U.S. Economic Outlook More Challenging Following Bank Failures

Over the weekend, federal authorities in the U.S. responded aggressively to the failures of SVB Financial Group and Signature Bank (both unrated by DBRS Morningstar) in order to calm financial markets and minimize the adverse effects on the real economy. In our view, these actions should reduce the likelihood of contagion, thereby minimizing any impact on the near-term U.S. economic outlook. However, the fallout could, on the margin, bring forward the expected deterioration in economic conditions.

“Under greater market pressure, banks could increasingly differentiate between high- and low-risk borrowers, thereby intensifying stresses in pockets of the corporate sector and weakening the investment outlook,” cautions Michael Heydt, Senior Vice President, Global Sovereign Ratings. “Likewise, labor market conditions may finally start to loosen, potentially accelerating the slowdown in consumer spending.”