U.S. banks are making it much harder to borrow money
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America's banks have become more reluctant to lend money to businesses and households — an intended side effect of the Fed's rate-hiking campaign.
Why it matters: New research shows that phenomenon playing out to an extraordinary degree. Making credit more expensive and harder to get will weigh on economic activity and quell inflation.
- This spring's bank failures may have also sped up that process, though the extent to which that has happened remains unclear.
What's new: An analysis from Evercore ISI finds that the shift in bank lending standards has been the swiftest, and most dramatic, of any recent episodes of monetary policy tightening.
- In some ways, that's to be expected: Easy lending conditions after the pandemic recession were met with a fierce campaign to cool down the economy in 2022.
- Banks responded in kind: A surge in inflation and higher rates on the horizon gradually made firms more reluctant to lend, for fear of how borrowers would handle the macroeconomic backdrop.
What they're saying: "This sort of tightening in credit standards is something that the U.S. economy has not experienced during the past monetary tightening cycles of the last few decades," Marco Casiraghi, a policy and macro strategist at Evercore ISI, tells Axios. "It's reasonable to expect this will eventually bite, to some extent."
Where it stands: The latest Senior Loan Officer Opinion Survey shows the largest share of banks (a net 51%) reporting tighter lending standards for larger and medium-sized firms since the period following the onset of the pandemic and, before that, the 2008 financial crisis.
- At a news conference last month, Fed chair Jerome Powell said the economy is "facing headwinds from tighter credit conditions for households and businesses, which are likely to weigh on economic activity, hiring, and inflation."
The intrigue: In previous periods when banks tightened credit, the Fed lowered rates to encourage bank lending to grease the wheels of the economy.
- "This is what makes this cycle different from others. In the past decades, conditions at some point became very tight, but it was not because of the Fed," says Casiraghi.
- Then, "the Fed was trying to undo that, in some sense, because they were cutting rates to try to make credit flow to the economy. Here, we have the opposite."
Of note: An easy explanation for the historic shift in credit standards is just that the Fed has raised rates by a historic amount in a short period.
- But even adjusting for the magnitude of rate hikes, "the tightening in credit standards observed now is twice as large as what it was" compared to the 2004-2006 tightening cycle, Casiraghi says.
- Demand for loans has plummeted more than in previous tightening cycles, too, Evercore found — likely as a result of credit becoming more costly and difficult to get.
What to watch: "The current magnitude of impact seems to be suggesting the passthrough to the bank lending channel in the US so far may be ... more timely and stronger than in the past," Casiraghi wrote in a note.
