Bank lending conditions and borrower demand have reached levels that have historically only existed during prior periods of economic recessions.

The Federal Reserve conducts a quarterly survey with banks to get an update on lending conditions and borrower demand across multiple parts of the economy, referred to as the Senior Loan Officer Opinion Survey (SLOOS).  The fourth quarter survey was released last week and continued the recent trend of tighter conditions and falling demand.

There are three major categories covered in the SLOOS, commercial and industrial/C&I (large, medium, small business loans), commercial real estate, and consumer.  The consumer category is divided into residential and other nonresidential consumer (autos and credit cards are the two largest categories).

The survey measures banks views on lending conditions through three functions, standards (tightening or easing), pricing (spreads widening or tightening), and banks willingness to extend credit.  The survey also monitors whether demand is increasing or decreasing across the various types of commercial and consumer loans.

Measuring current levels, and the rates of change, for lending conditions and demand can be a helpful gauge of how the economic cycle is evolving.  Banks have insight into how companies are performing and can start to shift their risk tolerance ahead of reported public economic data.  Also, banks reducing their willingness to extend credit and increasing the cost of capital can have a reflexive impact on the economic cycle where companies are forced to make cuts to their business as a result of losing access to liquidity or having to absorb higher borrowing costs.

Current absolute levels for commercial and industrial, commercial real estate, and consumer are showing a net tightening of standards and spreads and a decline in willingness to extend credit.

The current absolute levels of conditions and decline in willingness to extend credit have only occurred during prior recessionary periods.  On the corporate side, a net 44.8% of banks are currently tightening standards for large and medium size companies, and 43.8% are tightening for small companies.  For large and medium sized companies, that is the highest level since July 2020, and the only other times the level has been above 45 are April 2008-January 2009, January 2000-January 2001, and April-October 1990, all of which were during or around recessions.  The trend is the same for small companies, with the current level of tightening being higher than most of the 2000-2001 and 1990 period.

Source: Macrobond. 

Lending conditions for commercial real estate are broken out into three components, construction and land development, nonfarm/nonresidential (commercial real estate outside apartments), and multifamily.  Currently a net 69% of banks are tightening lending standards for construction and development lending.  This breakout series only goes back to 2013, but in that period it has only been higher in July 2020.  The same trend is true for the other types of commercial real estate lending.  Prior to 2013, all commercial real estate lending was reported together.  Comparing that series to today, lending standards for commercial real estate have only been higher than current levels in 2008 and 1990.

Source: Federal Reserve System. 

On the consumer side, the percentage of banks tightening standards on all household loans is 24.9%.  That is the highest level since July 2020, and the only other times it has been higher going back to July 1991 were April 2007-October 2009, October 1996, and July 1991.

For credit card loans, standards have only been tighter in July-October 2020, April 2008-July 2009, and July 1996-April 1997 with data going to 1996.  Auto loan condition data only goes back to 2011, and conditions have only been tighter in July 2020.

Source: Federal Reserve System. 

Banks willingness to make consumer installment loans has data back to 1983 and has only been lower than the current level in April-July 2020, April 2008-January 2009, and January 1991.

Source: Federal Reserve System. 

The pace at which banks have moved from easing conditions and a willingness to extend credit to tightening and a decline in willingness has been very rapid and has also only occurred during recessionary periods.  Over the last twelve months, conditions for large and medium sized C&I lending have gone from a net 14% of banks easing standards to a net 45% tightening, a 59% change.  That pace of tightening on a twelve-month basis has only occurred in July 2020, October 2008, and April 2008.  A similar pattern holds for small company C&I lending.

Source: Federal Reserve System. 

With the more limited history of the breakout by category for the commercial real estate lending types, there has never been a twelve-month period where lending standards have tightened at the current pace.

Source: Federal Reserve System. 

Since willingness to lend consumer installment loans has the longest continuous history, we will use it as a proxy for the pace of tightening across the consumer space.  The current shift in willingness to lend over the last twelve months has only been surpassed by July 2020 and April 2008-October 2008.

Source: Federal Reserve System. 

Demand from borrowers across all loan types has also declined rapidly and is at a pace and level that has only occurred during prior recessionary periods.

On the business side, the percentage of banks reporting stronger demand for business loans is currently -38%.  Going back to October 1991, this has only been lower in October 2020, October 2008-October 2009, and January 2001-October 2002.  Over the last twelve months, the shift in reported demand has dropped by 73% (net 35% reporting increased demand to net -38%).  That is the largest twelve-month decline in the history of the data set.

Source: Federal Reserve System. 

In commercial real estate, demand for construction and development has never been lower, and multi-family and other commercial properties demand has only been lower in July 2020.  On a twelve-month basis, demand has never declined this rapidly since the data was broken out by category in 2013.

Source: Federal Reserve System. 

On the consumer side, the net percentage of banks reporting increased demand for household loans dropped to -64.5%, driven by mortgages (credit card and auto loan demand are also negative). Going back to October 1991, this low level of demand has only occurred in January and October 2008.  The pace at which demand has declined over the last twelve months has only occurred in July 2020 and January 1995.

Source: Federal Reserve System. 

The current level of and pace at which lending standards have tightened and demand has declined across multiple borrowing types has historically been associated with recessionary economic environments.  Banks becoming less willing to provide capital and borrowers being less able to afford increases in the cost capital can contribute to the conditions (declines in corporate investment and consumer spending) that lead to those recessionary environments.  The coming months of economic data should provide insight into whether this period of time turns out to be different.

 

The views expressed herein are presented for informational purposes only and are not intended as a recommendation to invest in any particular asset class or security or as a promise of future performance.  The information, opinions, and views contained herein are current only as of the date hereof and are subject to change at any time without prior notice.