More bank economists see a path to skirting a recession. But if you pay close attention, you’ll see lenders continuing to wave a major red flag. Industry surveys keep showing that banks expect to pull back lending in the months ahead. The American Bankers Association’s economic advisory committee said last week that the odds of a U.S. soft landing are improving but that deteriorating credit availability and high credit costs are key recession risks. It followed recent Federal Reserve surveys that showed credit standards tightening across the country and loan officers expecting more in the second half of this year. RSM US released a survey last week that found middle market firms are starting to be squeezed by double-digit interest rates and will continue to face higher costs as they roll over low-rate debt. To get a sense of the bull and bear cases, MM spoke with Bank Policy Institute chief economist Bill Nelson, who earlier in his career tracked bank lending at Fed. Will bank lending loosen up, with the macroeconomic outlook and deposit outflows stabilizing six months after the failure of SVB? “Maybe not,” he said. What follows is a brief Q&A, edited for length and clarity. How much credit tightening have you seen so far and to what extent did that happen after the SVB turmoil? It pretty much turned during SVB. Growth had been strong coming out of Covid. And there’s been some ups and downs, but it’s been largely flat since March, with the overall tone fairly weak. The outlook is very uncertain. There's been a reduction in both supply and demand for bank loans. If you look at the [Fed’s] senior loan officer survey, their responses from banks … show over half of the banks are tightening. And those are numbers that are really only matched during previous recessions. Have you seen more or less credit tightening than you would have expected after SVB’s failure? Banks were already preparing for a slowdown. I’ve seen more tightening than I would have expected from SVB. … There has been a reduction in credit supply that is of the level to be worried about the macroeconomic outlook. The FOMC’s worried about it. When you look at the responses in the senior loan officer survey, when banks are asked why have they tightened standards, they always point to the same things, the things that are important to their business – concern about the outlook for the economy, concern about industry-specific things. But what's different is about half the banks also say they're worried about the regulatory supervisory outlook. A larger fraction said that those are things that they expect to lead them to tighten further in the second half of this year. The recession in 1990-91 is especially important to draw lessons from. It was just after some bank troubles. “Basel 1” [a set of capital rules] was just coming on board. So is this tightening a real recession risk? It's definitely a risk. Things could go fine. A soft landing could proceed. Maybe one, at most, more tightening in interest rates could be called for. And perhaps there is no large credit crunch caused by banks’ concern about the outlook. But there are a couple more bearish paths. One would be inflation settles in at some level well above 2 percent, and the Federal Reserve needs to tighten rates substantially further and slow the economy. And both of those … is going to contribute to a reduction in bank credit supply. The other bearish outlook is sort of a credit supply-driven recession along the lines of the 1991 recession, where banks pull back, they're being counseled to get smaller, and maybe shift their assets toward liquid assets and away from lending to businesses and households. On that cheery note – Happy Monday. Are you a banker or a borrower who’s experiencing the crunch? Let us know: Zach Warmbrodt, Sam Sutton.
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