An Early Look at Credit Conditions

One month on from Silicon Valley Bank’s (SIVB’s) failure, headlines are on high alert for any sign of economic fallout. For once, most observers are looking in the right place: lending. If fear of deposit flight led banks to hoard cash and cut lending aggressively, the economy could be starved of fuel for new investment and growth. In the three weeks’ worth of lending data available post-SIVB, year-over-year growth rates remained robust. But two sharp week-over-week contractions have rattled headlines, as did Tuesday’s NFIB survey showing small businesses reporting tighter credit conditions in March. Ditto for a New York Fed survey reporting similar observations for consumer credit. In our view, all are worth keeping an eye on, but we don’t think the data thus far are cause for alarm given some underreported mitigating circumstances.

On a seasonally adjusted basis, total lending fell -0.5% w/w in the week ending March 22 and another -0.4% the following.^[i] Weakness concentrated in business lending, which fell -1.8% w/w and -0.6% in those weeks, respectively.^[ii] The majority of that drop came courtesy of small banks, which are likelier to lend to small and local businesses, but large institutions pulled back as well. So overall, the data seem to jibe with the NFIBs survey, which showed a net 9% of surveyed small businesses reporting loans were harder to come by in the month (meaning, the margin of those reporting “harder” conditions minus those reporting “easier” conditions was 9 percentage points).^[iii]

We don’t doubt conditions are a bit tighter, partly because of March’s uncertainty and partly because that has been the trend since 2022’s second half. Per the Fed’s Senior Loan Officer Opinion Survey, the net percentage of banks tightening small business loan standards jumped from zero to 22.2% in July 2022’s survey, 31.8% in October 2022’s and 43.8% in January 2023’s.^[iv]

However, the hard lending data likely overstate matters. Loan growth data come from the Fed’s H.8 report, which monitors changes in commercial banks' loan and deposit balances. Most of the time, a rise or fall in those levels represents growth or contraction, respectively. But every now and then there is skew from accounting adjustments. Helpfully, the Fed reports all of these, and it shows a big one impacting results in the week ending March 22, with domestically chartered commercial banks divesting $60 billion worth of loans to “nonbank institutions.” Translating this from Fedspeak and reconciling it with FDIC reporting, this is basically the transfer of $60 billion worth of failed Signature Bank’s loan portfolio to the FDIC. In dollar terms, this accounts for over half of the drop in total bank loans the past two weeks. Not the whole amount, indicating some banks are indeed pulling back somewhat, but it does represent a very large chunk.

Seasonality could also be mucking with things a bit. The Fed adjusts its week-over-week and month-over-month data to try to iron out regular seasonal ups and downs. But seasonal adjustment factors are typically based on the past few years’ data. That is a bit of a problem right now, since March 2020 is when business lending surged as companies drew on credit lines and tapped the Paycheck Protection Program to stay alive during lockdowns. Now this historic bump is influencing the seasonal adjustment factor, creating some distortions. To wit: Last week’s seasonally adjusted decline was almost double the unadjusted decline. So that is another grain of salt.

As a result, survey data may be extra-useful in the next several weeks as we analyze incoming loan data from here. To that end, while the NFIB survey headlines focused on the reported tightening in small business loan standards, it is also worth noting that it didn’t seem to impact businesses’ ability to actually obtain loans. The percent of businesses reporting their lending needs as “satisfied” during the last three months rose from 25 to 29, while the percent reporting borrowing needs as “not satisfied” eased from 3 to 2. Next month’s report will show whether the improvement is a trend or a blip. We will also get the Fed’s Senior Loan Officer Opinion Survey for Q1 in May, which will show how SIVB and Signature’s failures affected banks’ own assessment of their willingness to lend. And in the meantime, the next few weeks’ loan growth data should be clearer, without skew from failed banks going into receivership.

So wait and see is still the right path, in our view. In the meantime, a silver lining: The more headlines dwell on lending weakness, the more it loses its surprise power, and the more stocks are able to pre-price further negativity from here. To send stocks sharply lower, it would take big bad news that no one is talking about—a small lending decrease, skewed by technical factors, that gets mountains of attention probably doesn’t qualify. So keep an eye out, but don’t overreact.

Hat tip: Fisher Investments Research Analyst Shayan Saeri