Bank Failures Explained: Questions, Answers and How CRE Fits In

QUESTION THREE

If we look at probabilities from implied Treasury yield curves (10-year versus the 3-month), the probability of recession was 67% pre-SVB and it rose to and has stayed at 80% since April 4. We have not changed our baseline view despite these recent events. Our baseline was already calling for a modest recession to occur in 2023 and we knew that adjusting to higher interest rates would result in tighter credit and greater volatility. For now, we remain confident in our baseline but would emphasize that risks have skewed further to the downside given recent events.

Recession risks were already high and lending markets were already tightening for the better part of a year leading up to the panic. The bank turmoil is still fairly new news and most forecasters haven’t had a chance to re-run their models. But it’s clear this episode resulted in a further tightening of credit conditions—which impacts the availability of credit to businesses, particularly for small and medium-sized businesses (who rely on community and regional banks). This is one primary channel through which monetary policy impacts the real economy, in addition to expectations and sentiment. Probability of Recession

Given the banking turmoil, have recession odds risen?

PROBABILITY OF RECESSION

ANSWER

100

In our view, yes – but only slightly.

90

80

70

60

50

40

30

20

10

0

Apr-71

Apr-13

Apr-16

Apr-19

Apr-10

Apr-01

Apr-77

Apr-22

Apr-83

Apr-62

Apr-92

Apr-65

Apr-95

Apr-74

Apr-68

Apr-86

Apr-89

Apr-98

Apr-07

Apr-80

Apr-04

Recession

Implied Probability (Based on 10-Year/3-Month, %)

Source: Moody’s Analytics, NBER Source: Moody’s Analytics, NBER

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Bank Failures Explained - Questions, Answers and How CRE Fits In

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