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.
Between unprecedented levels of quantitative easing and a reserve requirement of zero, banks’ excess reserves have grown rapidly.
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.
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,
and also reported weaker demand for C&I loans overall.
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.
Same thing here with demand on commercial real estate loans – weaker overall.
For households, banks tightened on all categories of residential real estate loans…
While demand, especially for GSE-Eligible mortgages, is picking up.
Banks are also tightening on auto loans, credit cards, and other forms of consumer loans.
As demand for these forms of debt are plummeting.
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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