Banking Sector Stress: A Challenge, Not a Crisis

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The recent deposit outflows from several banks in the US and Europe have triggered concerns and recollections of the Global Financial Crisis (GFC). However, the current situation, in our opinion, is better characterized as a period of banking sector stress rather than a crisis. The banking system today is better capitalized, less leveraged, and better prepared to handle liquidity issues compared to the 2007-2008 period.

Negative Growth Effects and the Role of Central Banks

Despite the non-crisis nature of current banking stress, it undeniably leads to negative growth effects. The issues at hand are likely to reduce the supply of credit and increase its cost, potentially impacting the economy. However, high inflation hinders central banks from promptly easing the slowdown. Despite the challenges, the likelihood of an imminent recession appears low, thanks to strong household and corporate balance sheets.

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