Fed's Jefferson: Stress Among Small Regional Banks Could Have The Greatest Impact On Small Businesses

Philip Jefferson, governor of the Federal Reserve, stated on Monday that the transfer of deposits from small to large banks could have a disproportionate impact on small businesses that rely significantly on community and regional financial institutions for credit.

Jefferson stated, "We are focused on the macroeconomy, but we are aware... that there may be potential distributional effects" if depositors withdraw funds from lesser institutions.

Recent banking sector duress has resulted in a decline in deposits at lesser institutions, and Jefferson said, "we will have to see how that plays out." This could have an outsized effect on modest enterprises... We desire for local and regional institutions to be robust."

Jefferson's remarks demonstrate how the recent failures of Silicon Valley Bank and Signature Bank have confounded a monetary policy debate that had been narrowly focused on inflation and the need to increase interest rates to control it.

The unexpected stress in the banking sector has increased the likelihood of a broader credit downturn as banks become more cautious, particularly smaller institutions viewed as potentially more susceptible to the type of run that brought down SVB.

The week following Silicon Valley's collapse, the Fed reported a record outflow of deposits from small and smaller regional U.S. banks, with deposits among banks outside the 25 largest falling by nearly $120 billion in the week ending March 15 learn more.

While a "credit crunch" could aid the Fed's fight against inflation while leaving less money in the wallets of businesses and households, a contraction that is too abrupt or disorderly could lead to a recession.

However, Jefferson also stated that inflation "is too high" and that he would prefer for it to return to the 2% objective of the central bank "sooner rather than later."

He did not indicate whether he believes additional interest rate hikes are appropriate or not, but he did state that he hoped inflation could be brought under control "in a way that does not harm the economy more than is necessary."