A Chokehold on Credit

Are credit markets tightening? There’s some data that indicates that they are.

Back in March, the Fed released a memo laying out how they would be supporting the flow of credit to households and businesses. As part of their efforts to achieve that, they announced that they would be reducing reserve requirements to zero for the time being. 

Real Vision Blog - Chart: Required Reserves Of Depository Institutions`
Required Reserves Of Depository Institutions
Source: FRED (Federal Reserve Economic Data)

Between unprecedented levels of quantitative easing and a reserve requirement of zero, banks’ excess reserves have grown rapidly. 

Real Vision Blog - Chart: Excess Reserves Of Depository Institutions
Excess Reserves Of Depository Institutions
Source: FRED (Federal Reserve Economic Data)

Of course, to encourage the flow of liquidity, rates have been cut close to zero as have the interest rates paid to banks on excess reserves. 

Real Vision Blog - Chart: Effective Federal Funds Rate & IOER
Effective Federal Funds Rate & IOER
Source: FRED (Federal Reserve Economic Data)

As a result, there was a major credit glut, especially in the beginning, with large corporations and businesses clamoring to secure debt to finance their operations as they faced extreme, slumped demand. The Fed’s liquidity injections that began in March helped assuage investors’ and officials’ fears of a tightened credit market.

But, are credit markets tightening? There’s some data that indicates that they are.

The July 2020 Senior Loan Officer Opinion Survey on Bank Lending Practices covers the terms and demand for bank loans to businesses and households for the past three months, corresponding approximately to Q2 2020.

Banks reported that they had tightened their standards for commercial and industrial (C&I) loans,

Real Vision Blog - Chart: Net Percentage Domestic Banks Tightening – C&I
Net Percentage Domestic Banks Tightening – C&I
Source: FRED (Federal Reserve Economic Data)

and also reported weaker demand for C&I loans overall. 

Real Vision Blog - Chart: C&I Loans, All Commercial Banks
C&I Loans, All Commercial Banks
Source: FRED (Federal Reserve Economic Data)

Banks have also said that there was tightening across all three major categories of commercial real estate loans – construction and land development, nonfarm nonresidential, and multifamily. 

Real Vision Blog - Chart: Net Percentage Domestic Banks Tightening – CRE
Net Percentage Domestic Banks Tightening – CRE
Source: FRED (Federal Reserve Economic Data)

Same thing here with demand on commercial real estate loans – weaker overall. 

Real Vision Blog - Chart: CRE Loans, All Commercial Banks
CRE Loans, All Commercial Banks
Source: FRED (Federal Reserve Economic Data)

For households, banks tightened on all categories of residential real estate loans… 

Real Vision Blog - Chart: Net Percentage Domestic Banks Tightening – RRE
Net Percentage Domestic Banks Tightening – RRE
Source: FRED (Federal Reserve Economic Data)

While demand, especially for GSE-Eligible mortgages, is picking up. 

Real Vision Blog - Chart: Net Percentage Domestic Banks Reporting Stronger Demand – RRE
Net Percentage Domestic Banks Reporting Stronger Demand – RRE
Source: FRED (Federal Reserve Economic Data)

Banks are also tightening on auto loans, credit cards, and other forms of consumer loans. 

Real Vision Blog - Chart: Net Percentage Domestic Banks Tightening – Auto, CC, Other
Net Percentage Domestic Banks Tightening – Auto, CC, Other
Source: FRED (Federal Reserve Economic Data)

As demand for these forms of debt are plummeting. 

Real Vision Blog - Chart: Net Percentage Domestic Banks Reporting Stronger Demand – Auto, CC, Other
Net Percentage Domestic Banks Reporting Stronger Demand – Auto, CC, Other
Source: FRED (Federal Reserve Economic Data)

This is where the rubber hits the road – will all of this excess liquidity from the Fed find its way into the economy, or will credit markets continue to tighten and potentially stifle economic growth in the long run? 

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