"Fairly Severe" Corporate Credit Crunch Is "Harbinger Of More Stress To Come"

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Over a month has passed since the first signs of stress in regional banks appeared, and we were able to identify the beginnings of a credit crisis.

We warned that "the next Silicon Valley Bank" would be the next to fail.

credit event

" had arrived. Jan Hatzius is the chief economist at Goldman Sachs.

Small and medium-sized businesses

Sized banks play a crucial role in the US economic system:

Banks with assets less than $250bn account for approximately 50% of US industrial and commercial lending. They also account for 60% of residential lending and 80% of commercial lending.

We outlined in March and April the macroeconomic impact that the regional bank collapses would have on lending.

The tightening of lending standards and the worsening of credit crunch, which could spark a difficult economic landing in second half, was confirmed by the

Federal Reserve's latest Beige Book

Based on information collected prior to April 10, it indicated:

The conditions in the financial sector as a whole deteriorated dramatically in tandem with the recent stress experienced in the banking industry. The District's small to medium banks reported a widespread drop in demand for loans across all loan segments. The delinquency rate on residential and commercial loans has also increased.

The overall trend is a decline in lending volumes and demand for consumer and business loans.

In response to increased uncertainty and liquidity concerns, several districts noted that banks had tightened their lending standards.

Credit availability is decreasing at an alarming rate in certain sectors. It is possible that the situation will only get worse through summer.

A note from provides more information about the credit crunch.


This report revealed a number of findings that shed light on the declining economic outlook.

The Federal Reserve has said that banks have tightened lending criteria. Small businesses report it's been a while since they had to borrow. The number of corporate bankruptcies is also on the rise. This is especially true in the retail and construction industries. --Bloomberg

Torsten Slok is the chief economist of Apollo Global Management. He warned that the Fed’s aggressive increase in interest rates, the fastest for decades, was a combination of the funding crisis and the Fed’s aggressive rate hike.

"If credit conditions tighten, because banks need more time to get into a position to give loans and to operate, this increases the risk of a hard landing -- even more than we had thought."

Slok had already discussed "a hard landing" with clients before SVB, but it now seems almost inevitable.

Janet Yellen, Treasury Secretary, said that there was no evidence to support her view on lending when she stated recently that the economy is still doing well.

Yellen was quoted in 2017 as Fed Chair saying that there would not be a new financial crisis 'in our lifetimes'.

Small businesses, however, are having a harder time borrowing money. According to a National Federation of Independent Business survey, 9% of owners that borrow frequently reported March as a more difficult month to get financing.

Matthew Mish, UBS's head of credit strategy, has noted that bankruptcy rates of both public and private companies have increased as lending conditions tighten. He said, "We're already seeing substantial failure rates."

Bradley Rogoff, Barclays Plc's strategist, warned that "the weakness we see in smaller issuers may be a sign of greater stress to come."

Junk bond spreads will increase as the US default rate rises.

Bloomberg reports that the volume of US corporate bonds trading at distressed levels - a risk premium at least 10 percent over the benchmark bond price, or a loan price less than 80 cents per dollar - has risen by 28% to $300 billion since the banking crisis last month.

Jim Caron, the co-chief investment office at Morgan Stanley Global Balanced Funds said in a recent Bloomberg Television interview that "There will be a Credit Crunch, not a Credit Crisis." He said that the credit crunch will unfold over time.

PitchBook data indicates that about a quarter ($1.4 trillion) of the leveraged loan market has a credit rating B-, which is just one notch lower than CCC.

Paul Marshall of Marshall Wace - one of the largest hedge fund firms in the world - warned investors this month that a credit crunch could be "fairly serious" and cause a recession.