple presidential administrations.
Overall, the declining confidence in financial institutions could present challenges to the smaller and medium-sized banks. On the other side of the equation, banks are less confident in lending, cutting bank the amount of credit they are issuing, with credit that is issued at higher interest rates.
In closing, it will be important to continue to monitor this situation, as a lack of confidence in financial institutions is one reason that depositors will leave what they perceive to be more vulnerable banks, leading to the potential for more lack of liquidity-related stress.