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The pressure on small and mid-sized U.S. banks following the swift downfall of SVB Financial Group could further slow the economy, and will likely raise the probability of a recession this year, analysts at Wall Street said.

JPMorgan JPM-N said regulatory scrutiny on smaller banks and a run on deposits will hamper loan growth. With no offset from larger banks, gross domestic product (GDP) would reduce by 0.5 per cent to 1.0 per cent, over the next year or two.

“Ongoing pressure could cause smaller banks to become more conservative about lending in order to preserve liquidity in case they need to meet depositor withdrawals, and a tightening in lending standards could weigh on aggregate demand,” said economists at Goldman Sachs GS-N led by Jan Hatzius.

Banks across the globe slumped following the closure of SVB and Signature Bank, with worries about stresses in the global banking system exacerbated by troubles at Swiss lender Credit Suisse CS-N. U.S. banks started to find footing again on Wednesday thanks to bargain hunting.

JPM notes that small banks, per the U.S. Federal Reserve’s definition, account for 30 per cent of aggregate banking system assets, and 38 per cent of the system’s loan book in the U.S.

Analysts believe the collapse of SVB and Signature Bank highlights the delayed effect of the U.S. central bank’s aggressive rate hike campaign.

Goldman Sachs raised its probability of the U.S. economy entering a recession in the next 12 months by 10 percentage points to 35 per cent, citing the stress on small banks.

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