Tighter Credit Conditions Having Gradual Negative Impact on GDP

Apollo Chief Economist

We built a small vector autoregressive model with GDP growth, loan growth, and bank lending standards, and giving a one standard deviation shock to bank lending standards using a standard Cholesky decomposition shows that it takes six quarters before tighter credit conditions have a maximum negative impact on GDP, see chart below. In other words, the negative impact of the SVB collapse on tighter lending standards will continue to accumulate until the second half of 2024 because it takes time for banks to repair their balance sheets.

Source: FRB, Haver Analytics, Apollo Chief Economist. Note: Impulse response from the VAR model with variables Loan growth (YoY), GDP growth (YoY) and SLOOS tightening (Banks Tightening C&I Loans to Large Firms). One standard deviation shock to bank tightening leads to -0.7% pt. decline in real GDP growth bottoming in six quarters. One standard deviation for bank tightening is 10.2 pts.

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