Banks Report Weakening Demand For Loans – The Slowdown Comes To The U.S.

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Summary

  • Banks are easing lending standards.
  • Despite easing standards, weaker demand was report across nearly every loan category.
  • Banks claim the current shape of the yield curve is not hurting business yet but fear an inversion and the impacts it would have.
  • Has the global economic slowdown washed up on the shores of the United States?

Banks Report Weakening Demand

Each quarter, the Federal Reserve publishes the results of their survey of Senior Loan Officials at domestically chartered banks. The respondents’ answers provide information that is critical to the Federal Reserve’s monitoring of bank lending practices and credit markets.

The primary information gathered in the Federal Reserve Senior Loan Survey is whether banks are claiming they are tightening standards on loans, making credit less available, or loosening standards on loans, making credit more available.

The banks also provide information as to the change in demand for new loans. This is an important read into the initial demand of the private sector. If banks are seeing a drop in demand for new loans, that can foreshadow weaker economic growth. The survey breaks down these two metrics across the size of bank and type of loan (credit card, real estate, automobile, etc.),

On balance, banks reported to the Federal Reserve that standards on loans have loosened and demand has weakened across most major lending categories.

Bank Survey:

Federal Reserve Senior Loan Survey

Source: Federal Reserve, EPB Macro Research

Commercial and industrial (C&I) loans have been one of the best segments for bank lending, growing north of 6% year over year.

Commercial & Industrial Loan Growth:

Source: Federal Reserve, EPB Macro Research

Despite the seemingly robust and accelerating rates of growth, banks are reporting weaker demand for C&I loans in the face of easing standards.

C&I Lending:

Source: Federal Reserve, EPB Macro Research

Commercial real estate has been a hot topic with trouble brewing in this space for quite some time. Banks reported weaker demand for construction and land development loans as well as loans secured by nonfarm residential properties. Banks did, however, report that demand for multifamily residential properties was unchanged on balance.

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CRE Lending:

Source: Federal Reserve, EPB Macro Research

Residential housing has been under severe pressure as of late with housing and homebuilder stocks down over 30% year-to-date. Consistent with this trend of reduced housing activity, banks reported weaker demand across all surveyed residential real estate loan categories.

On the positive side, banks reported stronger demand for consumer loans with the exception of auto loans (which have peaked) and credit card loans (which are decelerating).

Real Estate & Consumer Lending:

Source: Federal Reserve, EPB Macro Research

The following charts show the net percentage of respondents reporting stronger demand for various types of loans. A reading below 0 indicates that a majority of respondents saw weaker demand while a number above 0 suggests increasing demand.

The number of respondents reporting increased demand for C&I loans peaked in 2014 and has declined near a cycle low.

Percentage Of Banks Reporting Stronger Demand For C&I Loans:

Source: Federal Reserve, EPB Macro Research

Demand for commercial real estate loans peaked in 2013-2014 according to respondents of the Senior Loan survey and sits at a cycle low as well.

Percentage Of Banks Reporting Stronger Demand For CRE Loans:

Source: Federal Reserve, EPB Macro Research

Interestingly, all categories of residential mortgages are at cycle lows in terms of reported demand with the exception of sub-prime mortgage loans which saw an increase in reported demand.

Percentage Of Banks Reporting Stronger Demand For Residential Mortgage Loans:

Source: Federal Reserve, EPB Macro Research

Consumer loans are more stable than the previous categories of loans but remain in a downward trend in terms of reported demand as well.

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Percentage Of Banks Reporting Stronger Demand For Consumer Loans:

Source: Federal Reserve, EPB Macro Research

Most respondents to the Federal Reserve Senior Loan survey are on record claiming weaker demand for nearly every loan product. Clearly, the private sector has pulled back their willingness to borrow money in some capacity which will likely manifest itself in slower growth in Q4 and Q1.

Even more interesting is the weaker demand for loans come on the back of looser or easier credit standards which should make loans more attractive.

Banks appear willing to make loans, even with the current shape of the yield curve which most respondents claim is not adversely impacting business yet. Should the yield curve invert, according to respondents, banks would be forced to tighten loan standards which could start to hurt economic activity when coupled with weaker demand for most types of loans.

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