CRUNCH VS CRISIS Total credit from commercial banks - consisting of their bond holdings and the full scope of loans to businesses and consumers, from routine business credit and commercial real estate loans to residential mortgages and credit cards - is just off its record high from mid-February. But the credit growth rate has recently fallen below its historic average to a level that has often been associated with a recession. Overall annual credit growth rarely turns negative, but when it decelerates into the low single-digits as it has now, it shows that the lending that helps fuel overall economic growth is under strain. Only once since the early 1970s has it actually turned negative, in the aftermath of the 2007-2009 financial crisis. That was indicative of the lasting restraint that episode had on the recovery in credit and economic growth overall.
LESS RISK When credit conditions tighten, among the first categories of borrowers to feel the pinch are those with lower means or with poorer credit profiles as banks pull back from risk. One place to watch for that dynamic is in the issuance of subprime auto loans.
New York Federal Reserve data shows those volumes hit the highest in nearly two decades in the middle of last year, but had slowed somewhat by year end, though on balance were at the upper end of volumes seen before the pandemic. In the last big credit clamp-down, those loan volumes fell by two-thirds between 2005 and 2009.
CONSUMERS VS BUSINESS When overall credit conditions tighten, banks usually rein in loans to both consumers and businesses alike, though not always to the same degree and not always at the same moment. And sometimes special factors will create a pinch for one but not the other. That was the case 8-10 years ago when low oil prices triggered a credit crunch among U.S. oil fracking companies, weighing heavily for a period on overall commercial loan growth while consumer loan growth kept improving. Excluding the COVID-19 recession - when commercial loan volumes were distorted by pandemic relief efforts for businesses - business credit has suffered the bigger blow in the recessions so far this century. Consumer credit was particularly slow to recover from the 2007-2009 meltdown because of the centrality of residential mortgages and the housing market to that crisis. Annual growth in the two categories appears to have peaked around the middle of last year, though both remain at around 10% or more - well above the historic average growth rate of about 6.5%.
BANKS IN NEED
When banks find they cannot get the funding they need from
traditional sources - one another - they turn to the Fed,
borrowing from its "discount window," long dubbed the lender of
last resort.
In 2008, the explosion of its use was a clear signal that
crunch had turned to crisis as it showed that banks, wary of the
stigma associated with turning to the discount window, had run
out of other options.
But the Fed has since taken steps to de-stigmatize the
discount window, including lowering the penalty interest rate it
traditionally charged. It saw widespread use during the early
months of the pandemic and usage spiked again in the last two
weeks after Silicon Valley Bank's collapse.
<^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^
Bank credit growth is slowing already Taking less risk Consumer vs commercial credit Credit crisis: Banks turn to the Fed for cash ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^>
(Reporting By Dan Burns, Ann Saphir and Howard Schneider;
Editing by Andrea Ricci)
