Mohamed El-Erian said the latest upheaval around Bank of the First Republic will cause banks to rethink their standards and prepare for tighter regulations.
El-Erian, chief economic adviser at Allianz SE and a Bloomberg Opinion columnist, said on Bloomberg Television on Friday. “The expectation is that you better tighten your lending standards for both your own reasons and because more regulations are coming your way.”
Tighter and more expensive bank lending is likely to disproportionately affect smaller, lower-quality borrowers, Morgan Stanley said in a report on Thursday.
The recent turmoil caused by banks could eventually push down inflation, El-Erian said, but not in the way the Federal Reserve expects. However, the central bank may soften its stance at its meeting next week, he said.
“This Fed will be very keen to try and somehow stand in the middle and say ‘we’re not going to raise rates, it’s just a pause, not the end of the cycle,’” he said. “I think that’s the wrong thing to do.”
US credit markets recover and major stock indexes rise on Thursday after major banks including JPMorgan Chase & Co. and Citigroup Inc. created a lifeline for the First Republic. However, market sentiment took a hit on Friday as investors braced for next week’s Fed policy decision and continued to grapple with the turmoil hitting the banking sector.
“This is a multi-month period and not only financially, but more importantly, months in economic terms,” El-Erian said. “Even if we can address these concerns in the next few days – and I really hope we can – we still need a circuit breaker.”