Every Time This Has Happened, A Recession Followed
By Tyler Durden
Three months ago the Fed released its Fourth Quarter “Senior Loan Officer Opinion Survey on Bank Lending Practices”, which revealed something ominous. It showed that in Q4, lending standards tightened for the second consecutive quarter. This was a problem because as Deutsche Bank pointed out at the time two consecutive quarters of tightening Commercial & Industrial loan standards “has never happened before without it signalling an eventual move into recession and a notable default cycle. Once we have 2 such quarters lending standards don’t net loosen again until the start of the next cycle.”
As of today, we now have three consecutive quarters of tightening lending standards. In fact, based on the latest survey, net lending standards tightened even more than during Q4 as shown in the chart below, and are now the tightest on net since the financial crisis. Needless to say, if a recession and a default cycle has always followed two quarters of tighter lending conditions, three quarters does not make it better.
This is what the Fed said:
On balance, a moderate net fraction of banks reported a tightening of lending standards for C&I loans to large and middle-market firms over the past three months. Meanwhile, only a modest net fraction of banks reported tightening lending standards for C&I loans to small firms. Banks reported that they tightened some C&I loan terms for large and middle-market firms: A moderate net fraction of banks reported that they had increased premiums charged on riskier loans, a modest net fraction of banks reported that loan covenants had tightened, and most other terms to such firms remained basically unchanged on net. Banks reported mixed responses regarding changes in loan terms for small firms. A majority of the domestic respondents that tightened either standards or terms on C&I loans over the past three months cited a less favorable or more uncertain economic outlook as well as a worsening of industry-specific problems affecting borrowers as important reasons. Meanwhile, a significant net fraction of foreign respondents reported a tightening of lending standards for C&I loans.
In other words, credit availability is bad and getting worse, and may explain why the ECB had no choice but to shock the credit pipeline into action when Draghi announced that the ECB would monetize corporate bonds (and soon enough, junk bonds).
And while our focus looking at this data is on the implied probability (based on historical precedented, now at 100%) of a recession, Bank of America’s high yield strategist Michael Contopoulos is looking at the implications of continued lending tightness on the credit market, where he has been uncharacteristically gloomy for many moths. This is what he said:
Banks tightening their grip on lending
Today’s Senior Loan Officer Opinion Survey on Bank Lending Practices confirmed several of our concerns from last year; that in the face of deteriorating corporate fundamentals, a weak economic outlook, industry specific woes in the commodity space and global markets that have been volatile, banks would pull back the reins on lending. Below we highlight …read more
Source: Every Time This Has Happened, A Recession Followed
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