Small businesses and rural states may be hit hardest by US bank turmoil

- Plus: Inflation still poses the greatest macroeconomic risk for some of the world's biggest investors. # # --------------------------------------------------------------- In today's edition: - Smaller U.S. businesses and towns may be hardest hit by the recent banking turmoil, [our economists say.]( - OPEC is taking[advantage of its unusually high pricing power.]( - And some of the [world's largest investors]( rank the risks to their portfolios. (Was this newsletter forwarded to you? [Sign up now.]( --------------------------------------------------------------- Smaller businesses are more exposed to US bank turmoil Stress in U.S. banking, which has been concentrated among small and midsize lenders, is [likely to hit smaller American businesses the hardest]( Goldman Sachs Research economists Ronnie Walker and Manuel Abecasis write in the team's report. The financial jitters may also have a bigger impact outside large cities. - Companies with fewer than 100 employees are a critical part of the U.S. economy: they employ 35% of the private-sector workforce and generate a quarter of gross output. And they rely disproportionately on small banks for borrowing, receiving almost 70% of their commercial and industrial loans from banks with less than $250 billion in assets and 30% from banks with less than $10 billion in assets (versus 45% and 10% for larger businesses, respectively), according to the report. - Bank stress is likely to reduce lending growth by two to six percentage points, according to estimates from Goldman Sachs Research. “Because small banks are likely to tighten credit more aggressively and small businesses disproportionately borrow from them, the hit to lending to small businesses will likely be larger,” Walker and Abecasis write. - Our economists find that a substantial share of small business lending is still done locally, often by small banks: 60% of loans to small businesses are made by banks within 10 miles of the borrower and around 75% of loans are made by banks within 25 miles of the borrower. - And in many counties across the U.S., there's no nearby alternative to smaller banks. There isn't a globally systemically important bank (GSIB) branch in roughly two thirds of counties, making up 10% of U.S. GDP, according to Goldman Sachs Research. For those same counties, the closest GSIB branch is roughly 40 miles away, compared with 3 miles away for other counties. --------------------------------------------------------------- Can policymakers help prevent the next banking crisis? Although the recent stress in the banking sector, triggered by the failure of Silicon Valley Bank, seems to have been contained, questions remain about whether the stress could resurge and what policymakers can do to prevent it. [In the latest episode of Exchanges at Goldman Sachs]( which is based on Goldman Sachs Research's Top of Mind report, [All about bank(panic)s]( former policymakers Daniel Tarullo and Thomas Hoenig, and Yale's Gary Gorton, explain the drivers behind the recent crisis, the potential for it to repeat and what rules and regulations might help prevent that. - Banks need more stress tests. Tarullo, former chairman of the Federal Reserve Board's Committee on Supervision and Regulation, argues that all banks with over $100 billion in assets should be subject to annual Fed stress tests and that liquidity regulations should be reviewed. “We want to make sure that those regulations both protect the banks and the public and allow the banks to perform their intermediating role,” says Tarullo, who also believes that sizeable available-for-sale securities on bank balance sheets should be marked to market. - Higher capital requirements could help. Hoenig, former president of the Federal Reserve Bank of Kansas City and vice chairman of the Federal Deposit Insurance Corporation, believes more stringent capital requirements should rely on simple leverage ratios instead of risk-weighted ratios, which he thinks paint a misleading picture of banks' health. “In the case of Silicon Valley, for example, had you required more capital in terms of the simple leverage ratio — equity-to-assets — it would have had a slowing effect on their growth because for every dollar that they want to grow, they have to fund it with some of their own money…And that would of course give you a safer industry overall for the regional banks, for example, and for the larger banks.” - Should all deposits used for transactions be insured? Meanwhile, Gorton, a professor at Yale University who has written extensively on bank panics, argues that “you can't solve every problem with higher capital and liquidity requirements.” He tells Senior Strategist Allison Nathan and editor of Top of Mind, that policymakers should consider providing insurance for all deposits used for transactions — which would reduce the risk of bank runs — and, more broadly, focus on closely monitoring short-term debt in all its various forms. --------------------------------------------------------------- $5.6 trillion That's the amount of commercial real estate loans in the U.S., as of the end of last year, [according to Goldman Sachs Research](. More than half of those loans sit on the balance sheets of commercial banks, and of smaller banks in particular: 70% of bank commercial mortgage holdings sit outside the top 25 largest banks (by assets). “The potential for disruptions to U.S. commercial real estate activity from a pullback in small bank credit availability is substantial, unaided by the fact that the segments most dependent on bank financing — offices and retail properties — are also facing the strongest risk of functional obsolescence,” Goldman Sachs Chief Credit Strategist Lotfi Karoui and analyst Vinay Viswanathan [wrote this week in a report.]( --------------------------------------------------------------- OPEC's unusually high pricing power puts a floor under oil prices OPEC's surprise announcement of a cut in oil production this month shows the group is [taking advantage of its ability to raise oil prices without significantly hurting demand, according to our economists.]( Goldman Sachs Research lowered its year-end forecast for OPEC+ production, excluding Russia, by 1 million barrels a day after the announcement of voluntary production cuts by nine member countries including Saudi Arabia, Kuwait and the UAE. A lack of investment in oil production in other parts of the world, combined with the elevated market share of the OPEC+ countries and inelastic demand, has given OPEC the ability to put a floor under prices, energy economist Daan Struyven wrote in [a report on what he terms “the OPEC put.”]( oil demand is strong, the group can increase production, but if demand is soft, it can keep production restrained and limit the downside for prices. Oil prices had been falling since the failure of Silicon Valley Bank, but OPEC+'s surprise intervention spurred a rally of about $5 a barrel in the initial days following the news. An energy official in Saudi Arabia described OPEC+'s cut as a “precautionary measure aimed at supporting the stability of the oil market.” Goldman Sachs Research increased its price forecast for Brent crude, the global benchmark, to $95 ($90 previously) per barrel by the end of 2023. Significantly lower OPEC+ supply, slightly lower global demand and the modest release of French strategic petroleum reserves were all factors in the forecast change. --------------------------------------------------------------- April QuickPoll: Investors expect recession in 2023 Institutional investors remain bearish amid debates around recession, sticky inflation and cycle extension, according to the April Marquee QuickPoll. With bears outnumbering bulls by a ratio of more than two to one, recession fears appear to be the primary driver with 53% of investors expecting a recession in the U.S. in 2023. Meanwhile, investors expect more interest rate increases with 89% expecting more rate hikes this year and 74% expecting the fed funds rate to end the year above 4.5%. Meanwhile, the results show investors are split into three cohorts globally based on their responses. The first cohort — which represents about 21% of participants — sees “sticky inflation” as the key driver of markets and is generally bearish on risky assets. The largest cohort, representing 36% of participants, sees a recession as highly likely this year and tends to prefer quality assets. Finally, the third cohort, which makes up 24% of participants, sees continued strength in the U.S. economy or in emerging markets. --------------------------------------------------------------- Inflation poses greatest threat to insurers' portfolios Representing about $30 trillion in assets, insurers are one of the largest investors in the world and their investment decisions can have an outsized impact on markets and investment flows. Rising interest rates and recession fears set the backdrop for the 12th edition of the Goldman Sachs Asset Management Insurance Survey, [Balancing with Yield on the Inflationary Tightrope]( which identifies insights and trends across the insurance market, including a shift in the way investors view inflation and the likely impact on future asset allocation decisions. For the second consecutive year, insurers believe rising inflation poses the greatest macroeconomic risk to their investment portfolios. Credit and equity market volatility remains as the third greatest risk year-over-year, but an economic slowdown or recession in the U.S. jumped from the fourth spot in 2022 to the second spot in 2023. But appetite for risk has held steady amid improving investment opportunities and the desire to increase private asset allocations remains strong. “Insurers are looking at the backdrop with two lenses,” explains Goldman Sachs Matt Armas, global head of insurance asset management, [on the latest episode of Exchanges at Goldman Sachs.]( “They're increasingly worried about the potential for a recession and for the erosion of credit quality as the economy slows. But they're also very excited that interest rates are higher, that yields and returns available on, in particular, fixed income investments are higher. And they're really looking forward to taking advantage of those higher returns, those higher yields, to build those into their portfolios.” In fact, despite concerns about inflation, higher rates and a potential recession, “insurers actually think this is a better investing environment than they've seen over the last several years,” says Mike Siegel, global head of the insurance asset management and liquidity solutions businesses. “The insurers are more committed to putting capital to work than they have in the past.” --------------------------------------------------------------- Briefings brainteaser: How much oil do EVs save? Swapping internal combustion (ICE) cars for [electric vehicles]( the U.S. reduces fossil fuel consumption. On average, how many barrels of oil does replacing an ICE car with an EV save per year, according to Goldman Sachs Research? A) 6 barrels B) 9 barrels C) 11 barrels D) 16 barrels [Check your answer here.]( --------------------------------------------------------------- ICYMI: In the media [Bloomberg]( 11 [Goldman's Oppenheimer sees better value in non-US markets (2:35)]( [CNBC]( April 11 [Stable growth companies aren't priced in to this market: Goldman's David Kostin (4:03)]( [Barron's]( April 7 [Alison Mass named in Barron's 100 influential women in finance]( [WealthManagement.com]( April 7 [Infrastructure innovations are spurring global investment]( --------------------------------------------------------------- --------------------------------------------------------------- Some of the images used in this newsletter are sourced via Getty Images. The data provided in this newsletter is for information purposes only and should not be construed as investment or tax advice nor as a recommendation to buy, sell, or hold any particular security. 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