Banks Cutting Back On Loans As They Prepare For Next Recession

Meanwhile Behind The Scenes: Banks Quietly Slash Loans As They Prepare For The Next Recession

Reading through the Fed's latest Senior Loan Officer Opinion Survey (SLOOS), revealed absolutely nothing to be concerned about when it comes to loan demand and loan standards (aside from a warning that a yield curve inversion would, predictably, result in substantially tighter financial conditions): as we noted one month ago, the net percentage of banks reporting easier standards on loans to large- and medium-sized firms stayed flat at 16%, while standards for small firms were basically unchanged on net. At the same time, terms on C&I loans eased somewhat for large- and medium-sized firms, as 27% of banks surveyed (in net terms) reportedly narrowed spreads of loan rates over the cost of funds; other terms, such as premiums charged for riskier loans, loan covenants, and collateralization requirements, all eased somewhat.

There is just one problem with the above: none of it is true.

Iin fact according to a Reuters investigation, when looking behind headline numbers showing healthy loan books, "problems appear to be cropping up in areas such as home-equity lines of credit, commercial real estate and credit cards" according to federal data reviewed by the wire service and interviews with bank execs.

Worse, banks are also starting to aggressively cut relationships with customers who seem too risky, which in a time when 3M USD Libor just hit a fresh decade high despite a flattening in short-term TSY yields, is to be expected: after all financial conditions in the real economy, and not the markets, are getting ever tighter and the result will be a wave of defaults sooner or later.

Here are the all too clear signs that banks are starting to prepare for the next recession by slashing and/or limiting risky loan exposure:

• First, nearly half of the applications from customers with low credit scores were rejected in the four months ending in October, compared with 43 percent in the year-ago period, according to a survey released by the Federal Reserve Bank of New York.
• Second, banks shuttered 7 percent of existing accounts, particularly among subprime borrowers, the highest rate since the Fed started conducting surveys in 2013.
• Third, home-equity lines of credit declined 8 percent across the industry, with growth slowing in areas such as credit cards and commercial-and-industrial loans, the survey showed.