We wrote earlier this week that we shared Jamie Dimon's fear that the current bank run, and the near-death experience of many regional banks, would force small and medium-sized banks to tighten lending criteria as they entered survival mode and hunkered down. This, in turn, would effectively grind all new loan issuance into a halt, and send the US economy into an tailspin. (As a refresher, 70% of US GNP comes from consumer spending, and the majority of that is
It's a big problem, because
We also discussed earlier
Banks with assets less than $250bn are responsible for approximately 50% of US industrial and commercial lending. They also account for 60% of residential lending and 80% of commercial lending.
In addition, key sectors of the economy are locked out from critical funding lines.
The US economy will plunge into recession and its GDP will plummet
Just as the Fed's "inflation fighting" ordered.
The Fed won't find out until the beginning of May or about a month later when the rate is set.
The next Senior Loan Officer Opinion survey on Bank Lending practices is published
What impact the bank failures have had on the loan issuance. We know that in February, we reported this for the first time two months ago.
The demand for loans is plummeting
While bank lending standards are approaching their tightest levels ever.
As a result, there is good news.
We also reported first on Tuesday
Dallas Fed's most recent report gave us an early look at the big picture of loan demand and supply as of late march - just after the credit crunch and bank crisis had begun.
Bank Conditions Survey
This had a sombre conclusion.
The survey of bankers conducted in March revealed that business activity had deteriorated. The decline in loan volumes was largely due to a sharp drop in consumer loans ....
Over the reporting period, credit standards and loan terms tightened sharply. There was also a marked increase in loan prices.
Contacts expect a decline in business and loan activity, as well as an increase in nonperforming debts over the next six-month period.
"Some contacts expressed concern about the recent financial instability and waning confidence of consumers."
Since the survey was conducted after the majority of bank failures occurred in March, and at the height of the financial crisis...
The survey was conducted between March 21 and 29. 71 financial institutions participated.
It is a good preview of what will be revealed by the next SLOOs Report.
Today, we received another confirmation of a credit crunch that is imminent when the Fed used the Good Friday holiday as an excuse to release the latest consumer credit statistics. It was ugly.
It showed that the credit crisis was at its worst in February or the month prior to the Lehman collapse.
Credit card debt
The average LTM increase was $13.7 billion, a sharp drop from $12.8 billion in January and the lowest ever single increase since April 2020.
It is not clear if the credit card use has slowed down the most in the past two years because of weak demand, or due to an unexpected squeeze in the supply. We will know more in a month's time when the next SLOOS strikes. But the message is clear: One of the strongest economic lifelines has come to a grinding halt.
The silver lining was that, while nonrevolving credits had collapsed unexpectedly in early 2023 due to a sharp decline in auto loans, (thanks to record-high interest rates), this category experienced a modest recovery in March. It rose from $6.7 billion last month, which is 40% lower than the LTM average $16,8 billion.
The worst is yet to come: On Thursday, the
The American Bankers Association's index of credit conditions has fallen to its lowest level since the outbreak of the pandemic.
Indicating bank economists expect credit conditions to deteriorate sharply in the next six-month period. In turn, banks will likely become more cautious in extending credit.
Bottom line: While the consumer credit data are backward-looking, the trend is evident and the events of March will only lead to a sharper credit crisis, as the revolving credits - due both to a decrease in supply and demand – turn negative. This is followed by a contraction of GDP, and - then - another panicked stimulus package.