- David Solomon warns the banking turmoil may hit lending and curb fundraising in public markets.
- The Goldman Sachs CEO says the chaos led to massive volatility and made Treasury yields go haywire.
- The fallout could include weaker growth, poorer access to credit, and less market activity, he says.
The Goldman Sachs CEO underlined the sweeping, historic fallout from the collapse of Silicon Valley Bank and Signature Bank in March. The bank failures sparked a flurry of credit-rating downgrades and hefty valuation declines in the financial sector, and spurred Swiss regulators to arrange an emergency takeover of Credit Suisse by UBS, he noted.
“It’s important to appreciate the size of the disruption,” Solomon said on Goldman’s first-quarter earnings call on Tuesday, according to a transcript provided by AlphaSense/Sentieo. “Some of the market moves during the period were staggering, particularly in interest rates.”
The investment bank’s chief highlighted that 2-year Treasury yields have moved by 50 basis points or more intraday only four times in the past 25 years — and three of those days were in March (the fourth day was in September 2008, at the height of the financial crisis.)
Moreover, Solomon pointed out that 2-year Treasury yields recorded their biggest one-day move in over 35 years on March 13. He described the chaos as a “real-life stress test” that showed the resilience of Wall Street’s biggest banks, and warned it could have lasting consequences.
“The recent events in the banking sector are lowering growth expectations, and there is a higher risk of a credit contraction given the environment is limiting banks’ appetite to extend credit,” he said. “We continue to be cautious about the economic outlook.”
Solomon warned the banking fiasco will likely cool demand for raising capital in public markets and executing mergers and acquisitions, as it has rattled investors and darkened the economic outlook.
“It was kind of an unusual few-week period with really, really outsized volatility,” he said. “When you have that kind of volatility, it slows down or it has people push out things that they were thinking about bringing into the capital markets.”
Solomon was already bracing for a tough period before the banking upheaval. In February, he predicted the Federal Reserve would have to hike rates above 5% to curb stubborn inflation, and cautioned that tighter monetary policy could sap economic growth and increase unemployment. Still, he suggested the US economy might escape a severe recession.