Need to Know: There’s another looming cliff — the end of the student-loan repayment moratorium

“In a worst case scenario it’s possible that a ‘doom loop’ develops between smaller banks and commercial property, in which concerns about the health of these banks leads to deposit flight, which causes banks to call in commercial real estate loans, which then accelerates a downturn in a sector that forms a key part of its asset base, which intensifies concerns about the health of the banks and thus completes the vicious cycle,” the firm warns.

And Thomas Simons, money market economist at Jefferies, says there’s another worry on the horizon: the looming end of the student loan repayment moratorium.

Student loan payments will have to resume by the end of August, or possibly earlier depending on a Supreme Court decision, meaning 45 million people will have to start paying loans again.

Related: SoFi CEO Anthony Noto on suing over student-loan payment pause: ‘I’m also protecting our shareholders’

Citing New York Fed data, he says the average student loan payment for a borrower not in deferment was $393 per month — about 1% of spending, depending on which metric is used. “This may sound like a modest hit, but the impact on income is very similar to the tax increases associated with ‘The Fiscal Cliff’ of 2013, which was followed by a noticeable slowdown in consumption,” he says.

Granted, pandemic savings have acted as a buffer for inflation. But roughly half of that is now gone, and those savings were concentrated in wealthier households anyway. “Households still have roughly half of the excess savings from the pandemic sitting on their balance sheets, but there is less cushion to absorb a substantial increase in outlays.,” he says.

Student loan delinquency rates are basically zero at the moment — how can you be late when you don’t have to make payments — but those for autos, mortages and credit cards have picked up lately.

“The strain imposed on household balance sheets by the resumption of student loan payments could cause demand for loans to pick up, but only from borrowers who are having a harder time servicing their debt,” he says.

“Declining loan demand was already a profitability risk for small and regional banks prior to the recent emergence of stress and deposit flight. Risks have clearly increased over the last month, and they will increase further as household credit quality deteriorates,” he concludes.

Simons didn’t even mention that the student-loan cliff coincides with another worry, the looming debt-ceiling issue. The Bipartisan Policy Center last month said the day when the federal government can no longer meet all its obligations will likely arrive in summer or early fall.

The markets

U.S. stock futures ES00, +0.72% NQ00, +0.38% were pointing higher, following the second straight week of gains for the S&P 500 SPX, +0.56%. The yield on the 10-year Treasury climbed to 3.46%.

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The buzz

First Citizens Bank FCNCA, -1.11% is buying $72 billion of assets from the fallen Silicon Valley Bank at a $16.5 billion discount, the Federal Deposit Insurance Corp. announced, as the deposit-insurance fund is set to take a $20 billion loss. Investors cheered the deal, as First Citizens’ stock jumped 24%.

The news lifted regional banks including First Republic Bank FRC, -1.36% in premarket trade.

Fed Gov. Philip Jefferson is speaking at 5 p.m. on the transmission and implementation of monetary policy. Minneapolis Fed President Neel Kashkari told the “Face the Nation” program said the stress in the financial sector brings the U.S. closer to a recession.

Parts of Twitter’s source code leaked online.

McDonald’s MCD, +0.63% closed its stores in Israel, part of a broader shutdown that has clamped outgoing flights in protest of new judicial rules advanced by the ruling coalition.

Novartis NVS, +1.31% shares rallied as the drugmaker reported positive trial data on a breast-cancer drug.

Best of the web

An interesting dive into Signature Bank from The American Prospect, which asks whether the bank was a failure or a patsy.

Thousands of retirees have their savings frozen while legal battles rage around the empire of financier Greg Lindberg.

The president of the United Auto Workers was ousted in favor of a candidate who wants a harder line with automakers.

Top tickers

There were the most active stock-market tickers as of 6 a.m. Eastern.

The chart

This chart captures the deposit outflows from small banks to large banks, covering data through March 15 that the Fed released after the close on Friday. Jeroen Blokland, who authors The Market Routine blog, says small bank woes increase the chance of a recession. “Contrary to 2022, markets may be right and [Fed Chair Jerome] Powell wrong on interest rates. Unfortunately, one look at earnings expectations reveals that markets are not pricing a recession at this point. I remain cautious about equities and other risky assets like real estate and high yield bonds,” he says.

Random reads

Tech fortunes may have dropped after the pandemic, but not demand for Crocs CROX, -2.09%.

The French won’t let a little revolution get in the way of a nice glass of red wine.

The Chinese artist Ai Weiwei recreated a Monet — using Lego.

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