Where's the Credit?
What did the SLOOS say? Peak Credit Tightening or Credit Event?
Remember the SLOOS report? It’s the Senior Loan Officers’ Opinion Survey published by the Fed every quarter that tells us how much banks are tightening their loan standards. Ever since the banking crisis in March, the SLOOS has become an important report to watch, in order for us to gauge the creation of credit.
Well, we got a fresh report yesterday and there’s some chatter that the slowdown in tightening standards compared to previous quarters is bullish. This is not the case because a slowdown is a slowdown and in my opinion we have by no means reached peak credit tightening.
There are a few reasons that I can think of for the slowdown though.
I was a corporate banker for the better part of my 19-year career and I can tell you that sometimes targets trump risk management. Banks, and particularly smaller banks, need to make money to survive and with the backing of the BTFP, they can afford to tighten their standards at a slower pace to generate revenues.
But, these same banks are the ones that get into trouble when a crisis hits and circling back, it’s because they have weaker standards. So it’s by no means a sign of a better economic environment. Interestingly enough, the strength in GDP growth over the last quarter perhaps gives an illusion that everything is a-okay.
As a reminder, the BTFP is the Bank Term Funding Program, which is the facility that the Fed is giving out to banks whereby they can place their treasury bonds, and receive 100% of the maturity value in the form of a temporary loan. The program runs until March 2024, so that’s something to remember.
The Actual Report
I don't want to be the bearer of bad news but, nothing in the report stands out as bullish to me. Suffice to say, standards are still tightening and more importantly, demand for loans are dropping.
And guess where most of that demand is falling? Yes, the smaller businesses, which is defined as companies with revenues less than $50m.
Banks are raising rates across the board, and this of course is slowing down the demand for loans. According to the survey, companies are staying away from capex project, M&As, and worse still inventory financing. So that's also a sign of demand collapsing.
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