Quantifying the Impact of the Banking Crisis on GDP

Apollo Chief Economist

It is difficult to assess the duration of this banking crisis but assuming IG credit spreads stay at their current level around 150bps, VIX is two standard deviations higher than normal, and the Fed funds rate is 150bps higher because of tighter credit conditions, show how serious this shock can be if bank funding costs remain elevated and banks tighten lending standards over the coming quarters, see chart below.

The negative impact on GDP at around 1.25% would be only a third of the roughly 4% decline in GDP during the 2008 financial crisis, and to be sure, this quantification shows the impact on GDP if the current levels of stress continue.

But under the baseline assumption of growth already slowing because of the lagged effects of Fed hikes, the bottom line is that if the ongoing banking crisis results in tighter bank lending standards over the coming quarters, it increases the risks of a harder landing.

Source: Bloomberg, Apollo Chief Economist. Note: The chart shows difference in baseline forecast adding a 150bps shock to Fed funds rate and 30 bps to credit risk and a two standard deviation shock to VIX, all starting in 1Q23. VIX is currently two standard deviations from its mean since 2010.

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