If you're looking for an upbeat, contrarian outlook on lending amid the banking crisis of the last few weeks … you better keep looking.
It's nearly certain that credit will tighten in the aftermath of
Michael Jamesson, a principal at the bank consulting firm Jamesson Associates, said lenders are increasingly worried about an economic downturn that — at least in part — could be fueled by the bank-related fears and tougher regulatory scrutiny of banks. The specter of loan losses looms large when the economy slows, and community bankers in particular tend to pull back on their bread-and-butter small-business lending and, in many cases, consumer credit as well, he said.
When this happens, it can ultimately provide the final accelerant that cripples the economy, Jamesson said. "If bankers are too conservative with credit, it will be a self-fulfilling prophecy," he said in an interview. "If things don't calm down, we're going to have a recession."
Anecdotal information and surveys seem to be telling the same story.
Since March 10, when the crisis took hold with the surprise collapse of the $209 billion-asset Silicon Valley Bank, Piper Sandler analysts have talked to all 250-some banks they cover, and most have said they plan to rein in lending, according to Piper Sandler analyst Mark Fitzgibbon.
"They were terrified of seeing runs on their own bank, so the first thing many of them did was stop growing, stop making loans, stop buying bonds and get as liquid as they could," Fitzgibbon said. "They're being more cautious, given the environment and the need to hold more liquidity."
The true impact of the banking crisis on loan growth, and the exact ways in which lenders are boosting their liquidity, will be more visible when the first-quarter earnings season begins in a little over two weeks. Regional banks, which have endured more scrutiny of their liquidity positions than their "too big to fail" counterparts, begin publishing their results in earnest starting the week of April 17.
At many banks, especially the regionals, making fewer loans could be a useful strategy to conserve cash amid ongoing uncertainty about liquidity, analysts say. Fewer loans means banks could keep more cash on hand and shore up their balance sheets.
To be sure, the outlook for loan growth was dimming even before the two regional bank failures sparked panic about the stability of the banking system. Heading into the year, bankers and analysts were
During the fourth quarter, banks started tightening their credit standards on commercial and industrial and commercial real estate loans, and they became "increasingly nervous about the credit quality of corporate borrowers," according to a new commercial lending report from Coalition Greenwich, the data analytics firm formerly known as Greenwich Associates.
The Fed's latest quarterly senior loan officer opinion survey, conducted and released prior to Silicon Valley Bank's demise, found loan demand weakening across all major categories and, at the same time, bankers said they were raising the bar on who qualifies for credit.
The closely watched survey found bankers reporting tighter standards for commercial-and-industrial, commercial real estate, mortgage and consumer loans. Bankers cited
A consensus on what's ahead seems to be building. The Federal Reserve said last week that it expects tighter credit conditions, while the ratings agency Moody's Investor Services said banks will be more cautious about making loans. Goldman Sachs economists said small and midsize banks in particular will tighten their lending standards.
Fed Chairman Jerome Powell, in a press conference following last week's rate hike, said he and other policymakers had recently eased the level of rate increases from 75 basis points last year to 25 basis points in its latest move in part because they expect continued tightening of credit conditions and slower economic growth as a result. This could help tame inflation, he said, though it does raise the likelihood of at least a mild recession.
"Such a tightening in financial conditions would work in the same direction as rate tightening," Powell said. "You can think of it as being the equivalent of a rate hike or perhaps more than that."
Laurie Stewart, president and CEO of the $977 million-asset Sound Community Bank in Seattle, said high interest rates began to slow loan applications in 2022 and early this year. "We'd already seen a reduction in demand and loan pipelines," she said in an interview.
Demand has retreated enough that Sound Community does not need to rein in its lenders, Stewart said. But it would not surprise her to see more banks pull back this year, she added.
"Clearly, there are concerns about the industry as a whole, about the impact it may have on small businesses and consumers," she said, referring to the amplifying effect of bank failures.
The volatility imposed by the bank failures only compounds matters, Raymond James Chief Investment Officer Larry Adam said in a report. "The velocity of news during this banking crisis has led to an increased level of uncertainty and rapidly changing market conditions," he said.
Still, for all the fresh worry, Adam joined bankers in emphasizing that the problems that plagued the failed banks are believed to be isolated. Silicon Valley Bank's outsize deposit exposure to vulnerable technology startups dragged it down, while Signature delved deep into a cryptocurrency market that is struggling mightily.
The federal government has tried to reassure the nation about the stability of the banking system, in part to stave off more bank runs. It insured all deposits at Silicon Valley Bank and Signature Bank, even those that exceeded the Federal Deposit Insurance Corp.'s threshold of $250,000 per depositor. And last Thursday, Treasury Secretary Janet Yellen told lawmakers that regulators would take
While lending may slow and the economy could struggle in the near term, the banking system is well capitalized and liquidity levels are strong, Stewart said. She also noted that the job market remains robust, with employers adding 311,000 jobs in February after adding more than 500,000 the prior month. This should help safeguard against a steep recession, she said.
It's hard to say how long banks might maintain that extra caution on lending, and keep more cash on hand by way of reducing loan volume, said Fred Cummings, president of Elizabeth Park Capital Management, an alternative asset manager in Cleveland that focuses on U.S. banks.
It will be "a function of confidence" that depends on whether fears ease about outflows, he said.
"It could be [down] for the next couple quarters, for sure, and then it depends on the economic impact and frankly how long strong loan demand will be," Cummings said. "Will it be weak because the economy overall weakens, or will the economy surprise us and be more resilient?"
